Productivity Commission recommends business tax reform

Productivity Commission recommends business tax reform

As part of a major review requested by the government to find ways to boost Australia’s productivity and economic resilience, the Productivity Commission has released an interim report that recommends company tax reform aimed at encouraging businesses to invest more and help the economy grow.

The report, titled Creating a More Dynamic and Resilient Economy, notes that Australia has a relatively high company tax rate compared to similar countries, and suggests that the current system makes it harder for new and smaller businesses to compete with large established firms. Tax rules on claiming deductions for investments (like equipment or buildings) are complicated, making investment less attractive, and the system tends to favour companies that borrow (use debt) over those that raise money from investors (equity), which can disadvantage smaller businesses.

Reform recommendations

The Commission’s interim report recommends a new approach to company tax, including:

• lowering the company tax rate for most businesses from the current 25% (for most small to medium businesses) or 30% (for larger companies) to 20% for all companies with annual revenue below $1 billion – only the largest companies (with over $1 billion in revenue) would stay on the 30% rate; and
• introducing a new net cashflow tax (NCT) of 5% on company profits; and
• allowing businesses to immediately deduct the full cost of investments (like equipment, technology or buildings) in the year they buy them, rather than spreading deductions over several years.

In combination, the aim of these measures is revenue neutrality – keeping the government’s overall tax revenue steady while reducing the tax bill for most small and medium businesses and giving them more incentive to invest in new equipment, technology and growth.

When might changes happen?

Importantly, these are only draft recommendations in an interim report. The Productivity Commission is seeking public feedback until 15 September 2025 and will produce a final report with more refined recommendations by the end of the year.

The government would then need to consider, accept and legislate any changes. If adopted, reform measures could be phased in or introduced at once. So, there’s currently no fixed date for when changes would take effect; at the earliest it could be sometime in 2026, depending on government decisions.

Government’s response and next steps

Since the report’s release, the government has responded cautiously. Treasurer Jim Chalmers acknowledged the tax reform proposals as “an important input” into policy discussions that would feed into the Economic Reform Roundtable in late August 2025, but hasn’t endorsed or rejected the specific recommendations. He has emphasised that any reforms must be fiscally responsible, saying “all options [are] on the table” for tax reform provided they’re budget-neutral or budget-positive.

Following stakeholder discussions at the August roundtable and review of public submissions to the Productivity Commission’s inquiry, a final report is due by the end of 2025. No tax rate changes or new taxes have been adopted or ruled out yet.

For now, business owners should:

• consider submitting feedback: if you have views on how the recommended changes could affect your business, now’s the time to respond to the interim report;
• stay informed: watch for updates after September 2025 and after the final report is released; and
• plan carefully: if you’re considering major investments in your business, any changes could affect the timing and tax treatment – but until laws change, the current rules apply.

Source: www.pc.gov.au/inquiries/current/resilient-economy/interim