At-a-glance: Why cut company tax?

Here is a quick guide to how company tax works and why it has been cut gradually over recent decades.

What is company tax?

Companies in Australia pay a tax on their income every year. Under the current company tax rate, they pay 30 per cent of their assessable income in tax.

The rate is applied equally to all the company's taxable income.

Company tax works for Australian residents as a withholding tax on income they earn through Australian resident companies.

It also works for non-residents as a final tax on income they earn through an Australian resident company.

Company tax is separate from individuals' income tax.

Companies are defined for tax purposes as bodies or associations that may either be incorporated or unincorporated. However partnerships are not considered as companies and are therefore exempt from the tax.

Why cut it?

Cutting company tax is argued to increased domestic investment in Australia.

Company tax is said to encourage companies to retain their profits. This means it lowers domestic productivity, and lowers the overall level of investment in the country, company tax cut supporters argue.

What is the government proposing to do with company tax?

The Gillard government has proposed reducing the company tax rate to 29 per cent in 2013-2014.

A larger cut in the company tax rate, to 28 per cent, was proposed in the Henry tax review of Australia's taxation system released in 2010.

Supporters of the company tax rate cut argue it will make Australia a more attractive place for companies to invest, driving long-term economic growth.

How large has the tax been in the past?

The company tax rate in Australia peaked in 1986 at 49 per cent, and since then it has gradually declined.

The rate was reduced from 34 per cent to its current rate in 2000-2001.

How large is the company tax rate overseas?

Australia's company tax rate is currently higher than those for some other similarly-sized OECD countries.

Company tax rates have been falling across OECD countries over the past 30 years.

Here are the company tax rates for other OECD countries:

United Kingdom: 28%

United States: 35%

Canada: 18%

Japan: 30%

Sweden: 26.3%

Netherlands: 25.5%

Is a company tax cut linked to the proposed mining tax?

Treasurer Wayne Swan has said that while legislation for the mining tax and the corporate tax cut would be separate bills in federal parliament, they are part of the same package.

This is because the government plans to fund the company tax cut with the revenue it would collect from its proposed mining tax.

What is the Coalition's stance on a company tax cut?

The Coalition will not oppose a cut to the company tax rate, The West Australian has reported.

During the 2010 federal election campaign, the Coalition proposed cutting company tax by a higher rate than proposed by the government.

Pledging to cut the tax to 28.5%, Liberal party leader Tony Abbott said: “We are always going to be the low tax party.”

What is the Greens' stance?

The Greens will oppose the government's plan to cut company tax. Greens leader Bob Brown has said it would give the big four banks a $300 million tax holiday in 2013-14 and will be worth $500 million to mining companies BHP Billiton and Rio Tinto.

Brown has said that revenue saved from the mining tax should be used for a national dental care scheme, or for increasing youth allowances, Austudy and single parenting payments.