By Federation, many of the colonies had introduced income taxes, each with their own definition of assessable income and different rates applying to different categories of income. Australia’s first Federal income tax was introduced in 1915, in addition to existing state income taxes, following a need for WWI funding. This was accepted on both sides of political parties during WWI. Introduced by Mr. Billy Hughes in the Labor Government.
This 1915 Act was only 22 pages long, unlike the two income tax statues we have today, the Income Tax Assessment Act 1997 and the Income Tax Assessment Act 1936, both comprising thousands of pages.
This Tax Act was largely confined to ordinary income derived (allowing deductions for losses incurred) in Australia, it was closer to a comprehensive income base than our current tax system. Unlike, the UK capital gains were not taxed (or allowed deductions) until 1986.
As paying tax on the same base to two levels of government was inconvenient, there were a number of attempts to resolve federal and state taxation issues. In 1919, the federal government offered to withdraw from income tax as an alternative to providing grants to the states. However, some states rejected this option.
In the early years of the Second World War, the Federal Government increased its income tax to meet the costs of the war effort, revenue grew from 16% to 44%. Differences in state income taxes led to concern about the differences in tax burdens between taxpayers in different states.
In 1942, the Federal Government introduced legislation that increased its income tax rates to raise more revenue. This provided for reimbursement grants to the states provided that they ceased to levy state income taxes. The uniform taxation arrangements were initially only meant to apply for the duration of the Second World War. However, after the states were unsuccessful in seeking to regain their income taxing powers.