Our tax system does a lot: paying for education, healthcare and a safety net that makes Australia a great place to live.
It’s also reducing workers to tears.
“It’s pretty hard to deal with people that start crying in front of you,” accountant Sharnette Josephs says.
“You can’t help them.”
Despite the heat around the so-called stage 3 tax cuts, Ms Josephs’ clients are struggling because of a change to the tax system – the end of a tax offset called the LMITO.
And in the coming years and decades, there could be a lot more change coming.
Low tax, really
Australia is a low-taxing nation compared to similar countries.
Among OECD countries, our tax to gross domestic product (GDP) ratio is 30th out of 38 countries.
We tax income – wages – massively. Wealth and assets? Lightly.
Grattan Institute economic policy program director Brendan Coates says that won’t function in the future as the number of workers declines compared to the number of people the tax system has to support.
“We’ve kind of got an Aldi tax system designed to fund a Coles or Woolies budget,” he says.
Change shock
The focus of politicians and the media has been the stage 3 tax cuts. Legislated by the Morrison government and passed into law, they are set to begin on 1 July. The scheme was controversial because most of the benefits went to high-income earners.
The Albanese government made changes to the scheme – something also contentious because Labor had promised not to – that lowered the benefits at the top end and increased them at the middle and bottom.
But that’s not what’s causing the tears shed by clients of Lismore accountant Ms Josephs.
“Particularly the [clients] in the lower-income brackets, they’ve been really disappointed because they’ve been used to a bigger tax refund,” she says.
The low to middle-income tax offset – called the LMITO or ‘lamington’ – was introduced in 2018 and extended each year until 2023, when it wasn’t.
The LMITO was a temporary tax cut for anyone earning up to $126,000, with the greatest benefit of $1500 going to those taking home between $48,000 and $90,000 in 2021-22.
“So their tax refunds have diminished considerably,” she says.
Life without lamingtons
To put it in perspective, Ms Josephs gives the example of a client on $45,000, which is about the minimum wage of a full-time worker.
In 2022, the benefit for someone who received the LMITO was $1275. She expects someone in the same wage category to save $804 in tax from the stage 3 tax cuts. But as a rebate, the LMITO acted as a kind of enforced saving.
“I have a lot of people that wait for that offset come tax time,” she says.
“They get the refund and they can pay their rent, the [car] rego or some big household items – like buy a new fridge. And that wasn’t the case in 2023.
“I had to deal with people bursting out in tears, being really pissed off, not being able to pay my fees because now they don’t get a refund.”
She says the change has had a huge impact.
“It’s been really hard to explain to people it’s not what I have done, it’s not what they have done or haven’t done,” Ms Josephs says. “It’s just that this tax offset is not here anymore, and that’s been difficult.”
But the tax system will need to keep changing because the workers Ms Josephs is submitting tax returns for are shouldering a huge proportion of the burden of keeping our country going.
Settings ‘challenged’
Standing still is not an option, says AMP’s Shane Oliver.
When the bank’s chief economist looks at our tax system, he sees a looming problem – our high reliance on income tax.
On the most recent figures from the Organisation for Economic Cooperation and Development (OECD), the proportion of government revenue that comes from income tax – both personal and company earnings – is 62 per cent, the highest in the developed world. The average of similar nations is 34 per cent.
Australia doesn’t have separate ‘social security’ taxes, and our superannuation system of enforced saving is another element of difference.
Even then, for a low-taxing nation, we rely extremely heavily on workers to support everyday services.
“The current settings are going to be challenged going forward,” Dr Oliver says.
That’s in part because the goods and services tax (GST) isn’t collected on lots of things, including aged care services, which older parts of the population will start to spend more on.
“The problem will only get bigger because we’ll have less workers as a proportion of the population as the population ages.”
Amid the end of the LMITO, soaring rents and high-interest rates on mortgages, Dr Oliver worries about the impact of how we’ve set up the tax system – taxing the proceeds of work and not really touching income from assets and wealth.
“It’s very inequitable on young people,” he says.
Beyond issues of housing affordability, even people achieving a higher wage might find themselves going backwards.
‘Bracket creep’ is when wage growth pushes people into a higher tax bracket, where they pay a larger proportion of their wage as tax.
If tax brackets aren’t indexed – rising with wage growth and inflation – over time, wage earners rise into higher tax brackets and find their tax payments are going up dramatically.
“In fact, over the last couple of years, rising tax payments by Australian taxpayers have been a bigger drag on household income than rising mortgage payments,” he says.
Part of the stage 3 tax cuts was intended to ‘fix’ bracket creep.
But that’s only a start.
Reform push
The stage 3 tax cuts expose a problem the Grattan Institute’s Mr Coates wants to hammer.
