Much has been said over the past few weeks by Australian retailers about their dire position as a result of our Goods and Service Tax (GST) laws, which exempt certain overseas purchases via the internet. If you take on board some of the commentary going around, you might believe that the $1,000 GST exemption for imported goods is the sole reason behind declining consumer spending across the country.
But, as with any debate like this, you have to take what you hear and read with a grain of salt.
The fact is, the GST exemption was put in place to provide relief from the significant compliance problems that would exist if every single importation into Australia – regardless of its value – had to be subject to GST.
Imagine if you had a friend overseas who sent you a birthday present (worth $100) via mail. Before you received the parcel, you would get a message from the Customs Service saying that before you could receive your present, you would have to send them $10! It may sound harsh, but that’s precisely what would happen if the GST exemption didn’t exist.
It would probably not be a very happy birthday!
The $1,000 exemption is there to ensure that these kinds of scenarios don’t arise. You can argue whether or not $1,000 is too generous. Ultimately, no matter where the line is drawn, someone is bound to disagree with it.
A little over a year ago, the Board of Taxation, an independent expert tax policy adviser to government, looked into the importation exemption. They concluded, based on the investigation and analyses they carried out, that due to the compliance problem that would arise if the threshold were reduced or removed, no changes were needed.
Australian consumers who choose to buy goods online from an overseas location do so because of a range of factors, such as currency exchange, the quality and availability of a comparable product in the Australian marketplace, and perhaps the GST. So, while the tax exemption would feature in the decision-making process, it is not the sole motivating factor. The argument progressed by Australian retailers fails to acknowledge the other factors influencing consumer spending.
At the end of the day, the $1,000 GST exemption exists for very good reasons. To move forward, the government should clearly explain its policy position to the retailers, and then move on to important policy initiatives. I believe the government should let this issue go through to the keeper.
Monday, December 20, 2010
Monday, November 29, 2010
GST needs to do more ‘heavy lifting’
Last week saw the tax reform debate take a new turn when the state governments of Victoria and Western Australia openly canvassed the need for Australia to have a good look at the base and rate of our existing GST system.
As our members will know, the Institute has been a long-time advocate of the case for a broader based GST with a potentially higher rate than 10%. Dr Ken Henry was not given the opportunity by the federal government to review the scope of the GST as part of his landmark review of our future tax system. The exclusion of the GST was viewed by many in the business community, including the Institute, as a missed opportunity to tackle the big issues confronting our future tax system.
But things appear to be moving on. The fact that two influential state governments have now begun to openly speak about the need for a GST system that generates more revenues than is currently the case, is promising.
Why?
The answer lies in the fact that any serious overhaul of inefficient and market-distorting state taxes (like stamp duties or payroll taxes) brings with it a need to replace the lost revenue with a new source. Given that GST revenues are already passed through to state governments under the deal struck back in 1998, and the fact that the GST is an inherently more efficient tax, it would make a lot of sense for us to look closely at the option of expanding the existing base of goods and services currently subject to the tax.
The two options essentially boil down to looking at whether or not more goods and services should be brought within scope, and if it is appropriate to increase the actual rate of the tax beyond 10%.
The expansion of the GST in this sort of way would undoubtedly have a big impact on low to middle income earners; as consumers, rather than businesses, generally suffer the final impacts of consumption taxes like the GST. Because of this, any change to the base and rate of the GST would need to be coupled with an appropriate reduction of personal income tax rates in order to offset the increased costs that would be borne by those least able to afford it in our community. This, incidentally, is precisely what our neighbours in New Zealand have recently decided to do.
Tell me what you think: is moving to a broader based GST, with a higher rate, a good idea if it means a dramatic reduction in some of the cumbersome state taxes?
As our members will know, the Institute has been a long-time advocate of the case for a broader based GST with a potentially higher rate than 10%. Dr Ken Henry was not given the opportunity by the federal government to review the scope of the GST as part of his landmark review of our future tax system. The exclusion of the GST was viewed by many in the business community, including the Institute, as a missed opportunity to tackle the big issues confronting our future tax system.
But things appear to be moving on. The fact that two influential state governments have now begun to openly speak about the need for a GST system that generates more revenues than is currently the case, is promising.
Why?
The answer lies in the fact that any serious overhaul of inefficient and market-distorting state taxes (like stamp duties or payroll taxes) brings with it a need to replace the lost revenue with a new source. Given that GST revenues are already passed through to state governments under the deal struck back in 1998, and the fact that the GST is an inherently more efficient tax, it would make a lot of sense for us to look closely at the option of expanding the existing base of goods and services currently subject to the tax.
The two options essentially boil down to looking at whether or not more goods and services should be brought within scope, and if it is appropriate to increase the actual rate of the tax beyond 10%.
