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Younger generations will pay the price if the government fails to take action on comprehensive tax reform.
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A leaking bucket: Australia's dysfunctional tax system
13 February 2025
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9 minute read
Division 296 is a good example of what is wrong with the way we are approaching tax law changes.
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With the exception of changes for multinationals and the thin cap rules, Div 296 is the only substantial revenue measure that has been proposed by the current government despite all the extra spending commitments made during their first term in office.
The holistic settings around superannuation are already a convoluted maze of thresholds and complexity - so why add another layer? Any Government in power has the right to propose changes to the concessional treatment of superannuation savings however any changes should abide by the three principles of a good tax system - fairness, simplicity and efficiency, regardless of the number of impacted individuals. The only principle adhered to in relation to Div 296 is simplicity. There are many alternatives to bring in the extra revenue that could have been considered without all the unintended consequences which would have facilitated a safer passage through the Senate.
I applaud some of the Senators that are voicing their disapproval of the bad policy design that underpins this proposal. There was no real consultation, so let’s hope there is no last-minute horse trading to win enough support for the measure to pass the Senate.
So here we are and there is no talk of a of banquet of reform leading into the next election.
Both major political parties are hell bent on continuing to undertake piecemeal nips and tucks that add layers of extra complexity to already congested tax laws.
Over reliance on personal and company taxes (direct taxes) which are a drain on productivity are at the heart of why our tax system needs a holistic makeover and is no longer fit for purpose. The average personal tax rate is earmarked to increase over the next decade as our tax tables are not index.
Our revenue mix is out of whack and the over reliance on taxing personal effort is damaging to the economy when compared to other taxes. Treasury and the OECD has been warning successive Governments of this problem for decades. Indirect taxes such as the GST will need to do some of the heavy lifting as both the rate and base need updating. It’s never going to be all about changes to the GST as there are other indirect taxes that need to be considered, including the way we tax passive income. We fully understand the challenges of trying to this in the midst of a cost-of-living crisis. The GST changes will involve some trade-offs such compensating those on fixed incomes, and it needs to be done as a package of measures which would include amongst many other things, lowering personal tax rates.
High personal tax rates are also at the heart of why accountants spend so much time and effort trying to minimise clients overall tax position through perfectly legal mechanisms as the incentive makes it commercially worthwhile. The highest marginal rate kicks in at a relatively lower point on the income scales when compared to our international counterparts.
We should remind ourselves that part of the rationale for the introduction of a broad base indirect tax such as the GST was to eliminate inefficient state-based taxes, so this task is still outstanding. We all know that these state-based taxes hurt productivity but without a mechanism for replacing the lost revenue nothing will change.
Even if nothing changes, there are factors at play that will challenge addressing the long-term problems facing the federal budget. Our aging population will expose future Governments to less personal tax revenue as there will be fewer workers supporting a larger proportion of retirees. The shrinking pool of workers will mean the asset poor young will be paying dearly. Less petrol excise will also be recouped as the population transitions to cleaner alternatives. Similarly, taxes from tobacco and alcohol are all trending downwards.
The urgency for holistic tax reform is exacerbated by the fact that we are baking in extra layers of permanent government spending (i.e. NDIS, Aged Care, Childcare and defence) whilst the revenue side of the equation is under pressure.
Successive Governments have a lot to thank bracket creep for. It keeps giving, particularly when we have wage growth in periods of high inflation. This creeping tax burden does its job by stealth. This and favourable terms of trade for our major exports is what is keeping our credit rating and fiscal situation at bay.
We have not banked any of the mining boom (finite resources) away into a sovereign fund for a rainy day, so our economy and fiscal situation remains vulnerable if commodity prices soften or demand of any of our major trading partners dwindles. In the midst of a trade war anything is possible, and our privileged position globally could come unstuck as our weaknesses are exposed.
So, whilst we wait for tax reform, our structural fiscal imbalances will add to our existing debt pile which will be a burden on the next generation. In addition, it will continue hurting productivity which has been in a slow decline in Australia due to policy inertia on other necessary reforms in many areas of our economy.
By Tony Greco, general manager of technical policy, Institute of Public Accountants
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