Turnbull government's company tax cuts defeated in the Senate
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Turnbull government's company tax cuts defeated in the Senate

The $35.6 billion remaining of Prime Minister Malcolm Turnbull's flagship company tax cuts have been defeated in the Senate, putting an end to legislation that has fuelled unrest in the Coalition and culminated in a challenge to Mr Turnbull's leadership on Tuesday.

Mr Turnbull put the company tax cut package at the front and centre of his "jobs and growth" mantra when he was elected in 2016, warning a failure to cut the company tax rate from 30 to 25 per cent for companies earning over $50 million would end in investment fleeing Australia.

The political wisdom of that philosophy - argued forcefully by his lieutenants Finance Minister Mathias Cormann and Treasurer Scott Morrison for two years - took its final hammer blow before lunch on Wednesday when the Senate voted down the $35.6 billion remaining of the package 36 votes to 30.

Prime Minister Malcolm Turnbull, Minister for Finance Mathias Cormann and Treasurer Scott Morrison

Prime Minister Malcolm Turnbull, Minister for Finance Mathias Cormann and Treasurer Scott Morrison

Photo: Alex Ellinghausen

Former home affairs Minister Peter Dutton last month became the first cabinet minister to question whether the policy should be taken to the next election, after the government suffered a 9.4 per cent swing against it in the Longman byelection.

The unpopular tax cuts combined with a toxic debate over energy policy and rising electricity costs had fuelled anxiety among Coalition MPs for months. It culminated in Mr Dutton launching a challenge on Mr Turnbull's leadership on Tuesday, narrowly losing by 35 votes to 48.

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Senator Cormann defended the tax cuts until their death, taking a shot at political short-termism in his final speech before the vote.

"We have a responsibility to make judgements about what is in the best interest of families and workers into the future, not just to follow the lead of public opinion at one particular point in time," Senator Cormann said.

The government's chief negotiator - who has been locked in talks with the crossbench for more than 18-months - warned if the legislation was voted down, the moment would come when Parliament would have to revisit them as tax rates are reduced overseas.

"The people who will suffer most are low income Australians who will find it harder to keep their job and harder to get a job," he said.

The government's desperation to pass the tax cuts reached its peak in the days leading up to the vote, as the looming leadership crisis overshadowed the policy debate that has dominated Canberra since 2016.

It offered One Nation a deal to cut out the big-four banks - that would have saved $7.4 billion in tax revenue over a decade -  by excluding any deposit taking institution with more than $500 billion in held assets from the tax cut, repudiating its own long held economic principle that tax cuts should apply to all companies regardless of their size or sector.

Minister for Finance Mathias Cormann walks back to his seat after speaking with Senator Pauline Hanson in June.

Minister for Finance Mathias Cormann walks back to his seat after speaking with Senator Pauline Hanson in June.

Photo: Alex Ellinghausen

One Nation accused the government of lying, claiming it had never received such an offer before the vote.

The government has already passed tax cuts for small to medium businesses earning up to $50 million, which will be phased in over a decade from 30 to 25 per cent.

Up to $1.8 billion saved from the company tax cut defeat is set to go to an acceleration of tax cuts for small businesses that have already been legislated.

It now has an open invitation from the Senate crossbench to cut taxes immediately to 25 per cent for small-medium businesses rather than waiting for them to come into effect in 2026-27.

The move has the in-principle support of every crossbencher except for South Australian independent Tim Storer.

Cabinet, which is set for a reshuffle after Tuesday's leadership spill, had been moving towards dumping the remaining tax cuts completely once they were voted down in favour of an election war-chest it could use to blunt Labor's attacks on health and education.

"We take the view that there are other priorities that we want to address," said Labor senator Doug Cameron. "This government wanted to hand billions of dollars to the big end of town."

Eryk Bagshaw is an economics reporter for the Sydney Morning Herald and The Age, based in Parliament House