The expansion of the GST in this sort of way would undoubtedly have a big impact on low to middle income earners; as consumers, rather than businesses, generally suffer the final impacts of consumption taxes like the GST. Because of this, any change to the base and rate of the GST would need to be coupled with an appropriate reduction of personal income tax rates in order to offset the increased costs that would be borne by those least able to afford it in our community. This, incidentally, is precisely what our neighbours in New Zealand have recently decided to do.
Tell me what you think: is moving to a broader based GST, with a higher rate, a good idea if it means a dramatic reduction in some of the cumbersome state taxes?
Tuesday, November 16, 2010
Tax lessons from the OECD
Earlier this week, the Organisation for Economic Cooperation and Development (OECD) released its most recent economic survey of Australia. Many of its observations and recommendations closely reflected the Institute’s position in a number of areas.
The report said that ‘the proposed changes in resource taxation are welcome but should go further’. The OECD confirmed the economic merits of moving to a rent tax approach to non-renewable resources to replace the existing state-based royalties system.
Similar to the Institute’s position, the OECD recommended that ‘the resource rent tax [should] be extended to all commodities and all companies irrespective of their size’. Members will recall that our submission to the Policy Transition Group about the Minerals Resource Rent Tax (MRRT) included recommendations that the policy design of the new MRRT should be easily adapted to other commodities in the future as Australia’s reliance on coal and iron ore exports diminishes over time. While this recommendation has not been received well by some parts of the mining sector, I believe it represents a sensible approach to policy-making.
In other parts of the report, the OECD made observations about the need for Australia to drive down its corporate income tax rate. The report noted that at 30%, Australia’s tax rate is ‘well above the average’ of all small to medium-sized OECD countries. This message is consistent with the policy arguments we made during the Henry tax review. (Dr Henry ultimately recommended that Australia should move to a 25% corporate tax rate.)
The OECD also delivered a strong message to the government about the need to ‘increase the weight of the GST in total tax revenues’. This means Australia should broaden the base of its GST system and increase its rate. This reflects the Institute’s own policy thinking over recent years – increasing revenue collected from the GST would allow Australia to abolish a raft of inefficient and distortionary state-based taxes such as stamp duty and other levies.
It seems to me that international economic thinking and analysis all point to the same conclusions. All we need now is for the government to start thinking the same way!
The report said that ‘the proposed changes in resource taxation are welcome but should go further’. The OECD confirmed the economic merits of moving to a rent tax approach to non-renewable resources to replace the existing state-based royalties system.
Similar to the Institute’s position, the OECD recommended that ‘the resource rent tax [should] be extended to all commodities and all companies irrespective of their size’. Members will recall that our submission to the Policy Transition Group about the Minerals Resource Rent Tax (MRRT) included recommendations that the policy design of the new MRRT should be easily adapted to other commodities in the future as Australia’s reliance on coal and iron ore exports diminishes over time. While this recommendation has not been received well by some parts of the mining sector, I believe it represents a sensible approach to policy-making.
In other parts of the report, the OECD made observations about the need for Australia to drive down its corporate income tax rate. The report noted that at 30%, Australia’s tax rate is ‘well above the average’ of all small to medium-sized OECD countries. This message is consistent with the policy arguments we made during the Henry tax review. (Dr Henry ultimately recommended that Australia should move to a 25% corporate tax rate.)
The OECD also delivered a strong message to the government about the need to ‘increase the weight of the GST in total tax revenues’. This means Australia should broaden the base of its GST system and increase its rate. This reflects the Institute’s own policy thinking over recent years – increasing revenue collected from the GST would allow Australia to abolish a raft of inefficient and distortionary state-based taxes such as stamp duty and other levies.
It seems to me that international economic thinking and analysis all point to the same conclusions. All we need now is for the government to start thinking the same way!
Wednesday, November 10, 2010
All may not be what it seems…
As many of you are aware, the mining tax policy consultation group swept through Sydney late last week. Led by Australian business sector veteran Don Argus and Resources Minister Martin Ferguson, the Policy Transition Group (PTG) held several meetings with stakeholders during the two days they were in town.
The Institute participated in one of the stakeholder meetings alongside representatives of the Big 4 accounting firms and other professional associations. However, the meeting was not quite what I had been expecting.
Since I attended the meeting, a number of people have asked me what I thought about the process – the way in which the government and the PTG are going about putting the design of the new mining tax together. Unfortunately, my response to that question has typically been one of concern.
The major question to come out of this process for me is whether or not the PTG will be able to influence the government and its agencies in the final design of how the new Minerals Resource Rent Tax (MRRT) will operate, given it is mainly made up of external executives from the resources sector.
