The country's corporate tax system is unsustainable and should urgently be changed, according to a new report.
The report, released on Monday by the Australian National University, found the current system had a negative impact on investment and a bias towards debt.
The study also identified five systemic issues with the current corporate tax system, including a high corporate tax rate, as well as a gap between the corporate tax rate and the top tax rate for personal income tax.
Lead author of the report Professor Robert Breunig said implementing an "allowance for corporate equity" would help address flaws in the system.
The allowance is an extra tax deduction that is given to companies if they expand their equity base with investment.
"Not only will an allowance for corporate equity raise investment levels in Australia, including new money from overseas, it will also lower Australian companies' exposure to debt," Professor Breunig said.
"The (allowance) deduction will encourage companies to invest, will allow companies to earn more profit before they begin paying tax, and will make them more financially secure by removing the current system's bias towards debt."
Such an allowance has been implemented in other countries, with the report noting companies became less leveraged and investment increased under the measures.
Professor Breunig said Australia would stand to reap the benefits should it implement the allowance, and create more jobs in the process.
"An allowance for corporate equity is also a better solution than cutting the corporate tax rate," he said.
"While this could stimulate investment, a cut would also generate undesirable outcomes including handouts to foreign investors and undermining the personal income tax system."
Linking the new allowance to the current government bond rate would mean companies receive $21,000 to offset their tax bill for every $1 million of equity investment.
Under the current system, an investment that generates $21,000 of income before tax will attract $6300 of taxes, leaving the owner with $15,700.
Companies are currently better off borrowing $1 million than investing $1 million of equity, as they get a deduction for the interest on their borrowing to offset against profits before paying tax.
