The big tax changes likely to cross the treasurer’s desk

Abolishing stamp duty and shifting to a land tax could be among the first changes on the government’s agenda as Treasurer Jim Chalmers threw open the doors to a shake-up of the tax system in his pledge to kickstart growth in the country’s living standards.

Chalmers this week said he welcomed suggestions for tax reform ahead of the government’s productivity roundtable in August, when he expects to field suggestions from business, unions and independent bodies including the Reserve Bank.

Treasurer Jim ChalmersCredit: Bloomberg

The rethink comes as the Productivity Commission’s latest bulletin on Thursday shows labour productivity – a measure of growth in living standards which has remained broadly stagnant for the past decade – tumbled 1 per cent in the year to March.

Chalmers has flagged that any ideas or “packages of ideas” aimed at boosting productivity should either improve or maintain the budget bottom line, although he will consider ideas that cost the budget in the short term if they deliver longer-term growth and revenue.

Many ideas have been around for decades, but some are especially likely to resurface in coming months. Here are some of the changes expected to be floated.

Abolishing stamp duty, moving to land tax

The Productivity Commission – and most economists – have long advocated for the removal of stamp duty: the tax charged by state and territory governments on certain purchases, including buying a property.

Sources close to federal and state treasuries have indicated a transition towards land tax: a levy on the value of land, instead of stamp duty, will be among the suggestions put on the table.

However, as a major revenue driver for state and territory governments, stamp duty has been difficult to abolish. Former NSW premier Dominic Perrottet introduced a choice for first-home buyers between paying stamp duty and an annual land tax, but the change was scrapped by NSW Premier Chris Minns, who instead expanded exemptions on paying stamp duty.

Housing Industry Association chief economist Tim Reardon says the average stamp duty bill on a median-priced home had reached a record high of $31,210 nationally.

Robert Breunig, director of the Tax and Transfer Policy Institute at the Australian National University, says a land tax, including on residential properties which harbour 40 per cent of the nation’s wealth, would be an efficient way of taxing wealth without costs to the nation’s productivity. “If I tax hard work, people work less hard, but if I tax land, the land doesn’t do anything,” he says.

In its Shifting The Dial report back in 2017, the Productivity Commission recommended phasing out stamp duty and replacing it with a broad-based land tax, saying it would increase workers’ ability to move towards better-fitting jobs and ensure land and housing were being efficiently allocated.

Cutting income tax

One of Labor’s biggest election policies was a promise to reduce the 16 per cent tax rate to 15 per cent for incomes between $18,201 and $45,000 from July next year, before reducing it to 14 per cent in July 2027.

However, Deloitte Access Economics partner Stephen Smith says the government needs to go further. “I think we need to reduce our reliance on income tax, both personal income and corporate income tax,” he says, noting changes suggested in the Henry Tax Review including having a flatter, simpler marginal income tax system.

Breunig says Australia’s relatively high corporate and personal income taxes are part of the country’s productivity problem. “I think doing something about lowering personal income taxes to encourage hard work and lowering corporate income taxes to encourage investment, both have to be on the agenda,” he says. “We still want to be able to get a lot of corporate revenue from the banks and miners, but we want to help small companies and start-ups.”

Australia’s Future Tax System Review, known as the Henry Review, also proposed the idea of a standard tax deduction which the government has promised through its $1000 instant tax write-off policy for anyone claiming work-related expenses below $1000. While there is push back from some accountants who stand to lose some clients, the change is expected to save millions of taxpayers time and money during their tax returns.

Taxing wealth and closing the trust loophole

The government already has its sights set on superannuation, proposing to reduce the discounted tax on earnings from balances over $3 million. However, given Chalmers’ focus on maintaining the budget bottom line, the government will likely have to trade some productivity-enhancing (but budget draining) changes for those which will boost its finances.

Breunig says the government could go further on taxing wealth. “The big fairness problem in the system is that we treat wealthy retirees as if they have no income,” he says, suggesting a tax on superannuation income in retirement.

Smith says increasing the Goods and Services Tax (GST) may help pay for the cost of other tax changes, suggesting the government could bump up GST from 10¢ to 15¢ in the dollar, with the federal government pocketing the additional 5¢ rather than redistributing it to the states. “That then gives the federal government an avenue to reduce the burden on other inefficient federal taxes,” Smith says.

He also says a reduction in the capital gains tax discount from 50 per cent to 25 per cent, which mostly benefits wealthier and higher-income individuals, could gain relatively wide support.

Breunig says it is also worth considering a flat tax on all types of dividends and savings. “That would get rid of a lot of a game playing around trusts because a lot of the game playing now is through distributing dividends to different family members at different tax rates,” he says. “But if all dividends were taxed at a flat rate, that would just become uninteresting.”

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