Broader tax reform would be beneficial, if it focused on using more efficient taxes with stable bases, such as the GST and land taxes, while reducing overly generous tax concessions, the International Monetary Fund has advised in its 2018 Article IV Consultation Staff Report (No. 19/55) on Australia.

Article IV consultations are part of the IMF’s country surveillance, an ongoing process that culminates in regular (usually annual) comprehensive consultations with individual member countries, with discussions in between as needed.

Key tax-related recommendations

The report notes that the government’s medium-term fiscal strategy appropriately aims to reach a balanced budget by FY2019/20 and run budget surpluses thereafter. However, it warns that the projected budget surpluses should not be cut short prematurely through permanent tax cuts or increases in current spending, since some of the recent revenue strength may well turn out to be more temporary than expected. Staff also warns that a rigid interpretation of the cap on Commonwealth tax revenue of 23.9 percent of GDP formalised in the FY2018/19 budget might not be consistent with the principle of running sustained budget surpluses in good times. (Point 21).

Given Australia’s share of direct taxes in tax revenue, the report notes that shifting from direct to indirect taxes would lower tax distortions and enhance productivity. Along with the lower corporate income tax (CIT) for small and medium enterprises and the recent personal income tax cuts, reforms to raise GST revenues and a new attempt to cut CIT for all firms would help rebalance the tax system in a revenue-neutral way towards indirect taxation. To increase GST revenues, the report recommends broadening the tax base first and then considering the appropriate tax rates. To offset regressivity, an income-based tax rebate scheme could be included, funded in part by a reduction in overly generous tax concessions. (Point 49).

In this regard, the report suggests that broader tax reforms that also address housing and land use would reinforce the impact of supply-side measures. Stamp duties should be replaced by broader land taxes, which would strengthen incentives for efficient land use. Within the context of a broader tax reform, gradual lowering of capital gains discounts and limits on negative gearing for investors would reduce structural incentives for leveraged investment by households, including in residential real estate. A more limited capital gains tax exemption for owner-occupiers should also be considered. (Point 40).

Overall, the report notes that closing macro-critical gaps for infrastructure, gender equality, R&D, energy policy, and general tax reform should strengthen productivity growth, and that progress has been made in all five areas in recent years and are currently being addressed by the authorities (Point 46). It concludes that, given the limited monetary policy space, discretionary fiscal stimulus may need to complement monetary easing in economic downturns more frequently than it has in the past, highlighting the importance of substantial fiscal space the readiness for deployment of fiscal policy responses (Point 23; Point 60).

Selected Issues: Evaluating and Reinforcing the Commonwealth Of Australia’s Fiscal Strategy

Part of the consultation-related publications, the Selected Issues paper on Australia was prepared by a staff team of the International Monetary Fund as background documentation for the periodic consultation with the member country. It is based on the information available at the time it was completed on January 18, 2019.

Treasurer’s response

You can find the Australian Treasurer’s response to the publication here.


(Source: IMF News | Country Report No. 19/55 | Press release)

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