Australia's Future Tax System

Final Report: Detailed Analysis

Chapter D: Taxing consumption

D1. A cash flow tax

Key points

A simple cash flow tax (CFT) designed to tax private consumption as broadly as possible could be an important element of Australia's tax system into the 21st century.

A CFT could tax the difference between an entity's cash outflows (purchases) and cash inflows (sales). Cash outflows related to labour remuneration would not be deductible. To ensure that the tax fell on consumption in Australia, exports would not be taxed, but imports would be. While financial flows (such as interest payments) would not be included in a simple CFT, they should be taxed through an equivalent tax on the domestic consumption of financial services.

A broad-based CFT at a single rate could replace many other taxes on consumption, while significantly reducing tax compliance costs, particularly for small business. The CFT could also provide a sustainable source of revenue to fund government services, while significantly reducing tax-induced biases to consumption choices.