KPMG unveils far-reaching reform blueprint for Australian tax system

KPMG unveils reform blueprint for Australian tax system

Unprecedented changes across all aspects of personal, capital and business taxes and to the way tax is collected are proposed by KPMG Australia in its submission to Treasury on tax reform, published today.

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Peter Nash, KPMG Australia Chairman said: “If serious tax reform does not take place over the next few years, Australia risks being uncompetitive internationally. KPMG’s submission to Treasury contains some far-reaching proposals because the situation needs innovative solutions, not just tinkering at the edges. This is a once in a generation opportunity to get tax reform right and as a country we need to set the tax system on a solid footing for the long term.”

The paper proposes that all taxes would be collected by the Australian Tax Office (ATO), which would subsume all tax collection rights from the states over the next 8 years, with federal government bearing the administration costs. This would generate substantial efficiencies for businesses and individuals.

KPMG’s proposals include:

  • linking thresholds to average full time earnings to eliminate bracket creep
  • a 25 percent discount on personal capital income and expense including unfranked dividends
  • abolition of stamp duty and certain other inefficient state taxes for a new property services tax
  • overhauling the fringe benefits tax, with personal fringe benefits being divided into three categories – personal benefits, entertainment and non-personal benefits.

On business tax, the report calls for an extension of GST to 15 percent;  a reduction of corporation tax to 26 percent; introduction of new small business and innovation company structures to boost these sectors, together with enhanced R&D offsets. The imputation system would remain but be reviewed in 2020.   

There would be major changes to the structure of the current tax system: a Tax Reform Compensation Commission should be established to advise on permanent and transitional compensation. State budgets should be held in March to allow them to feed into a new series of Combined Australian Government Accounts to be released at the time of the Federal Budget in May, which would detail federal, state, territory and local government revenue and expenditure. There would also be infrastructure and intergenerational accounts, which would provide a new transparency to our federation.

Importantly, that the submission calls for these changes to be made over an 8-year time period. The 3 years 2015-18 would be spent bedding down the details of the proposed reforms, including suitable compensation packages. 2018 is the year intended for the commencement of the legislative measures, with a five-year transition period for implementation ending in 2023.

State and Federal tax structure

David Linke, KPMG National Managing Partner – Tax and Legal, said: “We accept that major change cannot happen overnight and believe that eight years is a realistic timeframe to secure the necessary political agreement. A key aspect of our thinking is to improve the current tax structure between states and federal government, which is a significant cause of inefficiency.”

“That was one of the main issues highlighted in our survey of over 200 CEOs, CFOs, non-executive directors and tax professionals collated by KPMG as part of the consultation process which informed our submission. This significant business input has enriched our paper and we look forward to discussing our proposals in the upcoming series of debates and forums on tax reform, which will rightly involve a wide variety of constituencies,” added Mr Linke.


KPMG believes that one critical impediment to reform that must be solved is GST – and the states should be advised that the current need for unanimous agreement on GST changes, promised in 1999 by Prime Minister Howard, should have a limited life and end in 2019.


A vital source of productivity gain in the Australian economy and society is greater female participation in the workforce and KPMG believes the interaction of the tax and transfer systems is an integral part of increasing this benefit.

David Linke said: “Changes to the tax system need to be viewed through a gender prism. Women have less superannuation than men and are more likely to derive interest income than dividends or capital gains. It is crucial that the taxation of childcare costs is overhauled and that the system taken as a whole encourages female participation”.

KPMG's proposals

KPMG’s proposals include:

  • Personal Tax: bracket creep is stealthy, regressive and hidden. It can be addressed by linking bands to average full time earnings and creating four new rates of tax: 15 percent for $0-$27,000; 25 percent for $27,000-$80,000; 35 percent for $80,000-$160,000 and 45 percent for above $160,000. Medicare Levy, Zone rebate and other add-ons would be incorporated into these new rates and thresholds.
  • Gender Equity: employer funded top-up child care costs should be treated as exempt benefits, and we should move away from a family or joint income test for childcare benefits. This leads to high marginal tax rates for primary carers seeking to enter the workforce. Assistance for childcare should be linked to the child, not partner income.
  • Fringe Benefits Tax: FBT has proved complex and inequitable. It should be replaced with fringe benefits being divided into three categories - personal benefits, entertainment and non-personal benefits, with the value of the former being included in the employee’s assessable income and the entertainment tax being allocated to the states.
  • Payroll Tax: the multiplicity of systems at state level is inefficient and payroll tax came second in the KPMG survey (after GST) as the area most ripe for reform. Payroll tax should be collected at federal level with PAYG collections at a rate of 5 percent applicable to all employees.
  • Personal Capital Taxes: greater consistency is needed across the various forms of savings. There was support in the survey for this. A discount of 25 percent should be introduced for: interest income of individuals, and expense on income-producing capital assets; net rental property income or expense; capital gains and losses and unfranked dividend income. This would reduce the detriment of the taxation of savings through interest and the impact of negative gearing. The CGT discount would be reduced from 50 percent to 25 percent. Unfranked dividends would receive the benefit of the 25 percent discount available to individuals and it would also apply to superannuation funds.
  • The superannuation system would be subject to a major reviewto establish its objectives but as an interim measure consideration would be given to life time caps on non-concessional contributions and superannuation balances. 
  • While death duties would not be re-introduced, death would be treated as a realisation event for CGT purposes in certain limited circumstances, which would diminish the ability to pass major wealth across generations untaxed.
  • A reduction in corporate tax rate to 28 percent in 2020 and to 26 percent by 2023 is necessary and one of the strongest-supported measures in our survey. The burden of company tax falls predominantly on labour and a 26 percent rate would bring the differential with KPMG’s proposed main personal tax rate to just 7 percent. It would also mean the difference with the Hong Kong and Singapore corporate tax rates would be less than 10 percent.
  • A simplified small business company structure should be established to reduce complexity and an innovation company created which would be able to monetise tax losses and hence attract investment from high net worth individuals. This would help address the funding problems at the $2m-$40m from which many start-up companies suffer.      
  • GST should be raised to 15 percent and comprehensively broadened in scope including all food, health and education. This topped the list in our survey responses. A 2014 OECD study of 20 countries showed that the regressiveness of GST can be overstated.
  • Stamp duty on residential and commercial property should be abolished, with conflation of rates, land tax, insurance taxes into a new Property Services Tax levied on progressive rates and administered by the ATO. Questions of compensation for those who have recently paid stamp duty would be considered by a newly-established Tax Reform Compensation Commission when formulating transitional measures through the change of base.

Peter Nash said: “As well as proposing solutions for all the various tax areas, we have also examined the system as a whole, which is not working optimally. Given the importance of a well-functioning tax system to the country, the legislative process cannot be a political football.

Therefore we propose a Tax Reform Compensation Commission, including members from both sides of the House, supported by Treasury, which would evaluate and model the impacts of tax reform and recommend measures, including changes to transfer payments, to ensure equity in the system. An independent body could better withstand the difficult politics of tax change and bring an objective approach to the process.

”David Linke added: “We also believe better presentation of budget information would give rise to more informed community discussion and make change easier. Accordingly we recommend Combined Australian Government Accounts which would disclose total revenue by source and function, and other new accounts and simplicity indices to measure the ease of doing business in Australia.

“None of these changes will be easy, but we believe they would be equitable and put the Australian tax system on a long-term sustainable path and away from the current lop-sided reliance on bracket creep and stamp duty to pay the bills” he said.

Further information

Ian Welch

Senior Communications Manager, KPMG Australia

Mobile: +61 400 818 891

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