New tax plan targets Australia's top 500 companies

Jim Chalmers is weighing ­whether to lift the effective tax rate on Australia’s 500 biggest companies while cutting it for smaller businesses after the Productivity Commission recommended a new cashflow tax.

Treasurer Jim Chalmers in question time on Thursday. Picture: NewsWire / Martin Ollman

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Jim Chalmers is weighing ­whether to lift the effective tax rate on Australia’s 500 biggest companies while cutting it for smaller businesses after the Productivity Commission recommended a new cashflow tax expected to boost business investment by $7.4bn.

Meeting the Treasurer’s rules for revenue-neutral, nationally focused, productivity-driving tax reform, the commission proposed a cut to the company tax rate by up to 10 percentage points for businesses with revenue under $1bn while adding a new 5 per cent net cashflow tax for all companies that leaves some exposed to higher taxes depending on how much they invest.

The commission said the new levy was “expected to create an ­increased tax burden for companies earning over $1bn” leaving mining giants Rio Tinto, BHP, and retailers such as Woolworths, Coles and JB Hi-Fi all exposed to higher effective tax rates. Large companies that pay zero tax on profits would have to pay tax on cashflows. Australia’s big banks would escape as interest-related transactions would be exempt.

Dr Chalmers “welcomed” the commission’s work and released an official agenda for the government’s economic reform roundtable later this month which will include handpicked guests such as Grattan Institute chief executive Aruna Sathanapally, who has touted the benefits of a cashflow tax. “We welcome the release of this paper and we’re grateful for the work,” Dr Chalmers said.

He noted his roundtable was designed to push specific reform ideas that would gain the greatest amount of support. “This is a targeted agenda that has been deliberately designed to give us the best possible chance of building consensus on the direction of economic reform,” he said.

To reverse a long-running capital strike, more than 1.2 million companies that earn below $50m would see their effective tax rate fall from 25 per cent to 20 per cent, while the rate for 6870 companies earning between $50m and $1bn would drop from 30 per cent to 20 per cent, under the commission’s modelling.

Productivity Commission deputy chair Alex Robson said the reduction in the headline rate combined with the cashflow tax on all companies would increase ­investment by $7.4bn, boost GDP by $14.6bn, help Australia’s struggling labour productivity grow by 0.4 per cent, and leave the budget neutral in the medium term after an upfront hit.

“To the extent to which there are transition issues depends on how you do it, and over what time period. And that’s why we’ve proposed here a modest and gradual approach,” Dr Robson said.

“In the past 10 years productivity grew by less than a quarter of its 60-year average. To turn this around, we need business to expand and invest in the tools and technology that help us get the most out of our work.”

The commission said that over time, there was “scope to expand the net cashflow tax” to fund more company income tax cuts.

A cashflow tax, which allows all expenses to be immediately ­deducted from cash inflows before tax is levied – would be a big ­undertaking for Dr Chalmers and test Anthony Albanese’s appetite for reform.

The commission said the ­reduction in Australia’s headline company tax rate would move Australia from having one of the highest to one of the lowest statutory rates for small and medium-sized firms in the OECD, driving competition for investment.

A key benefit of the net ­cashflow tax is that it influences capital-expenditure decisions ­because it “explicitly taxes companies based on earnings above the required rate of return.”

Hopes for private sector-led economic recovery have been dampened by weak business ­investment, zero productivity and low economic growth.

The latest national accounts revealed business spending on machinery and equipment fell by 3.7 per cent in the year to March, while recent surveys of investment intentions show companies are scaling back expansion plans.

Public spending which rose last year to its highest level since World War II has also started to ease, creating greater necessity for the private sector to invest and keep the economy from stalling after anaemic growth in the March quarter of just 0.2 per cent.

Support for pure company tax cuts has been mixed with Commonwealth Bank chief executive Matt Comyn saying they were not a priority.

Groups such as the Business Council of Australia and the small business council have pushed for tax cuts and are open to conversations on cashflow tax models.

Modelling from such groups on straight company tax cuts shows an immediate five-percentage-point reduction in the small ­business tax rate to 20 per cent in 2025-26 would result in an $11.4bn boost to GDP over five years, with forgone tax revenue totalling between $800m and $378m over forward estimates. There is a net GDP gain of about $10 for every $1 in lost tax revenue.

The commission said in its report that a five-percentage-point cut in the tax rate would induce companies earning less than $50m in revenue to reinvest 9.2 per cent of their additional after-tax profits in capital expenditure.

The PC also offered in its interim report – “Creating a more dynamic and resilient economy” –alternatives including an allowance for corporate equity, championed by Crawford School of Public Policy professor Robert Breunig, a member of the Prime Minister’s Economic Inclusion Advisory Committee. The commission said the closest alternative to a net cashflow tax was an ACE. “Instead of removing interest payments on debt and allowing full expensing, ACE provides an allowance for deducting the equity component of investments,” it said.

However it said introducing an ACE on new investment would result in a high statutory tax rate to maintain budget neutrality, and could be complex to implement.