Creating a more dynamic and resilient economy : interim report

Title page 1

Contents 7

Opportunity for comment 3

Terms of reference 4

Executive summary 9

Draft recommendations 10

About this inquiry 12

1. Corporate tax reform to spur business investment 15

Summary 15

Declining business investment makes us less productive 16

Reform to help firms invest, innovate and compete 19

Tax reform is never easy, but it can be simple 33

2. Regulating to promote business dynamism 36

Summary 36

Our regulatory systems hinder business dynamism 37

A regulatory policy that supports business dynamism 40

A roadmap to reform 54

Appendices 57

A. Public consultation 58

B. Supporting analysis for: Corporate tax reform to spur business investment 66

B.1. Tax principles 66

B.2. A note on economic rent 67

B.3. Further implications of the net cashflow tax 68

B.4. Reform options considered 73

B.5. Overview and comparative analysis of modelling commissioned to support corporate tax design 77

C. Supporting analysis for: Regulating to promote business dynamism 82

C.1. Survey of regulators and policymakers 82

C.2. Review of 'adequate' impact analyses 89

C.3. Regulatory stewardship guide 93

Abbreviations 94

References 96

Tables 23

Table 1.1. Stylised summary of the proposed reforms 23

Table 1.2. Example application of the 5% net cashflow tax 28

Figures 16

Figure 1.1. Investment is down, and therefore capital deepening is down 16

Figure 1.2. International distribution of statutory rates by decade, 1980-2024 17

Figure 1.3. How capital expenditure is funded for small and medium companies 25

Figure 1.4. The proposed reform will move Australia to one of the lowest statutory rates in the OECD for small and medium sized companies 27

Figure 2.1. A framework for the regulatory system 38

Figure 2.2. Regulatory stewardship objectives 52

Boxes 18

Box 1.1. Economic rents 18

Box 1.2. An overview of the current company income tax system 18

Box 1.3. Principles for tax reform 20

Box 1.4. How different firms respond to company tax cuts 24

Box 1.5. Design characteristics of the net cashflow tax 28

Box 1.6. Example of the net cashflow tax on capital expenditure 29

Box 1.7. Approaches to phasing the reforms 34

Box 2.1. When regulation fails 39

Box 2.2. The need for systematic review of housing construction sector regulations 46

Box 2.3. Regulatory delay: speeding up infrastructure approvals 48

Box 2.4. Effective review: APRA's self-initiated review to promote competition 48

Box 2.5. Duplicate and inconsistent regulation in the care economy 49

Box 2.6. Stewardship in practice: IP Australia and the policy register 50

Box 2.7. Overly prescriptive: why we can't have nice things, digitally 53

Box 2.8. Sunsetting of regulation could be more flexible to support regulatory stewardship 53

Appendix Tables 58

Table A.1. Consultations 58

Table A.2. Questionnaire responses 60

Table A.3. Submissions 63

Table B.1. The impact of tax systems upon after-tax required rates of return 68

Table B.2. How the net cashflow tax interacts with the company income tax 69

Table B.3. How the uplift rate is applied under the proposed reform 69

Table B.4. How debt funding is treated under the proposed reform 70

Table B.5. The impact of the proposed reforms for a company earning less than $50 million per year 71

Table B.6. The impact of the proposed reforms for a company earning between $50 million and $1 billion per year 72

Table B.7. The impact of the proposed reforms for a company earning $1 billion or more per year 72

Table B.8. Comparative modelling outputs of the Murphy and CoPS models 79

Table B.9. Modelling outputs of key reform threshold options 80

Table B.10. Modelling outputs of alternative tax reforms 81

Table C.1. Question 1 responses - respondent's role 83

Table C.2. Question 1 responses - type of agency of respondent 83

Table C.3. Question 2 responses 83

Table C.4. Question 4 responses 85

Table C.5. Question 9 responses 88

Appendix Figures 78

Figure B.1. Indicative percentage of firms with substantive foreign ownership 78