Australian opposition mulls lower taxes for residents in regions

• In short: Peter Dutton says he sees a "moral argument" why people in the regions should pay less tax than people in cities because of their higher cost of living.
• The existing Zone Tax Offset offers a regional tax discount of up to $1,173, but Mr Dutton said he was open to considering options for reform.
• What's next? Tax experts doubt any change to regional tax arrangements would survive a constitutional challenge.

There is a "moral argument" that people who live and work in the regions should pay less tax than city dwellers, Opposition Leader Peter Dutton says.

Dutton made the comments at an appearance in Mount Isa alongside local member Bob Katter, a vocal proponent of a "zonal" tax system.

"I think there are arguments for people who live in regional towns where you're paying more for petrol, you're paying more for electricity, you're paying more for housing, there's an additional cost that comes with it," Dutton said.

"We're happy to have a look at taxation arrangements."

That would fulfil a long-held aspiration for many Nationals politicians including Barnaby Joyce, who mentioned it in his first speech and championed it as a cabinet minister.

But there are several obstacles, not least the political saleability of a concession in regions at a time when the Coalition is trying to woo suburban voters anxious about their own cost of living.

The constitutional elephant in the room

One practical obstacle is the constitution, which states that taxes collected by the federal government cannot "discriminate between states or part of states".

Despite that prohibition, Australia already has an income tax concession in place for those in the regions.

The Zone Tax Offset (ZTO), first introduced in 1945 in recognition of the expensive and isolated conditions of regional living, offers a tax deduction of between $57 and $1,173 for residents in designated areas.

The constitutionality of that offset has never been directly challenged in its near-80-year history, but tax law experts believe it would be vulnerable to such a challenge.

"It is constitutionally questionable," said Paul Tilley, an ANU fellow and ex-Treasury official who has written a history of Australian taxation.

"The thinking for a long time has been that it would probably not survive a constitutional challenge. You can't change the law to get around this issue, it is a constitutional issue."

Great community spirit today at the Mount Isa Rodeo with @RealBobKatter. There's nothing like the energy and passion of this town. pic.twitter.com/NKkdqxqtf2

— Peter Dutton (@PeterDutton_MP) August 9, 2024

Tilley said it was "strange" for Dutton to reopen the debate in that context, given any change to current arrangements could awaken a challenge.

"The general approach has been to just stay quiet about it."

Dutton acknowledged the "constitutional restrictions" but said "some of that law frankly needs to be tested".

Twilight zones

The Katter Australia Party had a "complete review and revamp" of ZTO in its 2022 election platform.

That would include revisiting the zone boundaries, which are broadly the same as they were in 1945 despite considerable change in regional Australia.

For example, Darwin, Cairns, Townsville and Mackay are eligible for offsets even though they are now larger regional centres with considerable amenities.

A 2020 Productivity Commission report found little difference between the cost of living in these regional centres and in cities.

But residents of those four locations account for almost half of the roughly 500,000 people who claim the ZTO each year.

And residents in very remote areas, where food, transport, utilities and housing maintenance costs are higher - although housing itself is typically cheaper - get no additional amount.

"Believe me, people living in Weipa, Hughenden or Mossman need a tax offset more than those living in Cairns or Townsville do," party leader Robbie Katter said during the election campaign.

The amount is also not adjusted for inflation, and advocates say a more generous amount is needed to encourage more people to live in declining regional areas.

The belief that generous tax settings could revitalise the regions is at the heart of their appeal in those areas.

"The only proper way to attract people is to give them a reason to move," Mr Joyce wrote in 2013 during his tenure as federal agriculture minister.

"If there is not a substantial difference in tax liability but there is in access to infrastructure, people will naturally gravitate to cities."

An outback tax haven?

The Productivity Commission was less enthused in its 2020 report, commissioned by then-treasurer Josh Frydenberg.

It called the ZTO "outdated, inequitable and poorly designed" and recommended it be "rationalised and reconfigured to reflect contemporary Australia".

"Improvements in technology have reduced the difficulties of life in remote Australia, although to a lesser extent in very remote places," the report authors concluded.

The report found "no evidence" it could encourage relocation and saw "no general role for government" in trying to do so.

And while it recognised some cost barriers in very remote areas, especially for welfare recipients who also receive an extra regional allowance, it also noted regional employers and governments tended to offer higher wages to reflect that fact.

It also advised against expanding tax concessions to businesses located in regional areas.

The report prompted an angry backlash from regional politicians, provoking Bob Katter to brand its authors "dangerous, stupid people". The Morrison government opted to leave the ZTO unchanged.

Both major parties have traditionally defaulted to methods of regional support with less constitutional baggage, such as support for industry and subsidies for telecommunications or healthcare.

Dutton hedged his comments by saying the Coalition had "looked at different ways in which we could provide support".

"[But when] you're producing in many cases royalties and company tax that go to benefit people in capital cities … I think there's a moral argument," he said.

- ABC