Key takeaways

Australia uses a variety of ways to tax savings, usually through assets.

Owner-occupied housing is subject to stamp duty, while new housing is treated as ‘consumption’ and subject to the GST.

By contrast, rental income from investment properties is captured by personal income tax.

And then there’s also a separate tax system for superannuation, which usually imposes lower taxes than is typical for other investments, on top of special rules for the taxing of dividends, negative gearing and trusts.

The result of all this is that a person’s savings tax burden can vary widely depending on the nature of different investments.

Analysis from the Tax and Transfer Policy Institute at ANU has shown that this system is inefficient and is distorting the flow of savings across our society and economy. It’s also complex, incentivising Australians to engage in costly tax planning schemes. Finally, it’s inconsistent, with some taxes applied to savings progressively, while others are regressive.

A dual-income tax system could address these issues.

Under such a system, labour income would be separated from other income.

Work earnings would be taxed progressively, as they are now, while other income – interest, dividends, rental income, capital gains, or superannuation earnings – would be taxed independently under a second tax schedule.

This second tax schedule could apply a single flat rate, or a less progressive rate than is applied to labour income.

ANU evidence shows that this would be more efficient, simple and fair than the current system.

Four sets of reforms could pave the way to incrementally introducing a dual-income tax system.

First, the concessional tax treatments currently given to superannuation could be targeted. Taxing superannuation at a lower rate for younger Australians is one option.

Second, a flat tax on dividends could replace imputation. This would improve differences in tax rates between those working and retired, and between dividends on domestic and international shares.

Third, state governments could replace stamp duties with land taxes. Stamp duties distort decisions about when to move house, which in turn reduces the ability of people to switch jobs. Land taxes could be extended to owner-occupied housing with tax-free thresholds removed.

Finally, owner-occupied housing could be included in means tests for pensions and other age-related spending. This exemption has often led to the government supporting people with a high level of personal wealth, and to widely differing levels of support being offered to people with similar assets.