Tax Reform and the Risk of Unintended Consequences

Tax reform is important if we are to maintain the quality-of-life Australians expect and enjoy. Meaningful reform, however, is never easy, and we acknowledge the Federal Government for taking on what has historically been one of the most difficult policy areas to navigate.

For decades, governments of all persuasions have struggled to deliver significant taxation reform. The challenge is that while most people agree systems can be improved, meaningful change inevitably creates discomfort. Reform requires people, industries and governments alike to reconsider long-standing positions and behaviours.

To create lasting and effective change, stakeholders need to be aligned around both the need for reform and the intended outcomes. That alignment comes through communication, negotiation and a willingness to work through unintended consequences before policy settings are finalised.

That is why it is important the current conversation remains focused on the Government’s stated objective, improving housing accessibility and intergenerational equity.

In that regard, we support efforts aimed at improving access to established housing, including proposed changes to capital gains tax and negative gearing as they relate to existing residential property. While the long-term effectiveness of these changes will take time to measure, any genuine attempt to address housing affordability deserves acknowledgement.

Where concern is beginning to emerge across industry, however, is in the broader application of the proposed changes beyond established housing.

As currently framed, the reforms extend into areas including discretionary trusts, shares and other productive assets. This creates a disconnect between the stated policy objective and the practical reach of the legislation.

The taxation treatment of productive assets such as businesses and shares does not directly influence housing supply or accessibility in the same way as established residential property. In some cases, it may unintentionally impact younger Australians who have invested in shares because home ownership remains out of reach, while also affecting the willingness of small business owners to invest, expand and employ.

More recently, the public narrative around the reforms has also shifted toward “levelling the playing field” between employees and employers through the tax system. However, operating a small business carries fundamentally different levels of financial risk, responsibility and long-term investment compared with employment.

At a time when Australia is already experiencing workforce shortages, slowing productivity growth and declining rates of business formation, policy settings should actively encourage entrepreneurship, investment and business creation.

Recent economic trends suggest Australians are becoming increasingly risk-averse -  less willing to start businesses, change jobs or pursue new opportunities. That trend should concern policymakers because long-term economic growth relies on productivity, investment and innovation.

Within the construction and development sectors specifically, Infrastructure Australia has projected a workforce shortfall of approximately 300,000 workers by mid-2027. Encouraging more tradespeople and skilled operators into business ownership has the potential to increase employment opportunities, expand industry capacity and place downward pressure on construction costs over time.

The broader economic multiplier from incentivising productive investment and business growth is significant. Supporting businesses to invest, employ and expand ultimately strengthens long-term economic productivity and future tax revenue generation.

There is an opportunity for Government to refine the proposed reforms so they remain focused on established housing, while carving out productive business and investment assets that play a critical role in employment and economic growth.

Good reform should solve problems without unintentionally creating new ones.