17 Sep 2020 This week in tax
This week, Chair of The Tax Institute’s National GST Technical Committee, Bastian Gasser, ATI, Partner at Minter Ellison, explains the need for GST reform.
As Andrew Mills set out last week, The Tax Institute has embarked on a massive tax reform project, The Tax Summit: Project Reform. The Institute’s National GST Technical Committee has been using this opportunity to consider what part GST should play in this project — which, by happy coincidence, arrives as we mark the 20th anniversary of the GST.
20 years of GST
When our GST system was conceived just over 20 years ago, it was largely designed with best practice in mind. It was introduced to provide a stable source of revenue for the State and Territory Governments and was intended to grow with the economy. We had the benefit of being able to learn from the best of the various GST/VAT systems operating throughout Europe, Canada and New Zealand. Politics still played a small part, particularly when the base was reduced at the eleventh hour to exclude fresh food from the GST.
Since then, the GST system has been remarkably stable. We haven’t seen the seismic changes in the rate or the base that many of our international peers saw in the early stages of their GST or VAT systems, or even during the last 20 years.
However, taking a step back, by not changing and by not keeping pace with the economy, the GST system has also lost some fiscal relevance. We have seen a slow decrease in the proportion of total tax revenue coming from the GST, and the amount of GST collected relative to GDP. Changes to spending patterns towards GST-free items like health and education, have played a part. We can anticipate further declines once the full impact of the COVID-19 pandemic is felt.
What changes to the GST system have we seen?
In terms of rate? Nothing. No permanent changes, not even temporary ones, to deal with events like the GFC (and now COVID-19). This is quite unusual. The UK, Canada and some EU countries used temporary rate changes to stimulate their economies (or as part of austerity measures) in the immediate aftermath of the GFC. We can probably thank politics for that — the expectation (whether binding or not) that the States and Territories must support any changes to the rate has made such actions much more difficult.
In terms of the base, the only substantial change has been to tax more imported goods and services by making non-resident vendors liable for GST on services, and low value goods, that they export to Australian consumers. This is not a significant change in GST dollar collection terms, but it illustrates how Australia has been ahead of the curve in terms of dealing with this issue — one that other jurisdictions have watched with keen interest.
The remaining changes to the GST law over the past 20 years have related to compliance issues, such as the GST on property settlement withholding regime, and the 4-year amendment period rule. They have also addressed unwelcome court decisions, like the insertion of new Division 58 in response to the FCT v PM Developments Pty Ltd case. These were ad hoc, reactionary changes — hardly worthy of being considered any form of ‘tax reform’.
What does GST reform look like?
This is something our GST committee has been grappling with. There have been largely two significant debates among our committee members — reform of the GST against the backdrop of the broader tax system, and how reforms could be made within the GST system.
How can we consider GST reform, other than in the context of broader tax reform? As one committee member put it, we are ‘overweight’ compared to international benchmarks in property taxes, personal income taxes (although social security levies confuse this comparison), corporate taxation and excise, and underweight in VAT/GST. Genuine tax reform requires wholesale increases to either the rate or the base of GST, or both, to bring us closer to international best practice.
This could mean doubling GST collections, from $67 billion in 2019–20, to $134 billion. This would increase the GST as a proportion of GDP from 3.4% forecast in 2019–20 to 7% (back to the indirect tax to GDP ratio in 1986–87). This would leave plenty of room to reduce the rate and/or the base of personal income and corporate taxes.
Others on our committee have focused more narrowly on tax reform within the GST system. How could the base be tweaked to ensure GST collections at least maintain their current proportion of GDP? Have we overcome the reasons why a range of GST-free and input taxed things were not subject to GST when the system was first designed?
Key categories of GST-free and input taxed supplies include:
- Fresh food;
- Health goods and services;
- Education services; and
- Financial supplies.
Food: This is a no-brainer from a GST perspective. Taxing fresh food would remove complexity from the system (imagine the end of debates about what constitutes a cracker or a salad) and would increase GST collections. It’s important to remember that while this change will increase GST revenue, some would need to be used to compensate lower-income consumers.
Health and education: These present a larger honeypot, but both industries are highly subsidised by the Government. Applying GST to these categories of goods and services would be at odds with the policy rationale for the current levels of government subsidies in these sectors. It would mean an implicit reduction in the current level of subsidies (which is politically fraught), or an increase in subsidies to compensate in part for the imposition of GST, which would reduce the extra amount of GST revenue that could be collected. In addition, and perhaps surprisingly, structural trends in GST show that younger generations are allocating a growing proportion of their expenditure on these GST-free items.
Financial services: This is probably the easiest case to argue for. Much has changed in this space in the last 20 years, including technological advancements, among other changes, which enable us to better apply GST to financial supplies. Options for reform could include full taxation of fee-based consideration, removing reduced input tax credits, or a switch to the ‘additive method’ of GST for financial institutions. However, this would still involve substantial complexity, for a revenue gain that is not as large as might be expected. As these supplies are already input taxed to an extent, the additional GST collected would not be a full 10% of their domestic revenue.
There has also been some focus on compliance
Perhaps parts of the GST law could be redrafted to reduce some of the GST gap (the potential shortfall is estimated by the ATO to be worth around $5 billion each year).
This could include, for example:
- Introducing more reverse charge regimes, like the GST withholding regime for property settlements); or
- Extending the taxable payments reporting system (TPRS) to more industries.
Such measures are aimed at effectively ensuring the GST base is as broad in practice as it was intended to be in theory.
Are too many small businesses in the GST net? Should they be?
The most controversial idea within our GST Technical Committee has been about narrowing the GST base. The issue of whether the GST registration turnover threshold of $75,000 is too low and is capturing too many businesses that struggle to handle the complexity of complying with the GST system, is open to current topical debate.
As part of reducing red tape, perhaps the registration turnover threshold could be significantly increased so that small businesses can focus more on making money, growth and employing more people, rather than diverting energy and resources to GST compliance.
The ATO spends a disproportionate amount of its resources ensuring this cohort comply with their GST obligations. Perhaps there are better ways to allocate the ATO’s scarce resources.
As a GST adviser, some of the most interesting GST disputes I’ve worked on have been for very small businesses who simply can’t afford good tax advice, let alone mount a fight with the ATO if they happen to get it wrong (despite their best intentions). On the other hand, increasing the registration turnover threshold would move us away from international best practice, weight our tax system even further away from GST, and pose real issues with embedded or cascading tax.
These are the debates we should be having about our GST system and the debate that The Tax Institute is undertaking to build the case for change.
As always, we welcome your views and thoughts, which you can provide here.
Bastian Gasser, ATI