Australia

Australia's great GST debate gathers steam

A Sydney businessman outside the Reserve Bank of Australia (03 February 2015) Image copyright Reuters
Image caption Some experts say that a rise in GST could fix Australia's inherent tax problems

In Australia talk has turned once again to increasing the Goods and Service Tax (GST). But as Sydney-based writer Julian Lorkin reports, Prime Minister Tony Abbott - freshly wounded by a leadership challenge that saw 40% of his backbenchers vote against him - will have to tip-toe through a political minefield to achieve any meaningful changes.

"Last chance to buy… GST free!" shouted the advertisements back in 2000, when Australia introduced the tax.

The government's decision to introduce a 10% consumption tax was an unpopular move, not least because then Prime Minister John Howard had previously promised that a "GST would never become part of Liberal Party policy".

In the end, the tax - which many argue has a more pronounced effect on people on lower incomes - was only applied to a range of goods and services. Among other things, fresh food, and some education and health services were excluded, in a bid to win over a sceptical public.

Fifteen years later, talk has turned once again to increasing the GST - and while doing so may be fraught with problems, some experts say it could fix Australia's inherent tax problems.

Independent think-tank the Grattan Institute estimates that imposing GST on fresh food would raise A$6bn ($4.7bn; £3.1bn) a year in tax revenue. Removing exemptions for health, education and other services would raise about A$21bn more a year.

Image copyright Getty Images
Image caption Extra income from a higher GST could make up for the shortfall from declining mining tax revenues

According to the Organisation for Economic Co-operation and Development's biennial Consumption Tax Trends report released in December, GST revenues in Australia accounted for 12.1% of total tax revenue in 2012, the second lowest proportion in the OECD after Japan and well below the OECD average of 19.5%.

The low tax take is because Australia has an extensive list of goods and services that are GST-free but also because the rate has not changed since its introduction.

"In contrast, 20 OECD countries have raised their standard VAT/GST rate at least once in the last five years," noted the report.

The OECD says that makes the GST inefficient, and helps keep Australia's company tax rate at 30%, compared with an OECD average of 25%.

The report recommended the GST be raised to between 15% and 18%, and offset with lower income tax.

University of Queensland Professor John Mangan supports an increase and dismisses the claim that broadening GST to all food would hit the vulnerable hardest.

"There is GST on processed and fast food, which generally is eaten more by lower socio-economic income groups," explains Prof Mangan.

Image copyright Reuters
Image caption Finance Minister Mathias Cormann (R) is under pressure to raise more revenue

Fresh food - generally eaten more widely by more affluent Australians - does not qualify for GST.

Federal Liberal backbencher Dan Tehan is one politician not afraid to call for an increase in the tax.

"The budget needs this revenue," the MP told the BBC. "Fresh food and education should certainly be subject to GST," he says.

"The UK changed the tax mix, raising its GST, called VAT, and lowering income tax, which gave direct economic benefits. Australia could do the same," he says.

"However, broadening GST impacts people on fixed incomes and pensioners more. You need to lower personal tax, giving higher pensions and unemployment benefits to compensate."

In some ways, it all comes down to the sales pitch. GST proposals cost former Liberal Party leader John Hewson the 1993 election when he struggled to explain how it would be levied on a birthday cake.

Other countries have made lighter work of the PR challenge. The UK's VAT has changed several times, most recently rising to 20% in 2011. New Zealand has increased its rate twice.

Institute of Public Accountants Senior Tax Advisor Tony Greco says the extra income from a higher GST could make up for the shortfall from declining mining tax revenues. But he doubts politicians will succeed in winning over the public.

Image copyright AFP
Image caption The low tax take is because Australia has declared many goods and services GST-free

"Our Kiwi counterparts increased rates to 15%, and reduced direct taxes but they don't have the GST exclusions we have," explains Mr Greco. "It's very restrictive and means we can't easily change GST and lower corporate and personal taxation, giving a boost to the economy," he says.

"Corporate tax is a major hindrance in Australia, and companies prefer places like Singapore, which has lower taxation," he adds.

Back in 2000 the only way to sell a GST to the public was to give the GST revenues to the states and territories, Mr Greco says. Now, those governments all have to agree to any increase in the rate.

One way to increase GST revenue could be to lower the threshold below which online purchases made from overseas websites are excluded from GST, a proposal supported by Australia's big retailers.

Mr Greco says the A$1,000 threshold is three times the global average.

"Threshold lowering might level the playing field with traditional stores but it's nowhere as important as retailers argue," he says.

The downside is it could cost more than it is worth to collect the revenue.

Julian Lorkin is a Sydney-based writer and journalist.

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