Why Australia's Tax Mix Has to Change
Updated: Sep 7
The tax mix in Australia has to change, and this year’s budget may be just the start.
In 2010, Treasury said Australia had roughly 5 working-age people for every person over 65. By 2050, that number is projected to fall to 2.7, nearly half.
This problem was highlighted in 2010 when Ken Henry handed government the most comprehensive tax review this country has produced in decades. It recommended, among other things, shifting the base away from income and onto land and consumption. Most of that report was shelved. The one part that gained government support, a resource rent tax on mining, helped end Kevin Rudd's prime ministership within the year.
Nine years later, Bill Shorten tried again from a different angle. Franking credit refunds for people who paid no tax on their income. Reasonable position, argued badly, and it cost him the 2019 election. Every strategist in Canberra took the lesson: touch how retirees are taxed and you lose.
From then to now, nobody has been brave enough to touch it. So income tax is relied on to hold up the whole economy. Assets kept getting concessional treatment. But the ratio of workers to retirees keeps getting smaller.
What does a poor government do?
This year's budget is the first real attempt since Henry to change the way tax works. The 50% CGT discount, in place since 1999, is being replaced with cost base indexation and a 30% minimum tax on gains from 2027. Discretionary trusts get a 30% minimum tax from 2028. Negative gearing is being wound back on existing residential property. Add Division 296 taxing earnings on super balances over $3 million, and you've got the clearest structural shift away from income tax this country has attempted in a generation. Less reliance on income tax and more tax on assets.
None of this is about punishing anyone for being rich. It isn’t a philosophical debate. This is about a country that spent $39.8 billion last financial year on pensions and income support for people over 65, that's about to spend billions more on aged care in this budget alone, and that is running out of workers to fund it through income tax the way it has previously. Assets carried concessional tax settings for decades while the ratio held. The ratio no longer holds.
This isn't just a boomer-versus-everyone-else story either. There's a line running straight down the middle of Gen X. Half of them bought property before the market ran away, built assets, and are edging toward the same concessional settings their parents got. The other half missed the window, are still carrying a mortgage or renting at fifty, and are watching their tax bill fund a pension system they're increasingly unsure will exist when they get old.
That split shows up in the polling. One Nation's primary vote among Gen X now sits at 43%, the highest of any generation, ahead of baby boomers on 35% and light years past gen Z on 10%. Add to that, 68% of Gen X say the country is on the wrong track. That's not boomer resentment trickling down. That's a generation caught in the middle of a changing system, and some of them are pretty shitty about it.
However, we do need to acknowledge those who had planned according to the old rules. If you built a retirement plan around the 50% CGT discount, structured a trust for succession, or planned to hand a business to your kids under settings that have existed since before some of them were born, this budget just moved the goalposts on you, and you have most likely lost a little something.
But change built to please everyone ends up pleasing no one, and change delayed forever only leads to more desperate moves down the track. The test was never whether this works for someone who structured their affairs around 1999 rules. It's whether it works for most of the country, for long enough, so government isn't forced to choose between the paying a pension and funding a hospital.
So, we remove some of the tax burden from workers and apply it to those who hold assets. It’s the only logical choice.
Will it work? I think so, but only because it's harder to campaign against a cost base indexation formula than it is against a mining tax or a "retiree tax" . Some of the more ‘out there’ parts of the budget have already been given up to get the rest through and legislated. That was probably the plan all along.
We don’t need to question whether the budget got things right. We need to decide as a nation whether we are prepared to keep having this same conversation every three years for the next thirty years plus or whether we're willing to accept that the way we collect money has to change regardless of who's in power. And, if the coalition win the next election, I wouldn’t expect to see any of this rolled back, despite the yelling and screaming about how terrible these changes are, they know it’s needed too. And they do not want to come back into government to find the national purse empty.
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Ben Graham-Nellor is a financial adviser and founder of Smart Happy Money, based in Melbourne. He writes about building a more human, more inclusive financial advice industry.