Is Australia finally getting serious about tax reform, or just testing the waters?
The 2026 federal budget makes some long-debated changes to capital gains tax, family trusts and negative gearing. This has sparked fresh debate about whether the tax system is pulling its weight, especially when it comes to housing.
The reality is these changes are small. Taken together, they are expected to improve the budget position by just 0.2% of GDP by 2031, with most of that coming from new minimum taxes on trusts.
If these reforms are only scratching the surface, what would real tax reform look like?
There are four structural changes we should implement now to put our tax system on a stable and sustainable footing.
First, replace stamp duty
Stamp duties on property transactions cost anywhere from to A$35,000 to almost $60,000 on a $1 million property depending on the state, with concessions available for first-home buyers.
This system taxes Australians when they need flexibility most. Whether workers are moving to be closer to their new workplace, or finding a home that fits a growing (or shrinking) family, stamp duties add a large, upfront tax bill to relocate. Annual land taxes avoid this problem, raising revenue without discouraging moves.
State governments are reluctant to make this change because they would suffer a short-term loss of revenue. Transitions should therefore be phased in over a long time horizon. The federal government could help speed this up through time-limited funding support or incentives.
Second, tax windfall profits
Australia under-taxes windfall and monopoly profits. These are profits that exceed what is needed to encourage investment.
Nowhere is this clearer than in the taxation of natural resources. The Petroleum Resource Rent Tax (PRRT), intended to capture a fair share of profits from Australia’s gas exports, generated on average $1.6 billion in annual tax revenue over three years around the start of the Ukraine War oil supply shock – far less revenue than expected as global prices surged in 2021-22.
Corporate tax comes with drawbacks; it does not distinguish between normal and excess returns and so it discourages investment. However, it is one of the few channels through which windfall gains are taxed in Australia.
The policy challenge is not simply to cut or raise corporate tax, but to replace its most negative features while preserving – and strengthening – its role in taxing super profits.
Lukas Coch/AAP
Third, we must tax ‘bads’
Taxes can play an important role in pricing activities we wish to discourage, such as carbon emissions.
Australia’s current approach relies heavily on regulatory mechanisms such as the Safeguard Mechanism, which requires facilities to reduce their carbon emissions. It achieves limited reductions, and often at a higher cost than necessary.
A well-designed, broad-based carbon price would provide a clearer signal to cut emissions across the economy. It would also raise revenue that could be used to offset costs for households, support affected industries or fund broader tax reform.
If Australia is serious about emissions reduction and productivity growth, more direct pricing of “economic bads” (the opposite of public goods) should be part of the solution.
Fourth, reform tax on business investment
Past proposals to reduce company tax in Australia suffered because they deliver windfall gains to foreign multinationals and dampen above-normal profit taxation. This reduces revenue, making changes politically difficult.
Relative to a company tax, a cash flow approach to business taxation increases the incentive to invest while continuing to tax above-normal profits.
Like corporate tax, a cash flow tax is levied on profits. But the big difference is that a cash flow tax treats investment costs as an immediate tax deduction, rather than gradually depreciating the investment. A switch of this kind would be revenue neutral.
A switch in the way we tax profits would bring other benefits.
For many years, unclear intellectual property rules have made it easier for companies to shift profits to other, low-taxing places. The rise of digital services from Facebook, Google, Booking.com, Airbnb, Uber, Didi and other digital behemoths has ramped this up a gear.
It is estimated that the five largest tech giants recorded A$15 billion in revenue in Australia last year, but combined they paid only $254 million in tax at an effective rate of 1.7%.
These companies are platforms that act as intermediaries between producers and buyers. The nature of our location-based corporate income tax system means some companies can shift their profits to minimise their tax bill. Cash-flow taxes present a practical path forward, by taxing consumption where it occurs rather than where the mobile profits end up.
AP
Land, natural resources and economic super profits cannot relocate or disappear in response to taxation in the same way that labour, investment and transactions can. A system that relies more heavily on land, rent, and resources would be both more efficient and more robust.
Pressure for change
Australia has undertaken major tax reforms in the past, often in response to moments of economic pressure.
That pressure is building again. An ageing population, increasing demand for public services, and a more competitive global environment all point to the need for a tax system that supports, rather than hinders, growth.
Beyond the four measures we expand on here, an efficient means of taxing roads and transport as we transition to an electric vehicle fleet should also be high on the agenda of national cabinet.
Read more:
Australia has had ‘game-changer’ budgets before. How does Chalmers’ stack up?
