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Crikey Clarifier: what’s the mechanism for hiking the GST?

Tony Abbott has goaded state governments into lobbying for hiking the GST. Crikey intern Danielle Thompson looks at the mechanisms for change.

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.

6
  • 1
    max steinman
    Posted Monday, 19 May 2014 at 4:01 pm | Permalink

    I haven’t read this article but a ctrl+f for “regressive” without results tells me that I probably don’t need to.

    Raising the GST is regressive taxation, it will contribute to the already well established exponentially increasing global inequality, we need good progressive taxation systems more than ever.

  • 2
    Glen
    Posted Monday, 19 May 2014 at 5:28 pm | Permalink

    Thanks Danielle. I guess you’ve made it clear enough, but to reiterate, the GST is a creation of federal legislation, and can only be changed by federal parliament. The agreement with the states has no practical enforceability. No state could succeed in trying to enforce the agreement before any court if federal parliament decided otherwise.

    In the light of the Abbott government’s repudiation of federal-state agreements on health and education, it is extraordinarily disingenuous to pretend that the GST agreement somehow binds the commonwealth.

  • 3
    AR
    Posted Monday, 19 May 2014 at 6:43 pm | Permalink

    VAT,MOMS,GST,etc - consumption taxes are of supreme importance in the euroid context, esp the morally malleable southern societies were tax avoidance is the only sane response, predicated on graft & corruption to oils commerce & daily life.
    In other words, they are an alternative, not an addition, to income tax.
    This way, no matter how lceverly hidden, income when spent is taxed. Simple.
    To have both is a typically constipated political/bureaucratic response, unable to let go nanny’s hand of income tax for the brave adult world of pay as you spend.

  • 4
    drsmithy
    Posted Tuesday, 20 May 2014 at 8:27 am | Permalink

    No need to touch the GST. The States could bring in a land tax, which is about the fairest and most equitable tax base there is.

  • 5
    David Penington
    Posted Tuesday, 20 May 2014 at 2:36 pm | Permalink

    Senator Ian Macdonald wants to extend the GST to basic foods, which is highly regressive. I notice he doesn’t want it on private school fees or cosmetic surgery.
    Putting a GST on overseas credit car, paypal, etc payments would help rebalance the local retailer and producer tax disadvantage and would be sensible if it could be achieved.

  • 6
    David Penington
    Posted Tuesday, 20 May 2014 at 2:36 pm | Permalink

    credit card not car.

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