At a glance
- A new 5% cashflow tax is proposed alongside a lower company tax rate for some.
- It rewards high-investing businesses with immediate deductions for capital spending.
- Profitable, mature firms with low capital investment could pay more tax overall.
- The goal is to incentivise private investment and boost economic dynamism.
When Australia’s Productivity Commission suggested a “cashflow tax” in its August 2025 economic dynamism report, most people were hearing about it for the first time. Before the Commission put it on the agenda, it was an idea for tax policy specialists only.
If the federal government takes it up, working accountants will have to implement such a tax. So they have many questions about such a tax. Among the first: What would this new cashflow tax actually be? How would it work? And how might it affect my clients?
With the help of IPA tax experts, we can use some very abstract examples to show how it might work.
Before we do, though, two important riders. First, nothing here affects businesses that are not incorporated.
Secondly and more importantly, nothing about the cashflow tax is anywhere near final yet. The Commission has explicitly said that it has not worked out most of the details of how a cashflow tax would work. No other country has one. And the federal government has not come close to committing to it.
So the illustrations below are designed merely to help people understand how a cashflow tax might work in theory.
But if we’re going to have a national conversation about a cashflow tax, it might be worth knowing what it is. With the aid of a trio of IPA experts – General Manager of Technical Policy Tony Greco, Tax and Super Advisor Letty Chen, and General Manager of Advocacy and Emerging Policy Michael Davison – we have put together a necessarily simplistic picture of how a cashflow tax might affect four different businesses.
The Productivity Commission’s proposed new system
To understand the Commission’s proposed changes, we first need to think about how we’re taxed now. Currently, an accountant calculates “taxable income”. This is a complex process involving revenue, operating costs, and, critically, depreciation – the slow, multi-year process of claiming the cost of your assets.
A net cashflow tax is designed to be simpler. The formula is basic:
Cash In – Cash Out = Net cashflow
Your clients’ companies would pay a 5% tax on that final number.
(Of course, it would not be that simple in practice. For a start, the Commission has not yet given any detailed definition of “cash”. And for simplicity’s sake, financial transactions would be excluded from both sales and expenses, implying that interest earnings would not count as turnover, and interest payments would not count as expenses.)
Companies would pay this new net cashflow tax on top of the established corporate income tax. But for companies with annual revenue below $50 million, that tax would fall from 25% to 20%. For companies with annual revenue up to $1 billion, the fall would be even bigger – from 30% to 20%.
But the impacts of this new tax model would affect different businesses differently. The Commission itself says that with a net cashflow tax, “while most companies will pay less tax, the total tax burden will rise for some large companies, especially those not undertaking new investment.”
Warning: We know very little about what any system might look like in practice. The Productivity Commission has not yet clearly defined “cashflow”. These examples are designed to broadly illustrate the cashflow tax concept, and not to predict actual outcomes in any detail. Notably, the examples do not fully account for financing costs.
With that important warning in place, let’s try some simple, illustrative examples.
A tale of two builders
The construction industry is the perfect place to see how this might work in practice. It’s an industry defined by heavy capital investment and notorious for cashflow problems. Let’s imagine two small-to-medium construction companies, both operating through a company structure.
Modest winner: SteadyBuild Constructions (low-growth mode)
SteadyBuild is a well-established business. It’s profitable, has a good reputation, but isn’t aggressively expanding. It replaces gear when needed but isn’t making big new investments.
Let’s look at a heavily simplified version of its financials for the year:
- Revenue from projects: $3,000,000
- Operating costs (wages, materials, etc.): $2,400,000
- Profit (before capital spend and depreciation): $600,000
- New capital investment (a new ute and tools): $100,000
Now let’s look at its potential tax bill under the current and the proposed systems.
Under the current system (e.g., 25% SME tax rate)
To get its taxable income, SteadyBuild subtracts depreciation, not the full cost of the ute. Let’s assume a depreciation deduction of $30,000 for the year.
- Taxable income: $600,000 (profit) – $30,000 (depreciation) = $570,000
- Total tax bill (at 25%): $570,000 x 25% = $142,500
Under the proposed system (20% profits tax + 5% cashflow tax)
The tax bill now comes in two parts.
Tax 1 – profits tax (at the new 20% rate): The taxable income calculation is the same. $570,000 x 20% = $114,000
Tax 2 – cashflow tax: This is where we see the new mechanics.
- Cash in: $3,000,000
- Cash out: $2,400,000 (operating) + $100,000 (investment) = $2,500,000
- Net cashflow: $3,000,000 – $2,500,000 = $500,000
- Cashflow tax (at 5%): $500,000 x 5% = $25,000
SteadyBuild’s total proposed tax bill: $114,000 (profits tax) + $25,000 (cashflow tax) = $139,000
For SteadyBuild, the total tax bill is slightly lower under the new system. The benefit of the 5% cut to the main company tax rate more than covers the new 5% cashflow tax. It’s a modest win.
Bigger winner: GrowthBuild Contractors (high-growth mode)
Now let’s look at GrowthBuild. It’s a similar-sized company, but it’s all in on expansion. It just won a bigger contract and needs to upgrade its equipment to deliver.
It has the same essential operating financials, at least on a heavily simplified view. But it invests much more:
- Revenue from projects: $3,000,000
- Operating costs: $2,400,000
- Profit (before capital spend & depreciation): $600,000
- New capital investment (a new excavator, a crane, etc.): $800,000
Under the current system (25% SME tax rate)
GrowthBuild’s big investments leave it with a cashflow problem at tax time. Most of those investments would typically be depreciated over many years. Let’s assume it can claim $150,000 in depreciation for the year.