When we argue about the stage 3 cuts, we might think we’re having a debate about reforming the tax system. But we’re not.
“It’s not genuine tax reform. It’s giving back $20 billion a year of bracket creep to taxpayers, admittedly different taxpayers under each of the two party’s major plans,” Mr Coates says.
“But it’s doing it in a way that doesn’t generate much of an economic kicker and benefit to the country.”
The reason we struggle is a mixture of politics, the media and human nature.
“The furore over tax means that it is just incredibly difficult to reform taxes,” he says.
“It gets outsized media coverage – often focused on the ‘losers’ – which ignores the bigger picture that it’s in the national interest that the majority of people are better off.”
The ‘losers’
Where there are disputed elements of our tax system – such as discounts to capital gains tax, negative gearing, superannuation tax concessions and family trust arrangements – there are also swathes of the community that enjoy access to them.
While they’re available to all, these elements tend to be used most by older and wealthier Australians.
“You create this constituency that then pushes hard to keep the existing rules in place,” Mr Coates says.
“It creates a notable and obvious set of ‘losers’ in the event that tax policy has changed.
“That tends to get weaponised by oppositions to run scare campaigns against what are ultimately positive tax policy changes.”
What it’s created is a system that gives preferential treatment to income from assets – such as housing and trusts – and taxes wages more heavily.
Mr Coates says we can’t continue to ignore the problem, detailing a “structural budget deficit” of about $50 billion a year, or 2 per cent of our gross domestic product (GDP, or the value of the goods and services Australia creates).
The government can either make spending cuts, lift taxes or both, he says: “We’re going to have to make that up.”
Tax is the price we pay to live in a civilised society, he notes.
“We’ve probably not had governments in the last 15 to 20 years that have been up-front about the trade-offs that this involves,” Mr Coates says.
“But if you want to have a well-funded social safety net, if you want to have well-funded hospitals and schools, then we’re going to have to pay for them.
“With that demographic change as the population ages, it means things need to shift in a way that I think a lot of people are probably not quite ready for.”
‘Unsustainable … unfair’
Catherine Cashmore is in no doubt about how she feels about our tax system.
She is the president of Prosper Australia, a longstanding think-tank that wants to shift the burden of taxes away from “income and productivity” and onto land, natural resources and what she calls “monopoly rents” – where there’s a lack of competition that pushes up prices.
“The majority of our taxes fall onto labour income … it is unsustainable,” she says. “But it’s not just unsustainable, it’s unfair. It penalises people at the bottom of the pile.
That’s because we tax income created through wealth or assets – such as land that increases in value – very differently from the way we tax income from someone who works hard and is given a raise.
“People are losing sleep over how the tax system affects them personally,” she says.
“Tax dictates how you invest, and we encourage people to invest in non-productive assets, we encourage people through the tax system to invest in land, to speculate on rising land values, for example, which is unproductive.”
When that’s coupled with a reliance on taxing income, she says, it deepens a schism in society.
“It’s not just unfair, but immoral.”
We’re not short of ideas
A substantial review of the tax system by former Treasury boss Ken Henry in 2009 made more than 100 recommendations, most of which have not been implemented.
“Tax reform in Australia is incredibly hard,” says Dr Oliver, who notes the last major reform was the introduction of the goods and services tax (GST) in 2000.
“But it has become harder and harder.
“The horizon of voters has become more shorter term, politicians have been opinion poll driven.”
Lismore accountant Ms Josephs says there’s “no will” for proper tax reform.
She’d like to see the tax-free threshold – the lowest amount of earnings at which you have to start paying tax – more than doubled from $18,200 up to $45,000.
“Those people don’t even have to lodge tax returns, so I’m dealing myself out of a fee. But I don’t really care,” she says.
“If you abolish up to $45,000 for everyone – not having to lodge a tax return – you would encourage a lot more people to go and actually get a job. And it would make it a lot easier.”
There are a lot of ideas to move the burden from workers.
With population changes, an unavoidable debate is looming.
Do you think the tax system needs overhauling? Why not share your thoughts in the comments section below?
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The tax reform was put off course when Labor argued against the proposed GST including every single item. Your Income Tax would have been quite low compatred to today & the government could have easily compensated pensioners, health issues & the less well off workers with benefits. Anyone who did/does not want to work got zero if you do not contribute to society you do not deserve anything.
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Well that’s how it works, no matter whether anything one side comes up with is good or bad the other side opposes it. But neither major party really wants to change the cosy arrangement they have with big money which has produced the inequitable tax system we have.
The two big parties need to be thrashed and replaced with parliamentarians who are not bound to big money. Slowly this has been happening with minor parties and Independents increasing their numbers while the vote for Labor and the Coalition falls. I think this trend will continue until Liberal and Labor lose their dominance and influence.