The Australian tax and welfare system in Australia in its current form was by and large developed many decades ago and has since only had modest and largely ad hoc changes. This is in spite of the many changes to the Australian population and economy. In this paper we provide a new methodology and modelling tool for designing the tax and welfare system. We do this by using a microsimulation approach where we alter tax or welfare payments to optimise some objective of the tax or welfare system subject to a range of constraints, such as the overall welfare budget, payment restrictions or relationships between different payments. This seminar presents the modelling results where we estimate the welfare payment settings required to minimise poverty in Australia for the 2017-18 financial year. The research estimates the relationship between payment levels and the poverty gap which is then used to develop an “optimal” level of payments in terms of minimising poverty levels, allowing for specific constraints such as budget neutrality and restrictions with current payment levels. Initial results suggest that reductions in the poverty gap for current welfare funding can be obtained by increasing the Newstart payment and to a lesser extent Pensions and making offsetting reductions to some other payments such family payments and rent assistance. The modelling also shows which payments to increase where welfare budgets are increased and which payments to decrease where the welfare budget is lowered such that an objective, such as poverty is minimised. Initial modelling results for this new methodology for minimising the ‘poverty gap’ are encouraging and we expect the method can be extended to a wide variety of other potential policy objectives such as minimising financial stress, after-housing poverty or effective tax rates. This new methodology is not designed to provide a single answer to the design of tax and welfare systems, rather to be used by policy makers as a useful tool for considering current or alternative payment levels and tax rates from the perspective of a range of policy objectives.