Australia's Future Tax System

Final Report: Detailed Analysis

Chapter B: Investment and entity taxation

B1. Company and other investment taxes

Key points

Globalisation carries profound implications for Australia's tax system and for the taxation of investment in particular. In a world of increased capital mobility, company income tax and other taxes on investment have a major impact on decisions by businesses on where to invest, how much and what to invest in and where to record their profits.

Australia has been successful over recent decades in attracting foreign capital to finance relatively high levels of domestic investment. While the continuing growth of China and India, and the consequent strength in Australia's terms of trade, should ensure continued strong investment in Australia's resources sector, attracting investment in other sectors may become more challenging.

Reducing taxes on investment would increase Australia's attractiveness as a place to invest, particularly for foreign direct investment. Reducing taxes on investment, particularly company income tax, would also encourage innovation and entrepreneurial activity. Such reforms would boost national income by building a larger and more productive capital stock and by generating technology and knowledge spillovers that would improve the productivity of Australian businesses and employees.

Continuing to reduce biases in favour of particular assets by aiming for a broader, more uniform company income tax base would ensure that investment is allocated to its most productive uses. Reducing biases against risk-taking would also encourage entrepreneurial activity, which is important for economic growth. Features of the current system may bias investment and other business choices towards less productive outcomes. In turn, this may reduce productivity and economic growth.

For the longer term Australia should look more closely at moving to a business level expenditure tax. A few countries have adopted this alternative form of company income tax base in recent years, following widespread academic study. The Review has considered how Australia should respond to these policy developments. Adopting an expenditure tax base would change the dynamics of how Australia attracts international capital and overcome some of the problems of income taxes. However, it would inevitably give rise to other issues.