At a glance
- The Productivity Commission proposed a new net cash flow tax to boost investment.
- But the IPA warns the tax is complex, risky, and another new burden for small business.
- The IPA prefers simpler alternatives like an investment allowance or permanent asset write-off.
In August, the Productivity Commission (PC) put forward a new idea to boost Australia’s economic dynamism: a net cash flow tax.
The proposal, part of a broader push for tax reform, aims to raise the incentives for business investment in Australia. A cash flow tax would do this by allowing immediate deductions for capital spending.
That sounds good in theory: everyone wants more investment. But the Institute of Public Accountants (IPA) is urging caution.
The IPA warns that a new tax layer could create more complexity for the small businesses that are vital to the Australian economy. It argues that simpler, more familiar alternatives could achieve the same goal with less disruption.
How a cash flow tax might operate
What is this proposed cash flow tax at the centre of the IPA’s objections? And how might it affect businesses? Public Accountant has set this out in detail in two earlier articles:
- Behind the Productivity Commission’s big bet on small business
- What’s a cash flow tax – and will it help my business clients?
(It’s important to note that the PC’s proposed cash flow tax would only affect incorporated businesses.)
The PC proposes a new 5% tax on net cash flow, levied on top of corporate income tax. The calculation, in its simplest form, would be:
Cash In – Cash Out = Net Cash Flow
The proposed 5% tax is applied to that final net cash flow number.
To sweeten the deal, the PC suggests cutting the corporate tax rate for companies with revenue below $50 million from 25% to 20%. For businesses with revenue up to $1 billion, the rate would fall from 30% to 20%.
The PC’s final report on policies for economic dynamism is due in December 2025.
Potential winners and losers
With this preliminary proposal, the PC aims to boost economic dynamism by better rewarding investment. “Cash Out” in the proposal includes capital spending. So a business that invests heavily can immediately reduce its cash flow tax liability – perhaps to zero.
But the PC itself notes that while many companies might pay less tax, “the total tax burden will rise for some large companies, especially those not undertaking new investment”.
Public Accountant has shown the likely effects in more detail. Winners would likely include small, high-growth companies with heavy investment burdens – think of a biotech startup or an expanding home-builder. Big losers would likely include mature, stable, high-cash-flow companies such as Australia’s big retailers.
IPA verdict: Too complex and risky for SMEs
But while the goal of boosting investment gets a nod, the IPA has raised significant concerns about the proposed mechanism. It argues the PC’s plan is a poor fit for small and medium-sized enterprises.
Another layer of complexity
IPA tax and super advisor Letty Chen highlights the IPA’s primary objection to a net cash flow tax – complexity. It would go against the principle of simplicity emphasised by the treasurer, Jim Chalmers, she says. For accountants and their SME clients, any such tax would be a whole new compliance system to navigate. Preparing and paying it would be “a significant extra obligation for small businesses”.
As IPA general manager of advocacy and emerging policy Michael Davison has put it, for already time-poor businesses the proposed impost is “another tax you will have to keep track of”.
Key details of the tax proposal also remain undefined. IPA general manager of technical policy Tony Greco has noted that the Commission has not even provided a detailed definition of what would constitute “cash” for the purposes of the tax.
A high-risk experiment
The IPA also flags the sheer risk of the proposal. No other major economy has implemented a cash flow tax like this, making Australia a potential test case.
“It’s another tax you will have to keep track of”
Michael Davison, IPA
Implementing a cash flow tax for the very first time in a major economy is a high-risk business, warns IPA group executive for advocacy and professional standards Vicki Stylianou. Many unintended consequences may only surface after it is rolled out.
Arbitrage risks and SME disadvantages
The IPA warns the new system is likely to disadvantage SMEs. One specific IPA concern is the potential for tax arbitrage. The proposed 20% corporate tax rate would widen the gap with the top personal income tax rate. This could create incentives for individuals to channel income through corporate structures to minimise tax, an outcome the tax system is generally designed to prevent.
Letty Chen also points to a further problem: the PC has aimed for a policy that collects as much new revenue as it loses. This revenue neutrality criterion “imposes limitations on policy development and encourages a piecemeal approach to tax reform”. To reduce tax arbitrage, any cut to the company tax rate should be paired with a fall in the top personal income tax rate, she says.
Simpler alternatives to boost investment
Instead of embarking on a high-risk experiment, the IPA argues for using simpler, proven tools to encourage business investment. In its pre-budget submission and public statements – such as January 2025’s Tax Reform: Time to Act – the organisation has championed several alternatives.
These include the following:
- Reintroduce an investment allowance to provide a bonus deduction for capital purchases.
- Make the instant asset write-off permanent at a higher threshold, such as $30,000. This would give businesses certainty for planning their investments, rather than relying on temporary, last-minute extensions.
- Reinstate the small business technology boost and the small business energy incentive. These bonus deductions encourage specific, productivity-enhancing investments in digitalisation and energy efficiency.
The Productivity Commission’s diagnosis is right: Australia needs more business investment. Chen says the PC’s proposed solution has a valuable policy intent. But she adds that “it must be designed with simplicity in mind to avoid creating a new and disproportionate burden on the small business sector.”
The IPA’s concern is that the PC’s proposed cure may be worse than the disease. Rather than adding a complex and untested tax to the system, the IPA wants the government to look to simpler incentives that small businesses already understand.
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