- Taxable income: $600,000 (profit) – $150,000 (depreciation) = $450,000
- Total tax bill (at 25%): $450,000 x 25% = $112,500
The business has spent $800,000 on gear but still faces a tax bill over $100,000, potentially putting strain on its cash reserves.
Under the proposed system (20% profits tax + 5% cashflow tax)
This is where the PC proposal favours an investing business.
Tax 1 – profits tax (at 20%): $450,000 x 20% = $90,000
Tax 2 – cashflow tax: its investment provides a massive shield.
- Cash in: $3,000,000
- Cash out: $2,400,000 (operating) + $800,000 (investment) = $3,200,000
- Net cashflow: $3,000,000 – $3,200,000 = -$200,000
- Cashflow tax (at 5%): $0 (as cashflow is negative)
GrowthBuild’s total proposed tax bill: $90,000
The difference is noticeable. GrowthBuild’s tax bill is $22,500 lower in the year it makes its big move. More importantly, the system provides a cashflow advantage. Instead of being penalised for investing, the business is rewarded right away. The PC’s modelling suggests this kind of incentive, scaled across the economy, could boost private investment by $7.4 billion.
“The PC’s modelling suggests this kind of incentive, scaled across the economy, could boost private investment by $7.4 billion.”
Two very different giants
Now we can take a look at how the Commission’s tax proposal affects the biggest of businesses.
Maybe break-even: AusOre, a capital-intensive expanding giant
Let’s imagine a classic Australian mining giant, AusOre. It’s a familiar capital-intensive business, spending huge sums on exploration, massive earth-moving equipment, and processing plants. These are multi-billion-dollar, long-term investments.
Suppose in a given year, AusOre has the following simplified financials:
- Revenue: $5 billion
- Operating costs (wages, fuel, etc.): $3 billion
- Profit before depreciation: $2 billion
- New capital investment (new trucks, plant upgrade): $1.5 billion
Let’s compare its tax bill under the current system and the proposed new one.
Under the current system (30% profits tax)
To calculate its profits tax, AusOre can’t deduct the full $1.5 billion investment upfront. Instead, it claims depreciation. Let’s assume for simplicity its depreciation deduction for the year is $500 million.
- Taxable income: $2 billion (profit) – $500 million (depreciation) = $1.5 billion
- Tax bill (at 30%): $1.5 billion x 30% = $450 million
Under the proposed system (30% profits tax + 5% cashflow tax)
The tax bill is now a two-part calculation.
Tax 1 – profits tax: The profit calculation remains the same. The tax is $450 million.
Tax 2 – cashflow tax: this is where the magic happens for AusOre.
- Cash in: $5 billion
- Cash out: $3 billion (operating) + $1.5 billion (investment) = $4.5 billion
- Net cashflow: $5 billion – $4.5 billion = $500 million
- Cashflow tax (at 5%): $500 million x 5% = $25 million
AusOre’s total proposed tax bill: $450 million (profits tax) + $25 million (cashflow tax) = $475 million
In this scenario, the tax bill is slightly higher. But this is just for one year. The power of the cashflow tax comes from its ability to shield a company from tax during periods of intense investment.
If AusOre’s investment in a different year was, say, $2.5 billion, its net cashflow would be negative ($5b in – $5.5b out = -$500m). It would pay no cashflow tax that year, and the cashflow loss could potentially be used to offset income tax liabilities. The immediate deduction provides an upfront cash benefit that makes new investments more attractive.
For capital-heavy industries like mining, energy, and manufacturing, this system could significantly lower the effective tax rate over the life of a project, encouraging them to invest more in Australia.
Loser: StableServ, a big and mature earner
Now consider a very different type of large company: StableServ, a large, mature business services or retail corporation. It has strong, reliable revenues and is highly profitable, but it is not a capital-intensive business. Its main expenses are wages and rent; it doesn’t need to buy billion-dollar machines.
Let’s look at its simplified financials for a year:
- Revenue: $2 billion
- Operating costs (wages, rent, marketing): $1.4 billion
- Profit before depreciation: $600 million
- New capital investment (office fit-out, new servers): $50 million
Under the current system (30% profits tax)
Again, we’ll assume a depreciation deduction for tax purposes, say $20 million for the year.
- Taxable income: $600 million (profit) – $20 million (depreciation) = $580 million
- Tax bill (at 30%): $580 million x 30% = $174 million
Under the proposed system (30% profits tax + 5% cashflow tax)
Tax 1 – profits tax: the calculation is the same. The tax is $174 million.
Tax 2 – cashflow tax: StableServ has little investment to deduct.
- Cash in: $2 billion
- Cash out: $1.4 billion (operating) + $50 million (investment) = $1.45 billion
- Net cash flow: $2 billion – $1.45 billion = $550 million
- Cashflow tax (at 5%): $550 million x 5% = $27.5 million
StableServ’s total proposed tax bill: $174 million (profits tax) + $27.5 million (cashflow tax) = $201.5 million
For StableServ, the new system is a pure tax increase of $27.5 million. It gets almost no benefit from the investment incentive because it isn’t an investing business. As a mature giant, it pays a higher tax bill, which worries some observers.
The PC’s proposal effectively uses the steady profits of Australia’s low-investment firms to pay for the investment incentives offered to capital-intensive ones.
