Government Signals Major Overhaul of Australian Tax System

The Door Opens for Brave Reform

The Albanese government has decisively moved to open a national conversation on significant and potentially courageous tax reform, after an extended period of downplaying expectations. Treasurer Jim Chalmers has signalled a readiness to overhaul the system, a task that, if meaningful, will inevitably create both winners and losers and likely face a contentious political reception. The word "reform" itself is often overused, but true reform will undoubtedly encounter backlash.

Treasurer Jim Chalmers remarked last week that limiting the national policy debate to "ruling things in or ruling things out" has had a "corrosive impact". He is correct in this assessment. The media has at times contributed to boxing in politicians, which can limit the scope of necessary debate. However, politicians themselves have been the primary drivers of this limitation, often shutting down discussions out of political fear.

A New Political Climate for Reform

It appears Treasurer Chalmers has managed the political environment astutely. By allowing think tanks, independent politicians, and a generational debate on wealth to build a compelling case for structural change, he now finds a political climate more receptive to the idea. The political timidity that followed Labor's 2019 election loss seems to be dissipating.

This shift is aided by changing demographics in Australia's voting base. With Gen Y and Gen Z now constituting the largest voting blocs, the political calculus has changed, creating preconditions for reform.

This growing appetite for change is reflected in recent polling. A survey in early June by Talbot Mills Research, a pollster used by Labor, asked over a thousand people about the government's plan to reduce tax breaks for those with over $3 million in superannuation. The results showed strong support: 26% strongly approved and 37% somewhat approved, while only 14% somewhat disapproved and 11% strongly disapproved. This backing gives the Treasurer solid political ground for his proposals.

The Case for Change: A System Under Strain

The core of the government's argument is that Australia's tax system is becoming dangerously reliant on personal income tax to fund a structural deficit. This challenge is compounded by an aging population and rising community expectations for government services. As noted by the Grattan Institute, official estimates suggest a persistent structural budget deficit of about 2% of GDP, which equates to nearly $50 billion each year in today's dollars.

Independent MP Allegra Spender has been a vocal advocate for sweeping tax reform, arguing the current system is a barrier to home ownership and unfairly burdens younger Australians through bracket creep. She highlights that traditional revenue sources are declining as a proportion of the overall tax take, including fuel excise, tobacco excise, and the GST.

This view is strongly supported by expert analysis. In a recent report, the Grattan Institute stated, “Improving the efficiency of the tax system, by shifting Australia’s tax mix from more-costly to less-costly taxes, could materially boost Australians’ living standards.” The institute specifically recommends replacing inefficient taxes like stamp duties on property with a broad-based land tax, a move it says would encourage people to move to jobs and homes that better suit them.

Superannuation: The First Step in a Broader Agenda

The Treasurer has remained firm on his contentious plan to increase the tax on earnings for superannuation balances over $3 million, from 15% to 30%. This is presented as a first step towards wider reform. While critics have raised reasonable points about the tax's design, the government is signaling it is open to cutting income taxes as part of a broader reform package.

The Grattan Institute provides compelling reasons for this focus on superannuation. It notes that tax breaks on super cost the federal budget nearly $50 billion a year, with two-thirds of the benefits flowing to the top 20% of income earners who are likely already saving enough for retirement. Their analysis suggests superannuation is increasingly becoming a "taxpayer-subsidised inheritance scheme," with Treasury expecting one-third of all super withdrawals to be via bequests by 2060. To address this, the Grattan Institute has proposed the government go further, suggesting the threshold for higher tax be dropped to $2 million and that super earnings in retirement, which are currently untaxed for most, should be taxed at 15%.

Tax Reform as a Driver of National Productivity

Beyond budget repair, reform is being positioned as essential for economic dynamism. The Productivity Commission has identified corporate tax reform as a priority area to support business investment. This comes as Australia's productivity growth has fallen to its lowest point in 60 years. In a recent media release, Productivity Commission Chair Danielle Wood stated, “Boosting productivity is the only sustainable way to improve Australians’ living standards, but productivity growth has stagnated in the past decade.”

The Commission argues that Australia would benefit from a simpler, more efficient tax system to spur business investment, which has declined over the past decade. This aligns with calls from groups like the Business Council of Australia, who, as reported by Accounting Times, have described Australia's tax system as uncompetitive and a drag on productivity.

The Debate on Intergenerational Fairness

A central theme in the reform debate is intergenerational equity. Dr Aruna Sathanapally, CEO of the Grattan Institute, said the Treasurer has correctly acknowledged the government's role in making necessary trade-offs to preserve living standards. She states, "It is unfair to place that burden on today's children, rather than those who have benefited from a tremendous growth in asset prices."

This has sparked a counter-narrative, exemplified by a warning from broadcaster Neil Mitchell: "Boomers beware. Jim Chalmers is taking [sic] about 'intergenerational justice' in tax. That means a tax on boomers, who actually did a bit to build this country." The idea that one generation uniquely built the country is questionable, as all generations contribute during their working lives. Dr Sathanapally argues that intergenerational equity is not a zero-sum game, but rather creating a system that supports "education, innovation, paid work, and care for each other will support a better economy and quality of life overall".

The Opposition's Position

The Federal Opposition's response will be critical. While opposing contentious changes offers short-term political advantages, the long-term demographic and budgetary pressures will affect future governments of any persuasion. The Opposition has begun to frame the debate as a Labor tax grab.

Opposition Finance Spokesman James Paterson said this week that the Coalition is prepared to have a conversation about making the tax system more efficient. He stated, "we are not going to give them a blank cheque to increase taxes on Australians at the worst possible time for our economy." This position creates a challenge for the Coalition, which must also explain how it would fund its own priorities, such as a potential increase in defence spending to 3 per cent of GDP, without changes to revenue collection.