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The government has flagged a combination of productivity measures, an appetite for tax reform, and a savings package in the upcoming Federal Budget, while public debate centres around renewed calls to wind back concessions such as the Capital Gains Tax (CGT) discount, negative gearing and family trust arrangements. Changes to the tax system have been highlighted as aiding ‘intergenerational fairness’.
Yet much of the current discussion around tax reform misses the point. It is not simply about removing concessions or collecting more revenue from the same group of taxpayers – so called ‘tinkering around the edges’. Meaningful reform requires a broader rethink of Australia’s taxation system, with sustainability and balance at the forefront – particularly as structural budgetary pressures continue to build.
Productivity growth remains one of the most persistent challenges facing the Australian economy. Any tax reform package that emerges from this budget should be assessed not just on its revenue impact, but on whether it supports investment, workforce participation, and business growth.
While productivity initiatives will likely deliver limited economy‑wide impact as they are likely to focus on micro and small businesses, medium and large businesses – which drive a significant share of employment, exports and innovation – require certainty, simplicity and a competitive tax system. Tax reform that supports productivity should encourage scale, capital deployment and international competitiveness, instead of adding further complexity or cost.
One of the most significant structural issues in Australia’s tax system is the increasing reliance on personal income tax as the primary source of government revenue. Personal income tax is expected to represent a whopping 48 per cent of all Government revenue this year – and is forecasted to increase to 53 per cent in 2035-36. According to the OECD, Australia is only second behind Denmark in reliance on personal income tax for Government revenue.
As bracket creep continues, a growing proportion of the tax burden falls on working Australians, while structural pressures on government spending including NDIS, health care and aged care intensify. The Parliamentary Budget Office even noted that a sustained reliance on personal income tax will eventually be a structural risk to the budget. This has implications beyond household budgets. High marginal rates influence decisions on additional work, investment and skills retention, and they affect Australia’s attractiveness as a place to build and scale a business. A tax system that relies increasingly on personal income taxes without adjusting thresholds or rates risks undermining both participation and productivity.
Another overlooked element of tax reform is complexity. Australia’s tax system has become increasingly difficult to navigate, with layered concessions, integrity rules and carve‑outs that impose significant compliance costs on businesses and individuals alike. Simplification is not a headline-grabbing reform, but it is a meaningful one. Reducing complexity lowers administrative costs, improves compliance and enhances confidence in the system. A simpler tax system can be just as important to economic efficiency as changes in tax rates or settings.
However, any changes to concessional tax breaks – whether changes to CGT, negative gearing, or family trust – will ultimately result in more tax at an individual level. Rather than diversifying the tax base, incremental changes risk further entrenching reliance on individual taxpayers.
GST remains the most challenging – and unavoidable – aspect of tax reform. While there is little political appetite to increase or broaden consumption taxes, Australia’s reliance on income tax stands in stark contrast to many comparable economies. Australia has one of the lowest goods and services tax rates, such that it has not increased in line with other developed countries. Earlier this year the OECD called on the Government to consider lifting the GST rate from 10 per cent, in an effort to decrease the government’s overreliance on personal income tax.
However, any shift towards greater consumption taxation raises legitimate equity concerns. Lower-income households spend a higher proportion of their income on essentials and have less capacity to absorb price increases. As a result, GST reform cannot occur in isolation, requiring careful calibration through the tax-and-transfer system, potentially involving higher tax-free thresholds, increased pensions, or targeted support.
The core issue facing policymakers is that incremental change is unlikely to resolve Australia’s underlying tax challenges. Removing individual concessions may raise revenue in the short term, but it does not rebalance the system, reduce complexity or address long-term sustainability. While Grant Thornton has been discussing this issue for many years, it has since become a wider societal conversation given the increased and additional impacts of spending and structural deficits to the budget.
The upcoming budget can set direction, but real tax reform will require a multi‑year approach grounded in productivity, fairness and economic resilience. The Government has the maturity to enact such changes. The question is not who pays more tax next year – it is whether Australia’s tax system is fit for purpose in the decade ahead.
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