Why Australia struggles to shift the ‘tax reform gridlock’

Treatt said there was often debate within the tax profession that politicians were overusing the words ‘tax reform’ and were training the public to believe that some level of “tinkering at the edges” counted. 

Montani backed this statement by Treatt and added that politicians weren't even tinkering at the edges, but instead “tinkering with the means”.

“It's clear that progress has been limited, but it's important to understand why. Why do we have these very limited outcomes on reforms?” Montani asked.

“It's a gridlock where nothing seems to happen, or nothing seems to be able to happen. And the thing with the gridlock is that it causes consequential issues to take on prominence, and they become a bit of a distraction. An example is the whole Division 7A unpaid president entitlements between trusts and corporate beneficiaries.”

Montani added that well-known issues Australia had within its tax system, such as Division 7A and the Bendel matter, “simply wouldn’t be a thing” if a level, or mix of tax reform was achieved. 

According to the pair, there were 60-plus years of evidence reviews on why Australia needed tax reform, as well as other countries like New Zealand having successfully achieved it. 

In terms of the actual “tax mix reform” needed, Montani suggested that there needed to be a shift from the over-reliance on income tax towards the GST, as this would mean fewer people would bother with corporate beneficiaries and that income tax was just “a very damaging tax”. 

“So we know that we are predominantly relying more and more on income tax. Bracket creep. That's where most of that is coming from,” Montani said.

“People are getting pushed up into high tax brackets just with their incomes rising, trying to keep up with inflation. But of course, they end up paying more income tax overall. So that's an easy revenue increase for the government.”

This meant income tax was the one growth tax Australia had, despite it being the wrong type of tax to be a growth tax, which was how intergenerational inequity had begun and caused younger people to suffer an “ever-increasing income tax burden”. 

Though conversations around tax reform were being had, Montani said Australians and tax professionals weren’t having the right type of conversations as they were exclusively about what should be changed in the tax system.  

“The solution is to be found through understanding why the politicians refuse to make any meaningful changes. I'm sure people will have wondered at some point, why can't the politicians seem to bring themselves to make any kind of meaningful changes?” he said.

“For a long time now, it's because of that stockpiling of scare campaigns, just opposing whatever the other side proposes. They can't step out without saving face. And as a result, well, that's why we get these, these tinkering tidbits of changes.”