Proposed GST Reform-Is It Real? A Look Back and Forward

Thursday 23 July 2015 @ 11.45 a.m. | Taxation | Trade & Commerce

Following on from Wednesday's meeting (called a "retreat"), attended by the State premiers, chief ministers and the Prime Minister in Sydney, prior to today’s (23 July 2015) Council of Australian Governments (COAG) meeting, Goods and Services Tax (GST) reform appears to have become a high priority on the agenda. In the light of these developments, it seems of value to consider how the GST has developed as part of the Australian tax system and why now many argue for and against its increase, broadening its application or other changes.

Background and History

The proposal for a broad-based consumption tax like the GST was first raised by the Labor Federal treasurer Paul Keating in the 1985 Tax Summit. It was, however, dropped, following pressure from the then Labor Prime Minister Bob Hawke, the ACTU, welfare groups and business, all of whom had issues with aspects of the tax. These issues ranged from how the tax might adversely affect fixed income earners (such as pensioners, retirees and the poor), as most consumption taxes do, through to the complexities of administration and application for business.

In 1991, the proposal for a GST was revived by Liberal-National Coalition opposition who's leader Dr John Hewson made it the centrepiece of the party's platform at the 1993 Federal election. Sadly, he had great difficulty explaining the policy and, as a result of the ensuing public distrust, lost what many considered the "unloseable" election of 1993. In 1994, the Liberals Party discarded the platform when Dr Hewson was replaced as Liberal leader.

In 1995, former Liberal Leader John Howard re-entered as leader of the party pledging that he would "never, ever" introduce the GST and then led the Liberal-National Coalition to a large victory in the Federal election of 1996.

John Howard's resolve against the introduction of a GST was, however, reversed before the 1998 election, with his proposal for a GST that would replace all existing sales taxes and apply to all goods and services.

At the 1998 election, the Howard Government won the election by retaining a majority of seats in the House of Representatives, but suffered a swing against it of 4.61%, achieving a two party preferred vote of only 49.02%, compared with Labor's 50.98%. Even given the precarious outcome in percentages, John Howard went on to describe the election win as a "mandate for the GST" and, compensating for the lack of a Senate majority by turning to minor parties such as the Australian Democrats, he gained the necessary support to get the GST legislation through the Senate and enacted as law.

Two Key Factors

One of the main ways consensus was achieved for the legislation among the states and territories was that all the revenue raised by the GST would be distributed to the states and territories, and in 1999, an agreement was reached with the state and territory governments that their various duties, levies and taxes on consumption would be removed over time, with any resulting budget shortfall to be replaced by GST income, to be distributed by the Commonwealth Grants Commission. A further part of this agreement being that, Federally-levied personal income tax and company tax would be reduced to offset the GST.

Also, while the GST was eventually implemented with the support of the Australian Democrats, it was not implemented as first proposed by John Howard and the Liberal-National Coaltion, the support of the Australian
Democrats being conditional on the exemption of food, books and tourism packages sold offshore from the tax and that compensating measures were implemented.

The Current Position

The GST is now approximately 15 years old and was introduced as a new Federal tax by the Howard Government in 1999. The A New Tax System (Goods and Services Tax) Act 1999 (No. 55) (Cth) received assent on 8 July 1999 and commenced operation on 1 July 2000. It replaced the previous Federal system of indirect taxes including wholesale sales tax and was intended to phase out a number of State and Territory Government taxes, duties and levies such as banking taxes and stamp duty.

As it is currently implemented, the GST in Australia is a 10% value added tax attached to most goods and service sales. It is levied on most transactions occurring in the production process, but is refunded to all parties in the chain of production other than the final consumer or ultimate purchaser of the goods or service.

Why the Would Be Reforms?

As can be seen from its history, the GST was, like most taxes, never an easy topic for politicians to raise, with even its initial implementation being a negotiated and much amended process. While calls to reform, alter and/or increase the GST have come up from time to time in the last 15 years, the GST has remained largely unchanged in terms of it percentage rate and breadth of application.

Now, however, with the States looking at massive shortages of funding in education and health following on from the current Federal government's first budget, where it announced it would not be providing $80 billion to the states for future funding, it seems that the "GST elephant" has well and truly arrived in the room and requires serious attempts to be made to reform the tax.

