Australia's Future Tax System

Architecture of Australia's tax and transfer system

Section 7: The personal tax‑transfer system

Outline

This section examines the way in which the personal tax and transfer systems interact to affect the disposable income of individuals and families, and their incentives to work, save and invest (including in skills).

Key points

  • The tax and transfer systems combine and interact to be targeted, progressive and redistributive. There are many families and individuals who receive transfers and pay tax in the same year and from one year to the next.
    • Successive tax cuts since 1985 mean that taxpayers at all income levels pay less tax than if the tax thresholds had been indexed for inflation.
  • The Australian tax and transfer systems are separate systems. There are different bases of assessment between and within the two systems, including the definition of income, the unit of assessment, the period of assessment and the basis of eligibility. These differences largely exist to achieve a targeted system, but a result is that the system as a whole is complex.
  • Significant demographic change, including ageing of the population, will influence the affordability of the transfer system in the future. Participation and productivity increases may offset some of the impact of demographic change.
    • Some workers appear to be more responsive to incentives than others. For example, part‑time workers seem to be more responsive than males working full‑time hours.
  • In combination, the tax and transfer systems determine the disposable income of an individual or family. They also affect their incentives to participate in paid work and to acquire skills, and their decisions about when and how to save.
    • The adequacy of transfers is determined by the sum of income support payments, supplementary payments, in‑kind benefits and concessions.