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The myth of Australia’s high corporate tax rate

In the 1995 award winning film The Usual Suspects, the mythical figure Keyser Söze terrifies his enemies not through direct action but through reputation. He is more legend than reality, a spectre whose menace exists mostly in the imagination. Australia’s corporate tax rate occupies a strangely similar role. The headline figure of 30% is invoked in political debate as though it were a dead weight dragging on growth and driving companies offshore. But like Söze, the tax’s reputation looms much larger than its actual substance.

The reality is that Australia’s corporate tax system is unlike almost any other in the world thanks to dividend imputation. Introduced by the Hawke government in the late 1980s, this system abolished the double taxation of profits by attaching franking credits to dividends. Shareholders can use these credits to offset their personal tax obligations or receive them as tax refunds. Put simply, tax paid by companies is credited back to company owners when profits are distributed. For Australian shareholders, the corporate tax bill vanishes. It is not a tax in any meaningful sense. It is a prepayment.


Source: Firstlinks; Parliamentary Budget Office, Australia’s Tax Mix, Appendix A.

That is why it is misleading to treat Australia’s 30% corporate tax rate as a heavy impost. For Australian investors in Australian companies, there is no company tax. The burden of corporate tax only truly falls on foreign investors, who cannot redeem franking credits.

This matters because business groups, many politicians and too many commentators continue to argue that Australia must slash its corporate tax rate to remain competitive and to incentivise capital investments. Charts are circulated showing Australia with one of the highest headline rates in the developed world. But these charts ignore imputation, marking them as misleading. Notably, the US Congressional Budget Office found that the average tax rate for US investors in Australia was 17%, but only 11% on new investments, making Australia’s effective tax rate one of the lowest in the world.

The critical point is that Australia is not a high company tax outlier.

Research, including that of Professor Peter Swan, confirms that franking credits are valued by the market. They increase share prices, reduce the cost of capital, and make investment in Australian companies more attractive. This is a structural advantage unique to Australia, and it should not be overlooked.

It is likely that much of the confusion in this debate stems from a broader misunderstanding about the nature of company capital. Is it controlled by company managers, to be allocated at their discretion, or does it belong to shareholders, who are the rightful owners of the enterprise?

Legally and economically, company capital belongs to the shareholders, and dividend imputation reflects that by pushing the incidence of tax to them. Yet company managers often prefer to maintain the illusion that profits are theirs to control and allocate. The spectre of a crushing corporate tax conveniently supports this view, lending weight to calls for changes that ultimately enhance managerial freedom rather than shareholder returns.

The real winners from lowering company taxes

The main winners from a company tax cut would not be Australian companies or their domestic shareholders. It would be foreign investors and shareholders in low-payout firms, where franking credits are not fully distributed. These are precisely the groups that cannot make full use of imputation. Lowering the corporate tax rate would increase after-tax returns for them, but at the cost of government revenue.

Would this encourage investment and productivity? The evidence is far from clear. Extra retained earnings in low-payout companies are not automatically channelled into productive growth. They may just as easily fuel wasteful empire-building or other agency costs. Even the Productivity Commission’s own modelling suggests a tax cut would deliver only a one-off lift to GDP of about 0.4%. Not nothing, but small beer compared with the claims often made.

This is why the corporate tax debate in Australia so often feels dishonest. The bogeyman of a crushing 30% rate is invoked as if it shackles every business in the country. But for most domestic investors it simply does not exist. It is a phantom, a myth perpetuated by those who either misunderstand the imputation system or prefer not to acknowledge it.

If the real objective is to attract more foreign capital, that is a legitimate debate to have. But let us be upfront about it. Lowering the corporate tax rate is a policy choice to privilege foreign investors at the expense of government revenue. It may or may not be wise, but it should not be justified with scare stories about Australian companies suffering under a tax that, for most, dissolves on contact.

Keyser Söze terrified people because they believed in him, not because they saw him. Australia’s corporate tax rate plays the same trick. The 30% headline rate is brandished like a weapon, but in practice, for most Australian shareholders, it evaporates. Until this is admitted, policy debates will keep chasing shadows instead of substance. The greatest trick Australia’s corporate tax regime ever pulled was convincing everyone it exists when, for most Australians, it really does not.

 

Peter Swan AO is emeritus professor of finance at the UNSW Sydney Business School. Dimitri Burshtein is a principal at Eminence Advisory.

