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Jan 20, 2011

Retailers and the loophole that wasn’t there

The retail lobby against the internet has successfully seeded the idea that there is a GST "loophole." But no such loophole exists and and if they think it does, they're in a lot of trouble.

You can’t say the campaign by the retail lobby against the internet has been a complete failure. It has been very successful at seeding the idea that the current “low value importation threshold”  of $1000 is a “loophole”. Henry Rosenbloom, defending the retail oligopoly in Crikey earlier this week, referred to the GST “loophole” several times. And the media routinely refer to the “loophole”.

Well, I guess one person’s loophole is another person’s insidious tax grab, but normally a loophole is an unintended consequence of policy, something unforeseen by bureaucrats and government lawyers when drafting legislation and seized upon by tax dodgers. But the low importation value threshold is deliberate Government policy, not an unintended consequence. And it has been around for decades, long before the GST. Moreover, it has been reviewed on multiple occasions – most recently in 2009.

If you want the full history, go and look at the submissions to the 2009 inquiry by the Board of Taxation. The submission from the Conference of Asia Pacific Express Carriers, prepared by PWC, gives the history back to 1976 of the threshold below which it was deemed too expensive or burdensome to try to collect tariffs, wholesale sales tax or, more recently, GST, on goods privately brought into the country.

Conference of the what and who? CAPEC represents express delivery companies that have benefited from the growth in online trade because they deliver goods ordered online. Hmmm, the retailers didn’t mention that, did they? They focused on the jobs they say have been lost or are at risk in their industry, not the ones created in other industries – an approach that we’re familiar with from other industries demanding protection. And it’s not just the likes of TNT or FedEx. One of Australia Post’s key growth strategies in an era of declining paper-based communication is delivery of online-ordered packages via its extensive network of retail outlets.

Some retail jobs are more equal than others, perhaps.

But, coming back to the CAPEC submission, why does it go back the 1970s? Well, e-commerce had its analog antecedents, as plenty of Crikey readers have pointed out, via catalogues and magazines. In fact one of the retail submitters to the Board of Taxation inquiry, the Sporting Goods Association, acknowledges this, noting that the threshold issue applies both to goods bought via the Internet and magazines.

See, the idea that tax policy should recognise circumstances where it is too costly for government agencies to collect tax, or it’s impractical to force retailers to collect tax on behalf of government, or the costs and inconvenience of imposing the burden of collecting tax on consumers themselves is simply too great, has been established in Australian tax law for decades, long before the internet. So too is the idea of selective application of tax. That’s why we have duty-free shopping, which is nearly a billion-dollar pa industry that employs 3,000 Australians, all around a tax “loophole”.

Incidentally, the threshold where goods became subject to duty in 1976 was $250 – which as the CAPEC submission notes, is the equivalent of well over $1000 now. In one important sense, today’s retailers are actually getting a better deal than previous generations.

As this indicates, none of these issues are new, which is why they’ve been the subject of similar inquiries before

But yes, some industry groups did raise the threat of online shopping with the Board of Taxation. The Australian Toy Association said the same thing as the Sporting Goods Association. I mean, literally – they put exactly the same submission in, just with a different header on it. The booksellers’ association lodged a submission – the local publishing and bookselling industry has long been dealing with the threat of online competitors. And the music retailers’ association did too. They displayed the same iron grip on reality shown by the big record companies in the face of online competition, calling for eBay to be taxed.

But at least those groups, however self-interested, made an effort. What did the big retailers say? What did Harvey Norman, or DJs, or the National Retail Association, tell the Board of Taxation about the low value importation threshold? Well, nothing, at least nothing public. The threat of online retailing was so great just over twelve months ago that none of them bothered to argue the case publicly for lowering or removing the $1000 threshold.

In any event, the Board of Taxation, like Parliament’s Joint Committee of Public Accounts and Audit in 1998 (not online, alas), wasn’t convinced. Like the JCPAA, the Board (chaired, incidentally, by Dick Warburton, who might know a thing or two about retail from stints as Chair of David Jones and Westfield Retail Trust) recommended keeping the threshold at $1000.

So, in summary, there’s no loophole, this isn’t new, and the threshold has repeatedly been examined and found to be appropriate. Everything the retailers say on this issue is self-serving misrepresentations — the lingua franca of rentseekers.

If this issue has already been done to death as recently as last year, why did the Government refer it to the Productivity Commission? Because until the explosion of consumer fury at the campaign, this easily-rattled Government wasn’t sure whether it faced another mining tax-style campaign or not. The much-maligned Bill Shorten, to his credit, moved quickly to respond to the retailers and argue correctly that lowering the GST threshold wasn’t going to fix the retailers’ problems. But a better government response would have reflected the Paul Keating approach to rentseekers – belt them, belt them hard and often.

The determination with which the retailers are pursuing this campaign suggests that they really aren’t getting it. Not so much about the internet (and, yes, we’re all over the line that so-and-so “doesn’t get the internet”), but about what appears to be a more conservative Australian consumer who, post-GFC, is finally paying attention to decades of imploring from policymakers to spend less and save more.

Retailers may be facing a secular change in spending habits that will bring significant long-term benefits to Australia. Like so many industries before them, retailers will simply have to adjust to economic reform. If they really think the GST threshold is the problem, they’re in deep trouble.

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40 comments

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40 thoughts on “Retailers and the loophole that wasn’t there

  1. kate

    “Retailers may be facing a secular change in spending habits”

    Hmmm … gotta be a wisecrack in there somewhere … Something about worshipping the god of consumererism? … Gerry Harvey thinks he’s bigger than Jesus? .. . No doubt wittier minds than mine will step up to the challenge.

