Mr Costello said a bill would be introduced next year to repeal 28 per cent of tax legislation, making the system easer and more efficient to use.
"What that means is that practitioners will be able to use the Tax Act in a much more friendly way," he told reporters in Melbourne.
"They will not be worried by provisions which are inoperative and add to clumsiness or confusion, and this will be the largest simplification of tax legislation in Australian history, the repeal of nearly 30 per cent of legislation."
Mr Costello said the proposal followed a review of tax legislation by the Board of Taxation.
"This is a major reform to Australia's taxation legislation, a simplification of the dimension we've never had before, and a dramatic improvement to reduce complexity in Australia's tax system.
Inoperative provisions are those that have ceased to apply to taxpayers, either because they have no effect after a date in the past or because all the transactions they did affect have now concluded.
He would not be drawn on whether the changes would offer an opportunity for a new round of tax cuts from the treasury’s growing budget surpluses.
The Treasury is predicting a near-record budget surplus of more than $14 billion next year, giving Mr Costello the chance to deliver big tax cuts.
Mr Costello is about to announce an upgraded budget forecast on the back of strong company tax revenue and lower government spending.
The improvement, expected to register in the mid-year update of the budget, will show government finances in a much stronger position than at the time of the May budget, when an $8.9 billion surplus was forecast for 2005-06.