Prime Minister Tony Abbott says he makes “no apologies for wanting the states to be grown-up, adult governments that take responsibility for the programs that are theirs, for the institutions that they run”. With $80 billion wiped from state revenue, the GST is now firmly back on the table.
After a meeting of Australia’s premiers yesterday, there seems little desire to raise the GST or broaden the base. But New South Wales Premier Mike Baird says states “simply can’t afford” the new budget arrangement. Victoria’s Denis Napthine is hoping for a “fairer” distribution of GST so Victoria could receive a higher percentage, but he says he is not interested in changing the tax.
So who can change the GST, who will benefit, and is it politically viable?
What is the GST?
The Goods and Services Tax is a 10% tax on a variety commodities and services, excluding some basic foods, health services, education, exports and certain charity services. These exemptions were conceived to avoid targeting low-income households. If the base of GST were to become broader, more of those goods and services would be taxed.
Since the introduction of GST, the exemptions have remained largely unchanged. GST is applied to about 70% of its potential base. Australia currently has one of the lowest dependencies on GST among Organisation for Economic Co-operation and Development countries, but remains heavily reliant on personal and company taxes.
Do the states and territories have to agree to any GST changes?
According to the 1999 legislation, in order for the 10% GST rate to rise or for the base of GST to become broader, all states and territory governments must unanimously support the change. Then-treasurer Peter Costello stated in Parliament in 1999 after the legislation was put forth that “the bill clearly provides a lock-in mechanism”.
However, this piece of legislation could easily be changed with just a parliamentary vote. Constitutional change is really the only means by which the rate of GST could be “locked in”. Both of these options seem unlikely, however.
Associate Professor of Taxation Law at Flinders University Paul Kenny says he doesn’t “believe that the federal government would [change the GST without state consent]”, given the tax was set up to provide the states with revenue.
What does the Commonwealth need to do?
The federal government, in order to make changes to the GST base and the rate, must endorse the unanimous decision of the states and territories. Passages of legislation outlining the changes must then pass through both houses of Parliament.
In regards to how wide the base of the tax is, the current legislation outlines that the Commonwealth has to ensure that any changes that are passed must maintain the tax base’s integrity, must be simple to administer and must minimise the compliance costs of taxpayers.
The federal government has a grace period of 12 months after changing the tax base where it is able, if it sees fit, to amend the agreed-upon changes to the tax if they are necessary to properly implement it and if the changes will protect the revenue of the states and territories.
Kenny says broadening the tax base rather than lifting the rate “would make the whole thing simpler”. But he says the political process is messy and “doesn’t really lead to good tax reform”. He feels that a body independent of politics would be far more suitable to make changes to tax.
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