Reforming Australia’s tax system

Paul Osborne reports on the highlights from last month's tax forum in Canberra.

The federal government will set up a business tax review, increase the personal tax-free threshold and work with the states to make their revenue raising systems more efficient, in the wake of a two-day tax forum held last month.

Treasurer Wayne Swan said the measures, which also include a new tax research institute and the removal of the low-income tax offset, would be the "building blocks for the next stage of ongoing tax reform".

The commitments came after the forum was warned Australia was heading for a welfare spending crisis within a decade unless the government slashed the public service or cut lucrative tax breaks for the affluent.

"Some of the policies we have begun to sketch out together won't be popular, and many will be difficult to fit into a sound bite," Swan told delegates.

"So we need the spirit and commitment to reform we found over the last two days to endure well beyond the forum."

The personal income tax-free threshold is due to rise from $6,000 to $18,200 on July 1, 2012, but Swan said the government would raise this to at least $21,000 over time - meaning more than one million taxpayers will not have to fill out a return.

As well, Queensland Treasurer Andrew Fraser and NSW Treasurer Mike Baird will lead work on a states and territories tax reform plan, including a timetable for the harmonisation of some state taxes, with a first draft due at the end of 2012.

The final day of the tax forum in Canberra's Parliament House focused on the welfare system, personal income tax and oversight of the system.

Former senior Treasury official Greg Smith, a member of the Henry tax review, sounded a warning during the welfare talks that sharply focused the minds of the 200 delegates.

"I'm sorry to inject a sad note into the discussion, but my prediction for the next 10 to 15 years is that the issue will not be 'stop the taxes' or 'stop the boats', it will be 'stop the welfare system'," Smith said.

He said government spending and transfer payments would rise from 35 per cent of the nation's annual gross domestic product to 45 per cent. "It is a crisis," he said.

AAP

Fact box on the federal government's Tax Forum in Canberra:

*The government will set up a business tax reform working group which will send the government an initial report in November and a final report by March 2012.

*Queensland Treasurer Andrew Fraser and NSW Treasurer Mike Baird will lead work on a tax reform plan with other states and territories, including a timetable for the harmonisation of state taxes, with a first draft due at end of 2012.

*Former Victorian premier John Brumby will examine the efficiency of state imposts and ways their systems can be reformed.

*The government will raise the personal income tax-free threshold to $21,000 and remove the low-income tax offset.

*The government will fund an independent tax studies institute.

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