1980 to 2000: Tax reform

Throughout the 1980s, Australia underwent significant economic reforms, aimed at making Australia’s economy more competitive on the global stage. One change was the floating of the Australian dollar in 1983, which affected taxation on imports, such as wholesale tax and tariffs. Financial deregulation reduced the government’s control over the financial sector.

Another key reform was the introduction of the Prices and Incomes Accord, an agreement between the government and trade unions to moderate wage demands in exchange for ‘social wages’ of welfare and cuts to personal income tax.

Higher income tax rates for individuals exacerbated the difference between forms of income that were taxed and untaxed. Some individuals and companies moved to structure their income in ways which would minimise the tax paid. Multiple tax reviews[8], controversies[9] and a tax summit led to the introduction of broader taxes on capital gains and a specific tax on non-wage employee income, called the fringe benefits tax (FBT). These were integrity measures aimed to reduce behaviours that minimised tax paid. In the short term, the measures raised little additional revenue but protected the government against losing revenue. In the longer term, the measures broadened the range of income subject to tax. The top marginal tax rate was reduced from 60% to 49% in 1985.[10]

The reviews also considered the relationship between taxation and the performance of the economy. Customs duties (tariffs on imports) were identified as a dampener on economic growth. Reductions in tariff rates started with a rate cut equivalent to 20% of all tariffs[11]in July 1973 and continued with phased reductions in tariff rates through the late 1980s and 1990s. The coverage of Australia’s bilateral and multi-lateral trade agreements also expanded,[12] resulting in a decline in revenue from customs duty and excise.[13] Tariff revenue raised averaged around 4% of GDP between federation and 1985, before declining to 1.7% of GDP in 2022–23 (Figure 1-5).

A new treatment of taxation of corporate income was introduced in 1987, called ‘dividend imputation’. This aimed to encourage investment in companies without both the company and the shareholder having to separately pay tax on the same income.[14] The company tax rate was reduced from 49% to 39%.

Figure 1-5: Decline in excise and customs duties

Source: ASSA, ABS and PBO analysis.

While the reviews led to changes in income tax and customs duties, they also examined how the tax system might address the need for national savings and business investment. Subsequent changes continue to play major roles in our tax system.

In 1992 the superannuation guarantee was introduced, requiring employers to contribute 3% of employee wages, concessionally taxed, into superannuation.[15] The superannuation guarantee was introduced to boost national savings, reduce the cost of capital and increase investment,[16] and temper the wage-price ‘spiral’ that put upwards pressure on prices. The amounts were taxed at 15% rather than their marginal tax rates, which provided incentives to voluntarily make further contributions. This has lowered the effective average tax rate which Australians paid on their personal income (including superannuation) over the last 3 decades (Figure 1-6). By 2021‑22 the difference between the effective average tax rate on personal income with and without the inclusion of superannuation income has grown to around 1.5 percentage points.

Figure 1-6: Average Tax Rate, with and without Superannuation

Source: PBO analysis.
Note: It is assumed that the total taxable income is identical with or without the superannuation policy in place.

The final major reform in this period was the introduction of a broad-based consumption tax in 2000. The Australian Government had levied taxes on goods at the point of wholesaling since 1930, but the wholesale tax system had become a complex array of rates applying to different products. 

The different tax rates affected the prices of goods, distorting purchasing decisions of households. In addition, the consumption of services was growing faster than the consumption of goods, meaning that the wholesale sales tax was not keeping up with growth in the economy.

The Goods and Services Tax (GST) was introduced from 1 July 2000 at a rate of 10%, covering most household consumption except for fresh food, rent, and products where the government is a significant provider, such as health and education.

As part of an agreement between the states and the Australian Government, all GST revenue is passed on to the states. In return, the states abolished a range of highly inefficient taxes, and the Australian Government abolished wholesale sales tax. The GST raised sufficient revenue to entirely offset the revenue forgone from the abolished taxes.

While the income tax cuts associated with the GST may appear as a ‘tax mix switch’ between income and consumption taxes, the 2000-01 income tax cuts (and increases to welfare payments) were designed to compensate for the inflationary impact of the GST. In practice they returned the bracket creep that had assisted in repairing the budget over the previous 5 years (Figure 1-7).

In the longer-term, personal income tax returned to the same share of GDP. The GST directly replaced the abolished taxes, but also effectively replaced other indirect taxes. This included the steadily vanishing customs duties as well as the ‘franchise taxes’ that had been levied by the states for over a century but in 1997 had been found by the High Court to be unconstitutional.

Figure 1-7: Personal income tax and GST revenue

Source: ABS and PBO analysis.

Further personal income tax cuts were delivered over the 2003-2009 period when company tax collections increased markedly with commodity prices, enabling a temporary switch between corporate and personal income tax.

The 1980-2000 period also featured the historical peak of personal income tax as a share of tax revenue, at over 48% around 1985 (Figure 1‑8). Personal income tax subsequently declined to around 40% of all tax revenue, despite the average personal income tax rates remaining relatively stable.

There are 3 key reasons for the decline. The first is that the share of total national income directly received by individuals has steadily declined since the late 1970s, as businesses have tended towards incorporation. Unincorporated businesses income, which is reported on a personal income tax return, has declined from around 25% of the economy in 1960 to around 8% of the economy now. Correspondingly, corporate income has increased from less than 20% of the economy to over 30% over the same period.[17]

The second reason for the decline is the gradual reversal of the rapid real wage increases that occurred during the 1970s. 

The third reason is the rapid increase in company income tax associated with the mining boom since the early 2000s. Most of this tax is paid on behalf of foreign shareholders, with the income never appearing on personal income tax returns.

Figure 1-8: Declining share of personal income tax since the 1980s

Source: Australian system of national accounts, ATO tax statistics and PBO analysis.