The Federal Treasurer, Jim Chalmers, has publicly acknowledged that both state and federal budgets are under unsustainable pressure.
He’s been clear that achieving budget sustainability cannot be done without both raising taxes and cutting spending. Chalmers has also spoken about the need to reduce our reliance on income taxes.
Australia absolutely needs tax reform – reform that supports economic growth rather than stifling it.
Growing the tax base is the key to allowing governments to maintain or even reduce overall tax rates over time.
No one has a silver bullet.
And I’m not suggesting I have all the answers.
However, I do believe the government would be wise to be bold. Let’s face it: with virtually no real political opposition, there’s rarely been a better opportunity for a political party to lay the foundations for Australia to thrive over the coming decades.
Major financial reforms have always faced strong resistance.
Think about Paul Keating’s introduction of compulsory superannuation in the early 1990s or John Howard’s introduction of the GST in 2000.
It’s impossible to please everyone all the time.
The key is to remain open-minded and forward-thinking.
Reliance on income taxes & bracket creep
Taxing income has negative consequences for the economy.
It reduces the incentive to work harder or earn more.
Since we are taxed once on what we earn and again on investment returns, it also discourages saving and investing, both of which are vital for long-term economic growth.
Finally, income taxes become less effective in an ageing population because a smaller share of people are working and earning taxable income.
In contrast, consumption taxes like the GST are less distortionary.
You only pay tax when you spend money, so there’s a built-in incentive to save and invest, which is good for the economy.
Compliance is also simpler.
Bracket creep has become a growing issue in Australia.
As wages rise with inflation, more people are pushed into higher tax brackets, even though their real purchasing power has not changed.
That’s because marginal tax rates are not indexed to wage inflation.
As a result, the average tax rate paid by Australians is expected to be 24.3% in FY2025, and, if nothing changes, it’s projected to rise to between 26.7% and 28% by 2033, the highest on record.
In the 2009 financial year, the average tax rate paid by Australians was circa 22%!
Taxation is not necessarily a zero-sum game
Tax reform does not have to mean that if I pay more tax, I’m automatically worse off.
That kind of zero-sum thinking, where one person’s gain is another’s loss, was recently challenged in The Economist.
A good example is the increase in the Superannuation Guarantee from 9.5% to 12%.
Over the past four years, this has increased employers’ superannuation bill by more than 26%!
No business welcomes higher costs, of course.
But I would argue this change benefits all Australians, including business owners.
By lifting the proportion of self-funded retirees (currently 43%), we ease the long-term burden on the welfare system and, ultimately, reduce the tax load on future taxpayers.
Helping employees achieve a secure retirement is in everyone’s interest.
So, as we debate tax reform, we must avoid falling into a zero-sum mindset.
The focus should be on what’s best for the country, not just one group.
Good policy needs to serve both lower and higher income earners.
Housing affordability: tax incentive for private investors
Housing affordability affects both aspiring buyers and long-term renters.
While building more homes is part of the solution, development can only occur in certain areas, and not everyone wants to live in those locations.
Private investors provide about 84% of Australia’s rental housing, mostly through established dwellings.
This means the government has an opportunity to incentivise investors to help make housing more affordable.
The now-defunct National Rental Affordability Scheme (NRAS), which closed in 2015, offered tax credits to investors who built new affordable housing.
A modernised version of this scheme could extend tax credits to investors who rent out existing properties to eligible tenants (e.g. lower-income earners) at a discounted rate.
Alternatively, a scheme could be designed to provide tenants with greater long-term security.
For example, if an investor rented their property to the same tenant for 10 years and capped rent increases to inflation, they could qualify for a higher CGT discount when they eventually sell.
Encouraging private investors to help deliver affordable housing, especially in established, more desirable areas, could be a more cost-effective approach for the federal government.
No super contributions tax for balances under $200,000
I need to highlight two key points.
First, there are only two tax rates applied to super contributions.
If you earn up to $250,000 per year, contributions are taxed at a flat 15%.
If you earn more than $250,000, the rate jumps to 30%.
That means someone earning $45,000 pays an average income tax rate of around 11%, yet their super contributions are taxed at 15%.
In other words, they are taxed more to save for retirement than to earn income.
That’s a clear disincentive to save and unfairly makes superannuation a higher tax environment for lower-income earners.
Second, when it comes to super, it’s a race to $200,000.
Once your balance reaches that threshold, compounding does much of the heavy lifting.
An 8% return on $200,000 adds $16,000 in one year which is more than the average person contributes annually.
To better incentivise saving and help people reach that $200,000 milestone sooner, I propose a third tax tier for super contributions:
- 0% tax on contributions if your balance is under $200,000; or
- 15% tax once your balance exceeds $200,000; or
- 30% tax if your balance is over $200,000 and your income exceeds $250,000.
This would make the system more equitable and give lower-income earners and younger Australians a head start.
Luxury GST rate
The main criticism of consumption taxes like GST is that they are regressive.
That is, they take a larger share of income from lower-income households because these households tend to spend a higher proportion of what they earn.
Separately, using interest rates (monetary policy) to control inflation tends to disproportionately hurt low-income borrowers and renters, because they have less financial flexibility to absorb rising costs.
One way to address both issues could be to introduce a higher, luxury rate of GST.
This would apply to discretionary spending, things like holidays, fine dining, alcohol, and luxury goods (yes, all the things we enjoy).
It would reduce the regressive impact of GST and support the RBA by making interest rates more effective at slowing excess demand.
Industries that would be adversely impacted by the introduction of a luxury GST rate would need temporary support from the government to help them adjust to these new settings.
To further offset the regressive nature of GST, the government could provide low-income earners with a GST credit, like Singapore’s GST Offset Package.
Let me be clear: this would only make sense if it were part of a broader reform package that materially reduces income tax rates.
In effect, it would shift more of the tax burden away from income and onto consumption.
Main residence CGT exemption cap
The main residence exemption is arguably one of the largest tax loopholes in Australia.
The logic behind it is reasonable: because your home is not purchased primarily to generate income or build wealth, any interest on the mortgage is not deductible, and any capital gain is not taxed.
That’s fair enough.
What’s not fair is that this tax-free status is unlimited.
A few years ago, the owner of “Altona,” a Point Piper mansion in Sydney, made a $19 million tax-free gain in just four years. Surely, most people would agree that gains of that magnitude should attract some tax.
Introducing a cap on the main residence exemption would be a sensible way to close this loophole.
For example, the government could allow a generous lifetime exemption of say, the first $5 million of capital gains on your main residence is tax-free.
Once that cap is used, any future gains would be taxable, perhaps at a concessional rate.
Instead of the standard 50% CGT discount, main residences could attract a more generous 75% discount.
In the case of the Point Piper mansion, if the owner had already used their $5 million cap, they might have paid up to $2.3 million in tax on that gain (i.e., 75% of $19 million, taxed at 47%).
This approach would also function as a quasi-inheritance tax, capturing some revenue from the intergenerational transfer of ultra-high-value homes.
Not costed or critiqued
I’m not a politician, economist, or social scientist.
Of course, these ideas have not been costed.
I’m simply sharing them to illustrate that the government has an opportunity to be bold and innovative when it comes to tax reform.
We could design a system that helps the country and economy thrive over the coming decades.
One that rewards innovation, entrepreneurship, and hard work, while still looking after vulnerable and disadvantaged Australians.
We can all dream, I guess.