 

20 Comments
Razor
September 07, 2025

Taxing Multinationals 5% of the turnover would be the simplest way of recovering lost tax instead of taxing the smoke and mirrors profit.
This may reduce exports of gas which would reduce the price for Australians

Dudley
September 07, 2025

https://www.google.com/search?q=How+much+royalty+or+petroleum+resource+rent+tax+do+gas+exporters+pay+in+Australia

'Gas exporters in Australia do not consistently pay royalties, with a significant portion of gas exports currently being royalty-free, while the Petroleum Resource Rent Tax (PRRT) is a 40% tax on project profits that applies to some offshore gas projects, though often with considerable delays in actual payment. The PRRT is calculated by taxing assessable receipts after deducting project expenses, and producers can use deductions to reduce their tax liabilities, sometimes delaying PRRT payments until decades into a project's life.'

Graeme
September 07, 2025

It does not follow from "For Australian investors in Australian companies, there is no company tax", that "it is misleading to treat Australia’s 30% corporate tax rate as a heavy impost", unless you're only talking about the short term (dividend) impost on the Australian investor. In the short and longer term, Australia’s 30% corporate tax rate is an impost on the business. In the longer term Australia’s 30% corporate tax rate and franking credit system is also an impost on the Australian investor through the lower growth rate of Australian companies that this promotes.

James trethowan
September 06, 2025

"The burden of corporate tax only truly falls on foreign investors, who cannot redeem franking credits." ...No the burden of corporate tax only falls on those organisations who don't have enough accounting might to run rings around the ATO who chase the little man when too many to mention global multinationals pay ZERO or close to ZERO tax on tens of billion$ in revenue. Why is the govt and ATO, like school yard bullies, only willing to pick on the vulnerable just trying to go about their business and look after their families. The ATO and Govt like a bully are too scared despite their authority to go after the big offenders, who whilst leaching on Australia flout their profits at the same time crying poor. Enough is enough we have paid enough. We have paved roads, paid for hospitals, paid for schools, paid stamp duty, land tax, captal gains tax,, luxury car tax to potect an industry that also paid no tax and doesnt exist any more, fuel tax, road tax, fire levies, covid levies, income tax, super contributions tax. Tax tax tax. Time to make the parasites pay.
Look at the data it is horrendous..
https://data.gov.au/data/dataset/corporate-transparency/resource/3281f733-6f53-431b-84f5-d824c6bd9e60

Dudley
September 06, 2025


"Look at the data":

Of the 2759 companies which had a taxable income, 2433 paid more than 25% tax;
Total taxable income was $290,089,826,255, total tax $84,576,860,934.

Of the other 326 companies with a taxable income which paid less than 25% tax;
Total taxable income was $88,024,618,026, total tax $13,702,045,837.

Harry
September 06, 2025

A little simplistic since in reality no major company is returning 100% of profits to shareholders and hence a large percentage of franking credits not being utilised in the dividend payments. For example NAB is returning 65% of profits as dividends, that means 35% of its corporate tax is put into the hands of its shareholders.

Warren Bird
September 05, 2025

Peter Swan - a distinguished finance academic by any standards - has made a significant point in this article. Not in his words, but mine deriving from this article: far too few people, including policy makers (politicians and bureaucrats) who should know better, completely fail to appreciate the genius of the way the Australian tax system integrates all income that domestic tax payers earn into one coherent system.

Dividend imputation means that there is - in economic and financial terms - no company tax rate. There is income that is earned by or paid to Australian individuals that is taxed at their personal tax rates and a withholding tax of 30% on all other earnings. The impact on the Australian budget of dividend imputation is the same as a system in which:
- there is no tax on company profits
- all profits distributed domestically are taxed at the individual's personal tax rates (which happens to be about 30% on average)
- all profits distributed to overseas shareholders are taxed at 30% (which is the same as a withholding tax of 30%)
- all profits retained by the company are taxed at 30% (again, the same as a withholding tax of 30%)

I first wrote about this in an article on FirstLinks a few years ago (here: https://www.firstlinks.com.au/basics-franking-credit-refunds-fair ) Please re-read that article if you intend to respond to this comment as some of your questions will already be answered there.

Sure, companies see it as paying 30% tax on their profits, but as Peter has pointed out, that's a management and Board perspective, rather than a shareholder perspective. Perhaps a few more questions should be asked at AGM's about why Boards don't actually look at the business from the shareholders' perspective in this respect, because they seldom do!

