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Tax reform isn’t easy to achieve in Australia, where any proposals usually attract complaints from one section of the community or another. But, with ongoing structural deficits and an ageing population, sooner or later a government must take action.

The fast-moving media cycle quickly puts governments under pressure to rule options in or out when tax reform is put on the agenda, stifling any in-depth debate. ‘Losers’ from any proposed reform are vocal and receive airtime but ‘winners’ aren’t so easily identified – they could be the overall economy or the budget deficit – and so don’t receive the same attention.

When thinking about tax reform, tax shouldn’t be looked at in isolation, says Susan Franks CA, who leads the Australian tax, superannuation and financial advice team at CA ANZ. Why tax is being raised, the interactions with the transfer system and the equity impacts of the changes are also important considerations.

Australia is currently running structural deficits – for many years into the future – with revenue not meeting operational costs, meaning that expenditure cuts and tax increases need to be considered.

“It is difficult to make a case for tax reform that increases overall revenue, when government expenditure is perceived to be excessive,” Franks says. “Another impediment to tax reform is the perception that others are not paying their fair share. There are two aspects to this: the tax gap, which is the difference between taxes collected and the amount of taxes collected if all taxpayers were fully compliant; and the tax policy gap, which is where the tax system does not operate as intended.”

The last few budgets have seen the ATO receiving significant funds to implement compliance taskforces to reduce the tax gap and tax changes to reduce the tax policy gap – for example the 15% global and domestic minimum tax rate for large multinational entities, the Organisation for Economic Co-operation and Development (OECD) recommendations in relation to thin capitalisation and the introduction of a sharing economy reporting regime.

Hooked on income tax

However, there is only so much that a tax system heavily reliant on income tax can do. Australia has an ageing population. With proportionally fewer workers in the future as the number of retirees increase, governments will be less able to rely on revenue from personal income tax.

“In the absence of government action, future increases in public spending [and revenue shortfalls as some taxes decline] will be funded through bracket creep, further increasing the share of personal income tax,” noted the Parliamentary Budget Office’s November 2024 report – Australia’s Tax Mix.

Franks says this leaves governments with several options – increase tax on consumption, increase tax on capital gains or increase tax on land and/or excessive profits. State governments have been focusing on the taxation of land. At a federal level, the Greens are focusing on excessive profit taxes and the major parties are focusing on issues other than tax reform.

Increase GST

CA ANZ has been constantly calling for the GST base and rate to be increased. Modelling commissioned by CA ANZ more than 10 years ago indicated that the amount raised from a 15% GST could:

• Fund cuts to personal income taxes
• Fund increases to benefits and pensions to compensate those on low or fixed incomes
• Allow the country to abolish inefficient state taxes.

In addition to these benefits, there would still be money left over to improve the budget bottom line.

The OECD notes that Australia’s 10% GST rate is well under the average VAT/GST of 19.3% in the rest of the OECD. Additionally, the range of goods and services exempt from GST is larger in Australia than in other nations. Certain foods, health and disability services, charities and education are generally exempt. In New Zealand these are all subject to GST.

Taxes on general consumption produce more than 20% of total tax revenue in 21 of the 38 OECD countries and represent more than 30% of total taxation in New Zealand, Chile, Colombia, Hungary and Latvia. By contrast, they account for less than 15% of total tax revenues in Australia, Canada, Switzerland and the US.

The Parliamentary Budget Office study found that if the GST rate doubled from 10% to 20%, the amount of GST collected would increase from about A$100 billion to A$200 billion per year. The corresponding increases to a range of government payments, such as the age pension, would total about A$14 billion.

All up, the change would reduce personal income tax from making up 42% of all tax in Australia to about 30% (the same share in the 1950s) and increase the GST share from 11.5% to 23%.

Taxing capital gains

Changing GST isn’t easy, with governments coming under pressure to provide compensation to anyone who is left worse off, particularly low-income earners. A consequence of this is that the proportion of net revenue raised from such a tax change makes it harder to justify the expenditure of political capital on an idea that is unpopular with the electorate.

