Australia's Future Tax System

Architecture of Australia's tax and transfer system

1.3 An opportunity for reform

Australia's economic position provides an ideal opportunity for reform. The boost to national incomes from the significant increase in the terms of trade due to the resources boom, together with Australia's strong fiscal position provides a platform on which to base a reform agenda. Given the challenges that lie ahead, it is important to have a tax-transfer system that enhances incentives and rewards effort.

In improving the way the tax‑transfer system operates, a key focus will likely be to secure expanded opportunities for those who remain disadvantaged. However, it will be important to ensure that reforms to the tax‑transfer system are durable, should the recent strength in the terms of trade abate.

It makes economic sense to design the tax‑transfer system in a way that has minimal impact on incentives to work, save and invest and that achieves the intended outcomes with minimal complexity. This will allow Australia's productive resources to be better utilised. For example, every extra hour spent by households and business grappling with the myriad of tax rules and obligations (including the different regimes across the States) is an hour not used to produce goods and services (including utilising leisure time), that are of higher value to Australians. Likewise, every dollar needed to fund the administration of the tax‑transfer system is a dollar that needs to be raised through taxation. Given the regressive nature of complexity, a complex and inefficient system is also likely to fall short of expectations for a fair distribution of opportunities and risk throughout the community.

The current tax‑transfer system is a product of historical changes reflecting a range of policy objectives. Since federation, the primary focus of reforms has shifted from expanding the revenue base to fund growing expenditure programs, to improving the performance of the system in terms of its efficiency and equity, and reducing complexity, recognising that all three impact on the wellbeing of Australians.

It has been around 30 years since the last fundamental review of the tax system and around 20 years since the last major review of the transfer system. The Taxation Review Committee (the Asprey Review) which reported on 31 January 1975 provided a comprehensive set of proposals for reform of the Australian government tax system. Much of this agenda has been enacted over the ensuing 30 years. The income tax base has been broadened through capital gains tax and fringe benefits tax, the taxation of companies has been reformed through the imputation system, and a broad‑based goods and services tax has been adopted. Similarly, on the transfer side, the reform agenda set by the Social Security Review (1986‑88) introduced significant changes across all major social security programs.

Australia is now facing a different set of challenges. The breadth of this review provides an opportunity to step back from the day‑to‑day processes and historical events that have shaped the tax‑transfer system. It is an opportunity to consider how the system might best be shaped to complement, and even facilitate, the reforms needed to address the challenges facing Australia as we move through the 21st century.