And sure, there's a line item in the Commonwealth Government Budget for 'company tax', but the effect of imputation is that this is all refunded to shareholders and their share of the dividends that were taxed in the hands of the company are then re-taxed at their income tax rates. But the refunding and retaxing elements aren't separately reported. The financial reality, though, is that the economic driver of the Federal budget's revenue item is NOT the company tax rate! It's actually the personal income tax scales. The average of this - at least last time I looked - was about 30%, even including charities, those in pension phase in the super system who are taxed at zero on these earnings and those in accumulation phase whose earnings are taxed at 15%. Many tax payers are on the 30%, 37% and 47% marginal tax rates and that's what they pay on their share of corporate profits.

The Federal Government Budget documents should really highlight underneath the cash flow that is company tax payments a couple more lines: one for imputation refunds (credits) to personal tax payers and another for the tax that those persons pay (directly and indirectly) on their share of company earnings. Then we'd have an exact picture of whether the net amount paid by those across the marginal tax rate spectrum is positive, zero or negative. (I think it's about zero.)

So Peter asks a valid question: is 30% too much for foreign investors to pay on their share of earnings generated by Australian companies? (I'd extend the question to asking if 30% is too high as a withholding tax rate on earnings that aren't paid out as dividends.) The question of whether it's 'too much' essentially comes down to whether the 30% tax rate is inhibiting foreign investment in Australian corporates (listed and unlisted) and whether that in turn is holding down government revenue. Peter simply suggests that 'the evidence is far from clear'. He rightly says, though, that THIS is how the debate should be framed. I agree totally.

For those who think we should increase the company tax rate to raise more revenue, they need to realise that most company profits are not, in the end, taxed at the stated company tax rate. To increase the eventual government revenue take they'd need to increase personal income tax rates. Be clear and honest about that - which is also what I argued in that article linked earlier. Don't mess with imputation if you think some tax payers are taxed too lightly, but explicitly change their personal tax rate.

For those who fear that cutting the company tax rate would favour shareholders over other tax payers, then they also need to realise that it doesn't matter what the company tax rate is - as Peter has pointed out and I've reiterated here, company profits (at least those distributed as dividends, which are most of them) are ultimately taxed in the hands of shareholders as personal tax payers. With no change in their tax rates there is no change in government revenues from that large portion of profits despite a cut in the company tax rate!

So perhaps we could force that reframing by changing the way tax revenue is reported to align with the reality that I noted above - cut the company tax rate to zero, but levy a 30% withholding tax on undistributed earnings and earnings distributed to non-Australian tax payers. Then debate the 30% as a withholding tax rate.

To finish on the note with which I started, the Australian system is genius. For all the reasons outlined in my earlier article it is totally right that corporate earnings should be treated as shareholder income and taxed in their hands. This is more nuanced and profound than merely not taxing income twice, as was crudely, but perhaps necessarily, the way imputation was marketed as a policy when it was introduced. The various tax and financial system reports that had paved the way for it (e.g. Asprey and Campbell) understood that it wasn't that simplistic, but if Paul Keating needed to use that sort of terminology to get it over the line then more strength to him. It resulted in Australia having the best income tax system in the world (in terms of treating all income in the same way), but it wasn't really the basis for bringing imputation in. Too many people parrot that line without truly understanding the history or the policy thinking behind it.

So I completely agree with Peter Swan when he says: "Research ..... confirms that franking credits are valued by the market. They increase share prices, reduce the cost of capital, and make investment in Australian companies more attractive. This is a structural advantage unique to Australia, and it should not be overlooked." Or messed with.

Dudley
September 05, 2025

"the Australian [company tax] system is genius":

Lest dull of some very dull taxation systems in other jurisdictions.

It is an 'imputation system' like wage tax systems common the world over.

A more interesting question is why other jurisdictions insist on being hyper dullard.

Peter Swan
September 05, 2025

I thank you for your kind remarks. I prepared the way for Paul Keating's great decision in the seven research articles, mostly on the need to remove double-taxation of dividends and company income that were commissioned by the Campbell Committee. The franking credit system is not only fully priced but goes most of the way to remove double-taxation. Companies that refuse to pay dividends or low dividends still mistreat their shareholders, but they are only a small proportion. The dividend payout rate of Australian companies is the highest in the world. Reinvestment schemes allow companies to reinvest profits. The result is that Australian companies enjoy the lowest cost of capital in the world at around 10 percent per annum. Only Australians investing offshore face a requirement for an additional nearly 50 percent higher cost of capital due to global company taxes. All this is set out in my article in the Economic Record, 2019. This evidence convinced both the Senate Inquiry into Company Taxation and the Cross Bench to call a halt to Turnbull's attempt to substantially reduce the tax paid by foreign investors by lowering the tax rate on large companies.

