Australia is pedalling uphill towards the federal budget, in the wrong gear

I love getting out on my bike as often as I can. Getting ready for a long ride with a few a challenging climbs or two has taught me – many times – that effort is not enough. It takes careful preparation and strategy. Without it, you find yourself in the wrong gear, and even the strongest rider struggles to build momentum. As I was riding through the Tasmanian countryside on a recent charity bike ride, pushing myself up each hill, the struggle began to feel familiar.

Right now, the economy feels like those steep inclines. Businesses are pushing harder than ever, yet momentum is stalling. Productivity growth continues to be weak. Capital investment is stagnant. And our competitiveness is slipping at a time when global competition for talent, investment and innovation has never been more intense. The Middle East conflict has only added to this pressure – and quickly, particularly through energy prices and (once again) supply chain disruption.

One of the constraints on economic growth is Australia’s tax and investment system, which is no longer configured for the terrain we are riding on. Our corporate tax settings are above the OECD average and increasingly uncompetitive relative to peers. The headline rate at 30 per cent is high, and base broadening measures have added complexity. As a result, the after-tax return on capital in Australia has become less attractive than in other economies. I hear this from our clients – in Australia and internationally.

Research and development sits within this broader challenge. R&D is a key driver of long-term productivity and industrial capability, yet Australia now invests just 1.7 per cent of GDP in R&D, well below the OECD average of 2.7 per cent. Without stronger R&D investment, Australia will miss out on emerging opportunities in areas such as AI, advanced manufacturing and the energy transition.

The recent Strategic Examination of Research and Development recommends reforming Australia’s fragmented and underperforming system by enhancing the R&D tax incentive, simplifying access, encouraging private investment, and improving support for commercialisation and scale. There is also increasing evidence that large-scale R&D investment is shifting offshore as firms respond to more competitive international regimes.

At the same time, other nations are not slowing down. They are shifting gears decisively and, in many cases, accelerating away. We are now in an era of active industrial policy, where governments are using tax and incentive systems deliberately to attract capital and capability. In the lead up to this year’s Budget, it has become clear that Australia is competing in a very different global environment, one where nations are using tax settings as deliberate levers to attract capital, not simply to balance revenue.

Singapore has introduced a refundable investment credit specifically designed to attract high value economic activity. Hong Kong has strengthened its Corporate Treasury Centre incentive and introduced preapproval mechanisms that provide certainty for global investors. India, in one of the boldest moves globally, has announced a 20-year tax exemption for cloud and AI related data centre investment, positioning itself as a preferred home for next generation digital infrastructure.

Across Europe and Asia, the pattern is unmistakable. Germany is gradually reducing corporate taxes and expanding accelerated depreciation to encourage advanced manufacturing investment. China continues to offer reduced corporate tax rates for high tech and strategic sectors. Japan, Canada and New Zealand have all adopted full expensing or accelerated write offs that lift productivity by encouraging investment in automation, robotics and advanced equipment. Chile has announced plans to reduce its corporate rate with an ambition to reach 20 per cent.

Australia, meanwhile, is pedalling with determination but relying on a design built for a much gentler course. The time for taking a bigger reform agenda to the Australian public is now. And business must play an active role in supporting the argument – about prosperity for all.

If we are serious about competing for the industries that will shape our next decade of growth, Australia must modernise its corporate tax settings and adopt targeted investment tax incentives like those being implemented overseas. For example, EY modelling shows that lowering the corporate tax rate to 15 per cent for Advanced Manufacturing, which currently makes up around four per cent of the Australian economy, could generate an additional $1billon per year to the economy by 2040 and result in an additional $1.6bn in investment per year. 

R&D tax incentive reform is also essential, including aligning with recommendations to simplify the system, increase offset rates for large firms, remove the deductions cap, introduce quarterly refunds for early-stage companies and strengthen incentives for commercialisation and the retention of intellectual property onshore. Accelerated depreciation or full expensing must also be considered to lift capital investment at scale.

The Government has signalled targeted reform within tight fiscal constraints, including proposed changes to the foreign resident capital gains tax regime. The measure proposes a 30 per cent capital gains tax on foreign investors’ sales of land‑related assets, extending to wind, solar and battery projects and applying retrospectively to 2006. This is understandable given the pressure on the budget today.

However, these reforms could require extensive reviews of previous positions, administrative decisions and compliance. Although meant to resolve ambiguities, the retrospective approach raises concerns about reassessment of completed transactions, investor certainty and unintended tax consequences. Disciplined government spending and a more competitive tax framework need to work together if we want to shift Australia back onto a path of sustainable growth, that provides clarity for those wanting in invest in Australia.

Much like a cyclist who shifts gears to tackle challenging terrain, updating our tax policies will enable us to accelerate past obstacles and keep pace with global competition. By acting now, we can regain momentum and move forward efficiently. Australia has the talent, capability, and tools to succeed – it's time to use them.