Productivity Commission recommends business tax reform

The Productivity Commission has released an interim report recommending business and company tax reform to boost investment, productivity and long‑term economic growth in Australia. The government commissioned the review as part of a broader effort to strengthen the economy’s resilience and lift productivity.

The Commission argues that Australia’s current company tax system discourages investment and makes it harder for new and smaller businesses to compete.

Why the Productivity Commission Is Calling for Company Tax Reform

In its interim report, the Productivity Commission highlights several weaknesses in Australia’s company tax system:

• Australia applies a relatively high company tax rate compared with similar countries
• The system disadvantages new and smaller businesses compared with large, established firms
• Complex depreciation and deduction rules reduce the incentive to invest in assets such as equipment, technology and buildings
• The tax system favours debt‑funded investment over equity, which can limit growth opportunities for smaller businesses

According to the Commission, these features reduce business investment and slow economic growth.

Key Company Tax Reform Recommendations

The interim report proposes a new approach to company taxation aimed at encouraging investment while maintaining overall revenue. The Productivity Commission recommends:

• Reducing the company tax rate to 20% for all businesses with annual revenue below $1 billion, replacing the current 25% rate for most small‑to‑medium businesses and the 30% rate for larger companies
• Retaining the 30% tax rate only for companies with annual revenue exceeding $1 billion
• Introducing a 5% net cashflow tax (NCT) on company profits
• Allowing immediate deductions for the full cost of investments—such as equipment, technology and buildings—in the year businesses incur the expense, instead of spreading deductions over multiple years

The Commission says these changes would make investment more attractive and reduce distortions in the tax system.

Consultation and Timing of Potential Changes

The Productivity Commission has released these proposals as draft recommendations only. It is seeking public submissions until 15 September 2025 and will deliver a final report by the end of 2025.

The government would then need to decide whether to adopt the recommendations and introduce legislation. If the government proceeds, it could phase in the reforms or implement them in full. At this stage, no start date has been set, although any changes are unlikely to take effect before 2026, depending on government decisions.

Government Response So Far

Since the report’s release, the government has responded cautiously. Treasurer Jim Chalmers has described the proposals as an “important input” into broader policy discussions that will inform the Economic Reform Roundtable in August 2025, but the government has not endorsed or rejected the recommendations.

What This Means for Businesses

If adopted, the proposed reforms could significantly reshape company tax in Australia, particularly for small and medium‑sized businesses. However, businesses should note that the recommendations remain subject to consultation and government approval.

For now, the report signals the direction of debate rather than an immediate change to tax law.