SYDNEY, 30 JANUARY 2026: The Tax Institute is calling for tax reform and certainty to be placed at the centre of the Federal Budget 2026–27.

Australia’s tax system is increasingly complex, outdated and burdened by frequent legislative changes, rushed consultation processes, and a growing backlog of announced but unenacted measures. The status quo is not sustainable.

“The Federal Government initiated a discussion on tax reform last year, which The Tax Institute welcomed,” says Julie Abdalla, Head of Tax & Legal at The Tax Institute. “This is the year to deliver and implement meaningful tax reform that will improve certainty, encourage and reward hard work, foster growth, and benefit the entire community."

In the upcoming Federal budget, The Tax Institute is calling on the Federal Government as follows:

• begin implementing structural tax reform and real simplification to our tax system
• no tinkering, quick fixes, or minor tweaks that just make our tax system more complex
• announce measures with sufficient detail and certainty as to when they will be implemented. There are enough announced but unenacted measures already with no indication as to whether they will proceed, the government should not add to that list without a clear plan
• consult genuinely and collaboratively with the tax profession and affected stakeholders on any reform proposals

“Budget night usually generates headlines but with the current momentum towards tax reform, this year we are hopeful it will generate meaningful action,” says Abdalla.

A holistic reform agenda is urgently required. A net cashflow tax, as suggested by the Productivity Commission inquiry report, is not the silver bullet, as in isolation, it will simply increase complexity without sufficient upside for taxpayers. A modern economy requires a sustainable, coherent and durable tax system—one that is supported by meaningful consultation, structural reform and long-term strategic thinking.

Australians need comprehensive tax reform and certainty

Alleviate rising fiscal pressures through tax reform

Intergenerational Reports consistently demonstrate that expenditure associated with an ageing population, such as increased demand for health care, aged care services, the Age Pension and disability and community support programs, will continue to grow, while Australia’s tax revenues remain stable or decline. This imbalance is unsustainable without structural reform.

Meanwhile, Australia relies heavily on personal income tax, paid by a smaller number of taxpayers still of working age, leading to stable or declining tax revenue.

“We are mortgaging our children’s future, asking them to bear the burden of a tax system that cannot sustain that future. Without doing the work to undergo structural change, successive governments are handing working Australians a bill that they will never be able to pay,” says Abdalla.

Australia’s other most well-known tax, the GST, has remained unchanged for 25 years. Changes to the GST base and rate—supported by appropriate measures to protect low-income earners—are an essential part of moving away from a reliance on income tax and ensuring revenue sustainability.

Reduce instances of frequent and rushed legislative changes

The pace of legislative change has accelerated, often with short or poorly timed consultation periods. While legislative reform is necessary, the way policy is developed and implemented directly affects the integrity, fairness and functionality of the tax system.

Ongoing temporary increases to the instant asset write-off threshold create instability and defeat its policy purpose as an investment incentive. Permanently increasing the threshold to $30,000 and extending eligibility to businesses with turnover under $50 million would provide certainty and reduce time wasted on recurrent temporary changes.

Recent reforms—including changes to the thin capitalisation rules, and the introduction of public country-by-country reporting and Pillar Two—have been implemented quickly and, in some cases, retrospectively, increasing compliance costs, creating uncertainty, and reducing business confidence.

These issues are repeatedly exacerbated by short or poorly-timed consultation periods. For example, the revised Division 296 draft Bill was released for consultation immediately before the 2025–26 holiday shutdown, with nearly half the consultation period falling while most businesses were closed. Similar issues arose in 2023 with the Better Targeted Superannuation Concessions Consultation Paper and the earlier draft Bill, Treasury Laws Amendment (Better Targeted Superannuation Concessions) Bill 2023, where consultation windows were limited to just two weeks.

“We want to encourage trust and openness in the consultation process. Short or mistimed consultation periods create not only poor policy, but an atmosphere of mistrust and risk for everyone involved, including regular taxpayers simply trying to understand what it all means for them,” says Abdalla.

Rushed consultations:

• undermine confidence in the policy and law design process,
• increase compliance and administrative burdens,
• heighten the risk of unintended consequences, and
• reduce the likelihood of achieving balanced, durable policy outcomes.

The previous Division 296 proposal was clear evidence of this.

Family trust election rules must be amended

The family trust distribution tax is imposing unreasonable and disproportionate risks on Australian families and businesses. This tax is levied at 47% when a trust with a Family Trust Election or Interposed Entity Election makes a distribution outside the defined family group. Critically, family trust distribution tax assessments carry an unlimited review period, meaning the ATO can raise liabilities decades after even an honest, inadvertent mistake—now with non-deductible interest charges that compound the financial impact.

“These provisions are widely acknowledged as flawed and outdated and no longer serving their original policy intent. They carry the potential for catastrophic and unintended outcomes, including the erosion of intergenerational wealth and the destruction of otherwise viable family enterprises. Without the Commissioner's discretion, taxpayers have no protection from penalties arising from administrative oversights,” says Abdalla.

“Legislative reform is essential. At a minimum, the amendment period must be limited, and an amnesty mechanism or equivalent safe-harbour provisions must be considered in the interim. The status quo is not an option.”

Address ongoing uncertainty from unresolved laws and announced but unenacted measures

The Full Federal Court’s decision in Commissioner of Taxation v Bendel [2025] FCAFC 15 (Bendel) and the ATO’s interim decision to maintain its long-held position pending the High Court’s decision demonstrates the consequences of leaving long-standing provisions like Division 7A unresolved. Division 7A is well overdue for proper reconsideration and reform.

Ambiguity in corporate tax residency tests creates uncertainty for Australian companies expanding offshore and for foreign subsidiaries. Divergent rules for trusts and corporate limited partnerships add further complexity. Implementing the Board of Taxation’s recommended changes would provide clarity.

Several previously announced measures also remain unaddressed, including strengthening the foreign resident capital gains tax measure and the proposed $1,000 instant tax deduction for individual work-related expenses.

“Clarity is needed on whether these and other announced but unenacted measures will be progressed,” says Abdalla.

Streamline and simplify inconsistent thresholds and concessions

Small business concessions apply different aggregated turnover thresholds across multiple regimes, including income tax offsets, Research & Development incentives and income tax concessions (such as the prepayment rules and trading stock rules). These inconsistencies create inefficiencies and contribute to productivity lag. Efforts should be made to streamline and simplify these thresholds and concessions to support businesses to utilise them. Doing so would be consistent with the Government’s productivity growth agenda.

Now is the time for action

The Federal Budget presents an opportunity for the Government to commit to regular, transparent updates on outstanding announced but unenacted measures, to improve the timing and quality of consultation, and to adopt a more structured approach to tax law design. The Tax Institute’s Incoming Government Brief: June 2025 outlines a series of recommendations to support these objectives and strengthen the tax design process.

Long-term reform should draw on insights from the Economic Reform Roundtable, other Roundtables and tax reform discussions held throughout 2025, and the Board of Taxation’s Red Tape Reduction Review. Strong consultation delivers practical, durable legislation and reduces compliance pressures for business.

“The Federal Budget 2026–27 is a pivotal moment for the Government to show leadership and courage on productivity growth, fiscal sustainability and meaningful tax reform.

Australia does not need further temporary or piecemeal adjustments—it needs a coherent, strategic and sustainable tax system that provides certainty, supports taxpayers and advisers, and strengthens confidence in the economy,” says Abdalla.

ENDS