Personal tax and its transfer systems

Architecture of Australia's tax and transfer system paper examines the method in which the personal tax and transfer systems interact to affect the throwaway income of individuals and families, and their incentives to work, save and invest.

The Australian tax and with transfer systems are separate systems. There are different bases of evaluation between and within the two systems, including the definition of income, the unit of assessment, the time of assessment and the basis of eligibility. These differences mainly exist to achieve a targeted system, but a result is that the system as entire is complex.

The arrangement of the tax and transfer systems is progressive and redistributive. There are many families and individuals who get transfers and pay tax in the same year and from one year to the next (see chart below). This 'churn' imposes expenses on individuals as well as the administration of the system.

Succeeding tax cuts since 1985 mean taxpayers at all income levels pay less tax than if the tax thresholds had been indexed for inflation.

Significant demographic change, as well as ageing of the population, will influence the affordability of the transfer system in the future. Participation and productivity increases may counterbalance some of the impact of demographic change.