Dac
September 05, 2025

I don't understand the reason for lowering corporate tax so companies can keep more earnings to invest to be more productive. There's physical caps (like population/customers, natural resources, disposable incomes) on how much growth is good for a company, they can't keep growing to the moon.

Seems to me corporate managers who are in favour of lowering company tax just want to enrich themselves using shareholders' money.

Nicolas Gianfrancesco
September 04, 2025

"Lowering the corporate tax rate is a policy choice to privilege foreign investors at the expense of government revenue." This appears to be a jaundiced view; the reasoning for lowering tax rates has always been to attract more foreign capital; this must be weighed up against foregone government revenue.

Peter
September 04, 2025

Firstly, Australia's ability to attract foreign investment has been a key part of Australia's economic success. We should be aiming to attract more foreign investment, not less.

Secondly, not all dividends are 100% franked.

Thirdly, imputation credits only apply to amounts paid out as dividends. Companies generally don't distribute all of their earnings as dividends to shareholders. Lowering the corporate tax rate therefore allows companies to retain more earnings in order to invest in being more productive in the future.

Dudley
September 05, 2025

'the nature of company capital. Is it controlled by company managers, to be allocated at their discretion, or does it belong to shareholders, who are the rightful owners of the enterprise?'

"Lowering the corporate tax rate therefore allows companies to retain more earnings in order to invest in being more productive in the future.":

Paying dividends gives the equity owners, the shareholders, more immediate say about where to re-invest dividends; and pulls capital, franking credits, from ATO.

JohnS
September 05, 2025

raising the corporate tax rate will encourage companies to distribute more of their income as dividends.

If they need more capital, let them prove that their company is the best company to invest in. Let them attempt to raise capital from the market. If they are a good investment funds will come. If not, then funds won't come.

Let the market decide whether to invest in the company in question, rather than shareholders being forced to reinvest, by the company retaining earnings

Dudley
September 05, 2025


"rather than shareholders being forced to reinvest, by the company retaining earnings":

'Make Tax Great Again: 100% of taxable profit.'

Peter
September 05, 2025

Sounds like an incredibly wasteful way of managing money. Think of all the fees that would need to be paid to investment banks for all the issuance of new shares. What a ridiculous suggestion.

Vic Ciscato
September 04, 2025

The franking credit issue for investors has been discussed before, and I agree with the reason for its implementation. It is a tax issue, and those who do not pay tax in Australia do not deserve a credit from the ATO for their share dividends.

Vic

JohnS
September 04, 2025

At last someone has pointed out the truth, for australian investors, the corporate tax rate is effectively zero

If you want to increase Australian's ownership of Australian companies, the best thing you could do would be to increase the company tax rate. That would make Australian companies unattractive for overseas investors, drive down the share price (while keeping the after tax dividends to Australian shareholders the same), which would make those shares cheaper for Australians to buy those shares (Australian companies would become Australian owned at bargain prices)

Steve
September 07, 2025

Not quite John. The truth is not that the corporate tax rate is "effectively zero" (for Australian investors), it is "the corporate tax rate is your marginal tax rate" which clearly is not zero for most shareholders. Not sure if making Australian companies unattractive for investors is a good thing, we have needed to import capital for most of our existence. But the biggest issue is not the tax rate, which is levied on profit (the bit you have left after all your expenses are covered), it is the increase in cost of doing business. Energy, wages, red tape, sovereign risk (a govt may block your project because of a mythical bee or snake!) are much bigger hurdles than whether you pay 25 or 30% tax on the profits - its the size of the profit you can generate that matters. The tax conversation is very much a distraction to just being able to stay in business.

Dudley
September 04, 2025

Make Tax Great Again: 100% of taxable profit.

Then Foreigners can claim the 100% Australian company tax as a foreign income tax offset from their governments.

Australian shareholders file tax returns quick smart on July 1st to claim a franking credit that is 100% of their share of distributed profit.

 

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