Enough with the tinkering: Tax Institute calls for substantive reform in May budget

With the federal budget for 2026–27 due to be handed down in May, The Tax Institute (TTI) has called on the government to commit to structural tax reform and simplification.

TTI urged the government to avoid “tinkering, quick fixes, or minor tweaks” that would add complexity to the tax system. They instead called for structural reforms, announced with sufficient detail and certainty as to when they would be implemented.

“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,” Julie Abdalla, head of tax and legal at The Tax Institute, said.

“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."

Intergenerational inequality is expected to become a pressing issue over the next few decades due to Australia’s ageing population. TTI warned that Australia’s tax system was not fit to fund growing demand for aged care, health care, aged pensions and other community support programs.

In particular, Australia’s heavy reliance on personal income tax meant that a dwindling pool of working taxpayers was set to foot growing social expenditure bills, the TTI warned. It added that raising the GST would be an “essential part” of moving away from this reliance on income tax and securing revenue sustainability.

The Institute also reiterated its criticisms of the government’s approach to tax reform consultation, which it has previously slammed for being “poorly timed and ill considered.”

“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,” Abdalla said.

She called on policymakers to reduce instances of frequent and rushed legislative changes.

The TTI also said that family trust elections rules should be amended as they currently did not allow for enough flexibility to amend administrative errors. It warned that the 47 per cent family trust distribution tax (FTDT) was being applied retrospectively, often spurring large and unexpected tax bills.

“These provisions are widely acknowledged as flawed and outdated and no longer serving their original policy intent,” Abdalla said.

“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.”

In support of the government’s productivity agenda, TTI also suggested the government should streamline and simplify inconsistent thresholds and concessions for small businesses. Small business concessions applied different aggregated turnover thresholds across multiple regimes, creating inefficiencies and productivity drags.

The institute also called on the government to provide stronger clarity on unresolved tax issues, such as Division 7A, which was clouded by uncertainty due to the ongoing Bendel case. Furthermore, the TTI said that ambiguity in corporate tax residency tests and diverging rules for trusts and corporate limited partnerships increased complexity and uncertainty for practitioners.

Abdalla said that the federal budget was an opportunity for the government to commit to structural reform and urged it to avoid more piecemeal adjustments.

“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,” she said.

“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.”