Also, while the Federal government has, as is often reported, repeatedly said it will not make changes to the GST, including increasing the rate or broadening it to include currently exempt services like food and education without going to an election, and without a “parliamentary consensus” - it would seem that were there to be rational attempts at reform proposed they would be taken on and prosecuted by the Federal government.

What Has Been Said on Reform of the GST?

The latest push to reform was kicked off by NSW Liberal Premier Mike Baird who has called for the GST to increase from its current 10% to 15%. The announcement was made as part of plans to present the proposal to Prime Minister Tony Abbott and other state and territory leaders in Sydney.

Mr Baird's proposal results from the expected shortfalls, particularly in health funding as referred to above, and he argues that increasing the GST is the best way to deal with them:

"The concept in terms of how we deal with health funding - and that's maintaining existing services - is the biggest challenge we face in this state and indeed across the country. If you get to a position rolling forward, both Budgets - Commonwealth and states to 2030 - when you get to that position on reasonably conservative assumptions you get to $45 billion of deficits, of which $35 billion is health costs. So the big challenge is how do we fund health costs because at the moment we haven't got the capacity to do it and really we need to get on with the job."

In response to this approach, at least one Labor Premier, namely, SA's Jay Weatherill, is reported as willing to consider some GST changes but not necessarily an increase to the tax. Mr Weatherill favours more discussion about the possibility of broadening the range of goods and services covered by the GST to include areas such as financial services, which he claims do not affect the poor and those on fixed income, and is quoted as saying:

"I haven't indicated any support for an increase in the GST. What I've indicated is that there should be a discussion about new revenue measures. My proposition is that we should actually increase the GST in terms of its breadth by covering financial services. It's not an area that's presently taxed. It's an omission from the scope and it doesn't hit poorest families the hardest. It's one of the few changes you can make to GST which can increase the revenue, but not actually hurt poorer families the hardest. That's the sort of change I want to see, that is, any change that can raise revenue but it doesn't come out of the pockets of those who can least afford it."

At the Federal level, Labor, through its shadow treasurer, Chris Bowen, has taken the view that the Federal government's cutting of health funding to the states is a tactic to force the states into agreeing to make changes to and increase the GST. He is reported as saying the Federal government

". . . always had the plan to cut $80 billion out of health and education to make the States accept the need to increase the GST or broaden the base. Mike Baird has capitulated to this campaign from his friend and supporter, Tony Abbott. Mike Baird can do that if he wants to, but the Labor Party will stand consistently against increasing the GST. This is not a policy that we support or will support, and clearly other Premiers and State Treasurers have made the case they will not support it either."

The Victorian Labor government has also indicated it does not support an increase, with Premier Andrews indicating he would instead argue for an increase to the Medicare Levy as a way of funding future health needs. He is reported as saying:

"My position on the GST is a very clear one. I will not be supporting an increase in the rate of the GST or radical changes to the sorts of goods and services that basically attract the goods and services tax. We have been very clear about this. The Prime Minister went to the last election and he said there'd be no cuts to health and no cuts to education. He then did exactly that. He cut hospitals and he cut schools. Now he'd like to increase the GST. He'd like everyone to pay for his lie."

The Queensland Labor Government also does not favour increasing the GST, while the Tasmanian position also appears to be in favour of looking at other options. The Western Australia position continues to be for its entitlement to a larger share of GST revenue, with its Premier Colin Barnett reported as also favouring reform, especially with respect to the broadening of the application of GST:

"Certainly distribution from WA's point of view, I think you need to look at online purchasing - seems to me there needs to be an equality between consumer purchasing whether it's at a shop or buying online, I think also you need to look at the coverage, should the exemptions - like fresh food - still be in place? Because they add enormously to the complexity of GST and the cost of collecting it. The point I make is that states need to go away in my view, it might take a year, it might take longer - and sit down and go through all of the issues and present a united case to the Federal government. That's sensible reform."

Will Serious Reform Follow?

The government, while possibly making the debate for reform necessary, has, through the Prime Minister, refused to say directly whether it would like to see an increase in the GST but has been encouraged by the debate:

"I'm just not going to speculate. But I certainly think it was a very constructive proposal from Premier Mike Baird. It's a sign that New South Wales along with South Australia are thinking seriously about what we need to do to have better schools, better hospitals in the years to come and a more effective Federation in the years to come."

At this stage, it does not appear that the required consensus that will make politicians comfortable about changing the GST has emerged but it does appear that ambit claims are being made and that more concerted and likely outcomes may flow from COAG and like discussions between our State and Federal leaders.

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