Wednesday, September 17, 2025

What Australia could learn from the Nordics for a fairer tax system

Five of the 20 partners at the rebranded Sayers Group have left the firm, including its only two Canberra-based partners, ahead of senior KPMG partner Paul Howes starting as chief executive in January.
Those leaving the firm, now called Tenet Advisory & Investments, include senior partner James Collins, Caitrin Dunn and Shaun Bauer, along with newer partners William Broughton and Mat Norton. Collins has retired; the others could not be reached for comment.

What Australia could learn from the Nordics for a fairer tax system

Labor will be tempted to try to close down tax breaks and perceived loopholes, such as the capital gains tax discount, in the name of intergenerational fairness.

John Kehoe Economics editor Sep 17, 2025 

Emerging out of Treasurer Jim Chalmers’ economic roundtable was a loose consensus among the chosen participants that the intergenerational bargain is breaking down, partly due to the tax system.
Governments need to ensure that too much pressure is not imposed on the income tax paid by working-age people, as Treasury projections warn will happen in the decades ahead, unless elevated government spending is cut or revenue is raised from other tax bases.

Various participants suggested reducing tax concessions for wealthy and high-income people for capital gains, negative gearing, superannuation and trusts.
Ultimately, the objective must be to have a better tax system that incentivises and rewards work, encourages investment, ensures equity between generations and promotes horizontal equity, a principle that people in the same economic situation should pay the same amount of tax and receive the same benefits.
The tax system should also be made simpler for taxpayers to comply with and for tax authorities to administer.

The temptation for the Labor government will be to try to close down tax breaks and perceived loopholes, such as the 50 per cent capital gains tax discount and for family trusts, in the name of intergenerational fairness.
But if the government is truly serious about reforming the taxation of personal savings and investment, there is a better way.
A consequence of the progressive income tax scale with a punitive top rate of 47 per cent (including the 2 per cent Medicare levy) kicking in at a relatively modest by international standards $190,000, is that it encourages tax planning by people who are savvy enough to receive structuring advice from accountants and lawyers.
This practice is sometimes referred to by tax experts as the three S’s: splitting income (with lower-taxed family members); shifting the timing of income (such as deferred capital gains by delaying the sale of assets); and structuring income (via trusts and companies).
Ideally, Australia would have a flatter income tax scale to make this rational and legal behaviour by taxpayers less appealing. That would require cutting the top personal rate to 40 per cent or less, as former Labor prime minister Paul Keating has suggested.
Another option is the dual income tax system. Several former Treasury tax experts agree that Australia should adopt a dual income tax system like the Nordic countries.
In this system, labour income derived from wages and salaries would continue to be taxed at progressive marginal rates. While non-labour income, including property rental income, capital gains, interest, company dividends and distributions from trusts, would be taxed at a flat rate throughout people’s lives.
Investment losses, such as from rental property known as negative gearing, would no longer be offset against labour income in a dual income tax system. AFR
A flat rate is simple to administer, reduces the scope for tax avoidance and reduces the incentive for high-income investors to seek tax-advantaged investments.
People would be more likely to make investments based on their economic returns, rather than the preferential tax treatment they can engineer. Capital should flow to the highest risk-adjusted returns and not be dictated by tax.
Investment losses, such as from rental property known as negative gearing, would no longer be offset against labour income. Instead, investment losses would only be offset against investment income and could be carried forwards against future investment income.
Opinions differ on the appropriate tax rate, but somewhere between 20 per cent and 25 per cent appears to be a reasonable starting point for discussion.
At face value, this tax rate may seem low for high earners. But there would be no tax-free threshold for investment income. The tax-free threshold would be preserved for labour income only.
Moreover, there is a sound case to tax capital more lightly than labour income. Capital used to invest has already been taxed as labour income. Double taxation distorts the incentive to consume now, versus saving for future investment. Investment and risk-taking, especially by entrepreneurs, need to be incentivised.
Capital income compounds over time, so high taxes on it can be economically harmful. Hence, most countries tax capital more lightly. New Zealand does not have a capital gains tax (which is overly generous), while the US has a top capital gains tax rate range of 15-20 per cent on long-term assets.
“Any changes to the taxation of savings and investments should not just be a revenue grab. A better and more consistent treatment of both would be real tax reform.”
In Australia, the existing 50 per cent discount for capital gains is not as generous as it sounds. Currently, it amounts to a maximum 23.5 per cent tax rate for capital gains for high earners for the disposal of assets such as shares and property held longer than 12 months.
But that is the headline tax rate on nominal gains, including inflation. Before the 50 per cent discount was introduced by the Howard government in 1999, only the real capital gains were taxed, which avoided taxing inflation.
Today, an asset held for about eight years faces a real effective tax rate on capital gains of about 35 per cent after allowing for inflation. The longer an asset is held, the less generous the discount is due to inflation eroding the real gains.
The real issue is not so much the discounted tax rate, but rather the ability for taxpayers to smooth their income and tax payments over their lifetimes through the three S’s.
For example, a wage and salary earner in their high-earning years can maximise the tax deductions at up to 47 per cent for mortgage interest deductions on investment properties. In retirement, they can sell the investment property and pay less tax on it when their other earnings are much lower.
Applying a flat tax rate on all personal investments and quarantining any losses against investment income would remove this distortion. It would also introduce greater neutrality between the taxation of different forms of savings and investment.
Today, people with savings in the bank are taxed at marginal rates, eroding the value of their savings. Other forms of savings and investment, such as superannuation and trust distributions streamed to low-taxed family members, are typically taxed more lightly.
Any changes to the taxation of savings and investments should not just be a revenue grab. A better and more consistent treatment of various savings and investments would be real tax reform.
 is economics editor at Parliament House, Canberra. He writes on economics, politics and business. John was Washington correspondent covering Donald Trump’s first election. He joined the Financial Review in 2008 from Treasury. Connect with John on Twitter. Email John at jkehoe@afr.com