For the umpteenth time, tax reform is back on the agenda as the centrepiece of Treasurer Jim Chalmers’ latest talkfest aimed at boosting productivity.

Chalmers is now positioning himself as a crusader against red tape, but it’s hard to take that seriously when the Albanese government has introduced 5,000 new regulations in its first term, according to recent reports.



There’s the usual story of wasteful government spending at every level, but the deeper issues lie in changing demographics.

The number of non-taxpayers is rising rapidly as more of the Baby Boomer generation of Australians retire and live longer—90% of retirees pay no income tax at all. Add to this our skewed personal income tax system, where just 12% of taxpayers are footing 62% of the bill, and the imbalance becomes clear.



Just look at the current system. Once a person earns $135,000 a year, they start losing 39% of every extra dollar. That jumps to 47% once they earn $190,000. These are not very high-income figures by today’s standards, yet we’ve created a tax system in which someone earning over $190,000 loses almost half of every additional dollar.

There’s something fundamentally wrong with that: it shifts the focus from earning more and being more productive to finding ways to minimise tax—and that’s a dead weight on the economy.

The problem is that most taxation changes are difficult to implement.



For years, there’s been talk about eliminating the capital gains tax exemption on the family home, but that’s a practical impossibility. No government would dare to do it, and even if they tried, the massive disparity in house prices across Australia would make it unworkable.

There’s also ongoing discussion about reducing the capital gains tax discount on assets held for more than 12 months, but again, implementation is tricky.

It’s a fundamental tax principle that you shouldn’t tax inflation, yet removing or substantially reducing the CGT discount without addressing inflation would do just that. And if a change was phased in by applying the change only to assets acquired after a certain date, you’d see a frenzy of purchases before the deadline, followed by a slump.



The result? Distorted markets, disrupted planning, and more confusion than clarity.

Super is always a target, and now there’s talk tthat he government might slap a 15% tax on some pension-phase accounts that are currently tax-free.

But there’s a major flaw in that plan: super’s purpose is to provide retirement income, and it does that by creating a low-tax or zero-tax haven. A couple with $800,000 invested in their own names would pay no tax anyway, thanks to offsets and franking credits.

Tax their super, and they’ll just pull the money out and invest it themselves.



As always, there are rumours about changing how family trusts are taxed. Many of the country’s wealth producers run small businesses, and with so many going broke in the first five years, asset protection is a top priority.

Businesses run as a sole trader or in a partnership, leave all your personal assets at risk if things go wrong.

That’s why most business owners use a trust or company structure. A trust doesn’t pay tax itself; it distributes profits to beneficiaries, who are then taxed at their marginal rates. While trusts do offer some tax advantages, these are limited for most business owners.

Typically, the beneficiaries are mum, dad and the kids, but distributions to children under 18 are taxed at the top marginal rate once they exceed $416 a year. With the 30% tax bracket now stretching to $135,000, there’s little point in targeting trusts with a special tax—owners would simply start paying distributions as wages instead.



The practical solution is to increase GST to 15% with no exemptions. That would strike a blow to the black economy and ensure retirees contribute something towards the rising cost of supporting them.

Any GST increase will be slammed as regressive—hurting the poor more than the rich—an argument that applies to most embedded taxes. Petrol tax, liquor excise and cigarette duties are all regressive, yet these are widely accepted.

The strength of GST is that it’s almost impossible to avoid: it captures a large slice of the cash economy and, while it hits low-income earners hard, it hits big spenders hardest—the more you spend, the more you pay—so those with the most disposable income typically pay more.



About the author: Noel Whittaker, AM, is the author of Wills, death & taxes made simple and numerous other books on personal finance. An international bestselling author, finance and investment expert, radio broadcaster, newspaper columnist and public speaker, Noel Whittaker is one of the world’s foremost authorities on personal finance. Connect via Twitter or email ([email protected]). You can shop his personal finance books here.

Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. Always seek professional advice that takes into account your personal circumstances before making any financial decisions. The views expressed in this publication are those of the author.