Attention is currently being directed towards tax expenditures – a term that encompasses tax concessions, exemptions and incentives. The increasing level of detail that is contained in the tax expenditure and insights statements, about who benefits from tax expenditures and by how much, could be perceived as an attempt to generate discussion about the appropriateness of these tax expenditures.

Tax expenditures which are being highlighted include ones in relation to the taxation of capital, namely the concessional taxation of superannuation contributions and earnings, and the capital gains tax (CGT) discount.

In particular, Franks flags the tax concessions for the CGT. If an investor has owned an asset for more than a year, they only pay half their marginal personal tax rate on the gains when they sell. This means most capital gains are only taxed at half the rate as personal income.

The cost to the budget bottom line of the CGT concessions on residential property alone will hit A$5.4 billion in the current financial year, according to the Parliamentary Budget Office. Other assets such as shares, unit trusts, bonds and so on are also eligible for the discount.

Additionally, residential property investors receive a deduction for the costs and interest payments on their properties. The cost of negative gearing to the budget bottom line in the current financial year will be A$6.9 billion.

These tax concessions overwhelmingly benefit high-income earners. The top decile of earners takes A$4.3 billion of the A$5.4 billion CGT exemption and A$2.9 billion of the A$6.9 billion in negative gearing concessions.

There is also the issue of whether the government should try to tax unrealised capital gains – levying tax before assets are sold to bring revenue forward – but Franks says the mechanism for doing this is a difficult problem to solve.

“There’s a reasonably large cohort of people, higher-income earners and lower-income people, who need to be dialled out of this [superannuation] system.”

Hands off super

The government has already moved to tax some unrealised capital gains in superannuation accounts, specifically those made on capital gains from the portion of the balance above A$3 million. The changes are scheduled to be issued to individuals from 1 July 2026 and also include an increase in the tax rate for earnings from balances more than A$3 million from 15% to 30%.

Tony Negline CA, superannuation and financial services leader at CA ANZ, says any changes to superannuation need to bear in mind the system’s purpose – to enable people to save for their retirement during their working life. As such, it is a long-term investment for an individual, up to 50 years or more, and any changes to the system have to take account of the people already in the system.

“The government has to be very careful with changes to superannuation because you’re mucking around with people making very long-term decisions for their future, based on the current system,” he says.

“One thing about the system is that it is a very, very complex system. When you marry the superannuation rules with the tax rules and then fold in the Centrelink benefits and then, later in life, fold in the aged-care benefits, nothing meets neatly together.”

Negline says the 11.5% of a worker’s salary, which their employer is legally required to contribute to their superannuation, could be seen as a form of taxation. However, he questions whether the system should include every wage or salary earner in Australia.

“There’s a reasonably large cohort of people, higher-income earners and lower-income people, who need to be dialled out of this system,” he says.

A high-income earner bringing in A$250,000 or A$300,000 a year is “probably big enough and bold enough” to be able to sort out their own retirement needs, Negline says.

At the other end of the income scale, someone earning about A$30,000 probably isn’t paying any income tax, yet is paying 15% on their superannuation contributions and earnings. When these people retire, their main source of income will be the aged pension.

For someone earning A$20,000, the super guarantee 11.5% wages that their employer must contribute, equates to about A$44 a week. Negline says these people could benefit from having the money now.

We should also thoroughly research, including the impact of residential property prices, whether Australians should be able to use the 11.5% super contribution to meet the capital repayments on their home loans, Negline says. He notes that anyone who owns their own home has a much higher standard of living in retirement than those who don’t.

People with broken work patterns are unfairly disadvantaged when it comes to building their superannuation balances. This largely affects women who step away from work to have and care for children or other relatives, subsequently impacting their ability to build their superannuation. Scrapping the annual superannuation cap is a significant and practical step towards building and safeguarding superannuation in Australia, while improving women’s financial security.

Along with the concessional rate of tax superannuation account holders pay on their investment earnings, the employers who pay their wages receive a tax deduction for their contributions to their staff’s superannuation.

Advocating for change

Franks says that as the federal election looms, CA ANZ continues to urge both major parties to commit to a roadmap for tax reform.

“This roadmap should consider Australia’s heavy reliance on personal income tax collections, the intergenerational equity of the tax system and modernising laws to make them agile for the digital and gig economies,” she says.