  2. Meski

    Improve your range, service and pricing, local retailers. Then we’ll come back.

  3. andrew carter

    Where do companies like Harvey Norman, et al, acquire their goods? I imagine (but welcome clairifcation) that a lot of the retailers that are claiming internet sales are causing the loss of Australian jobs (as well as a reduction in the tax base) source their products from Asia and abroad because they are cheaper than acquiring them locally. Is that not the same thing they are now so concerned about?

  4. James Wade

    Do you know what shits me the most about this whole chi-bang?

    You don’t save a measly 10% shopping overseas online. When I’ve bought things online, I’ve typically saved 30-50%.

    Plus for things you don’t need right now, it’s a hell of a lot more convenient than trekking to the shops and dealing with parking and crowds.

    Not to mention the increased range of stuff you can buy. Most Aussie retailers cater to the lowest common denominator. If you want anything slightly nichey, you’ll most likely have to go overseas for it.

    I also wonder how much of the improvement exchange rate (I guess whether or not it’s an improvement depends which side of the fence you sit on) retail has passed on. At a guess, I’d say not much… prices didn’t really appear to be falling through the floor.

    I think the currently situation just shows how much big Australian retail has to answer for. The service is lacklustre, product range limited, and prices are inflated.

  5. Liz45

    Most informative article, Bernard, thank you!

    @ANDREW CARTER – Not to mention the fact, that we don’t manufacture many of the goods here any more. Maybe the odd mattress manufacturer/re-storer etc, but what white goods or TV’s/computers etc are manufactured here? None to very few I’d suggest. More furniture perhaps, but I don’t think many of any other goods are manufactured in Australia. I don’t think we even make telephones any more – even the ones with a Telstra brand are made overseas?
    As for clothes? Particularly women and kids – Made in China! Even the majority of dress and manchester fabric is made overseas these days. I make most of my clothes and for my grand kids(particularly when they were little) and not much is made here – very sad!

    I recall Gerry Harvey, prior to the ’07 Election, advocating, that there be two ‘tiers’ of workers – one half from Australia on award wages etc, and the other from overseas on about half or a little more. No doubt he’d take full advantage of that if it ever became govt policy? (there was public outrage, letters to the editor etc, and Joe Hockey had his staff checking out the names of letter writers?).

    Serves Gerry right! So much for our rights to freedom of choice! I’m personally a bit ‘scared’ of buying on line, but I know people who have, and they’re more than happy with their choices/service etc. That could certainly be improved here!

  6. Tim nash

    Shoppers look after their own interests and purchase goods from the internet. In doing so they inadvertently improve some domestic industries like Australia post, and also in other industries like IT and Graphic design.
    In peoples own self interest they improve the local economy – it’s the old invisible hand.

    The Sales tax is a side issue, retailers don’t like what’s happening as Bernard has pointed out and this is a chance for retailers to vent themselves.

    Little good it will do them, even with GST it’s still much cheaper to buy online.

  7. freecountry

    You’re right about the jobs. As Ross Gittins explains, fear of job losses is a leftover from the recessions of yesteryear. In today’s Australian economy, one door closes and another door opens.

    Strictly speaking, you’re right about the threshold not being a “loophole”, but only strictly. Until recently, mail ordering meant costs of delivery and international payments, delays, and risks of being ripped off, which more than balanced out any exemption in taxes and duties for low-valued items.

    That’s no longer true. Internet technology and online payment systems such as Paypal have made the mechanics of internet commerce trivial. Momentum in online retailing has brought about economies of scale. The price barriers are gone for all but the most everyday item. Today you could just about order your daily groceries and stationary online, just as cheaply as you can steal a shopping trolley and wheel it to the station.

    So the volume of trade which is exempted from the tax for reasons of expediency is growing every year. As it grows, it introduces distortions into the market for goods and services. These distortions mean that shops are providing free showroom services for shoppers, who go to have a look and ask advice, write down model numbers, and then buy online.

    It also means cavemen like me who still shop in my own country are actually subsidizing those who shop online. I’m honoured to do my bit, but in aggregate this causes our whole economy to grow a little bit more slowly than it could. We still have full employment, but the wages are worth just that little bit less.

  8. Barry 09

    No more Gerry Harvey shopping for me any more or any other rent seeker trying to prop up their Billions in profit. Have found Kogan.com.au and many other Australian online shops to use and help Aussie post workers/ contractors earn more. Liz try big companies and use paypal , for payment. Let your fingers do the walking and save on fuel. I buy all my motor bike parts on line and have sold parts on ebay to the world. Cannot walk into Honda shop and buy 1970’s parts off the shelf and is cheaper in the states for small light items (postage is a killer ). Labor should hammer the next Billionaire rent seeker into the ground and deport ( Jail ) him/her for treason or what ever to make them a example to others or they will keep on whinning.

  9. Sue11

    Great analysis. Maybe the retailers should get some hints from the Mining Companies about how to cry wolf more effectively.

  10. botswana bob

    The question is what are the overcharging retailers up to? As long as the South Pacific Peso is up in value–it has a record of volatility –charging the GST isn’t going to do much to drive consumers back to their high prices. The Brisbane Courier-Mail had an excellent example on a Canon digital camera that cost over $A1000 on line. Paying the GST and shipping and the camera was still $1000 less than in the stores owned by serial shouter Gerry Harvey. And its more convenient to order online than drive to a shopping centre, be slugged for parking, trudge to the shop and try to attract the attention of a disinterested shop assistant only to be told the item is out of stock.

    I reckon the campaign is directed at getting government not to charge GST on items under $1000 to the shops owned by these billionaires. A classic try on by the super rich.

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