At the Sydney meeting, we were advised that the Treasury Department had already started drafting the legislation surrounding the new MRRT. In order to draft legislation, Treasury must have a pretty good idea of how the detailed policy design is going to work.
Does that mean that the government and Treasury have already pre-judged the outcomes from the PTG consultation process? If so, is that really the way we want to go about critically important reforms to our tax system in the future? You be the judge.
The Institute participated in one of the stakeholder meetings alongside representatives of the Big 4 accounting firms and other professional associations. However, the meeting was not quite what I had been expecting.
Since I attended the meeting, a number of people have asked me what I thought about the process – the way in which the government and the PTG are going about putting the design of the new mining tax together. Unfortunately, my response to that question has typically been one of concern.
The major question to come out of this process for me is whether or not the PTG will be able to influence the government and its agencies in the final design of how the new Minerals Resource Rent Tax (MRRT) will operate, given it is mainly made up of external executives from the resources sector.
At the Sydney meeting, we were advised that the Treasury Department had already started drafting the legislation surrounding the new MRRT. In order to draft legislation, Treasury must have a pretty good idea of how the detailed policy design is going to work.
Does that mean that the government and Treasury have already pre-judged the outcomes from the PTG consultation process? If so, is that really the way we want to go about critically important reforms to our tax system in the future? You be the judge.
Thursday, October 7, 2010
R&D tax concessions – coming soon
The first week of parliamentary sittings of the ‘new paradigm’ that is the 43rd Australian parliament is complete.
I watched the first sitting day at Parliament House and there was a decidedly different mood in the air. After the initial excitement of the official opening and swearing-in ceremonies, Parliament got down to the ‘real’ business of running the country. Prime Minister Gillard took the helm and introduced her new team to the people of Australia.
Wayne Swan remains in his pre-election portfolio of Treasury and at the same time maintains his role of Deputy Prime Minister. Nick Sherry, who was previously the Assistant Treasurer, has been replaced by Bill Shorten, who steps into a combined portfolio of Assistant Treasurer and Minister for Superannuation and Financial Services. He will have direct responsibility for the day-to-day functioning of our tax system.
One of the highlights of the first week was the Minister for Innovation and Industry, Senator Kim Carr, re-introducing the legislation that deals with the implementation of the proposed new research and development (R&D) tax credit regime. You may remember that the previous government had been embarking on a reform project around replacing the existing R&D tax concession with a new credit system that delivers ‘below-the-line’ tax savings to eligible businesses.
The government’s objectives for the new R&D tax regime are to shift the benefit of the tax credit from large businesses to small to medium enterprises. Whether the changes will deliver the outcome the government are looking for is yet to be determined.
My concerns are in regards to the start date of the proposed law, which is currently retrospective at 1 July 2010. In my opinion, the proposed start date must be pushed back to 1 July 2011. In the tax policy world, it’s highly unusual to pass retrospective tax laws unless there is some major integrity risk for the tax system; that’s clearly not the case here so there is no reason to pass the laws with a 2010 start date.
What are your thoughts on the new R&D regime? Do you think it will deliver any tangible benefits to the business community, and do you agree that the start date should be deferred by one year?
I watched the first sitting day at Parliament House and there was a decidedly different mood in the air. After the initial excitement of the official opening and swearing-in ceremonies, Parliament got down to the ‘real’ business of running the country. Prime Minister Gillard took the helm and introduced her new team to the people of Australia.
Wayne Swan remains in his pre-election portfolio of Treasury and at the same time maintains his role of Deputy Prime Minister. Nick Sherry, who was previously the Assistant Treasurer, has been replaced by Bill Shorten, who steps into a combined portfolio of Assistant Treasurer and Minister for Superannuation and Financial Services. He will have direct responsibility for the day-to-day functioning of our tax system.
One of the highlights of the first week was the Minister for Innovation and Industry, Senator Kim Carr, re-introducing the legislation that deals with the implementation of the proposed new research and development (R&D) tax credit regime. You may remember that the previous government had been embarking on a reform project around replacing the existing R&D tax concession with a new credit system that delivers ‘below-the-line’ tax savings to eligible businesses.
The government’s objectives for the new R&D tax regime are to shift the benefit of the tax credit from large businesses to small to medium enterprises. Whether the changes will deliver the outcome the government are looking for is yet to be determined.
My concerns are in regards to the start date of the proposed law, which is currently retrospective at 1 July 2010. In my opinion, the proposed start date must be pushed back to 1 July 2011. In the tax policy world, it’s highly unusual to pass retrospective tax laws unless there is some major integrity risk for the tax system; that’s clearly not the case here so there is no reason to pass the laws with a 2010 start date.
What are your thoughts on the new R&D regime? Do you think it will deliver any tangible benefits to the business community, and do you agree that the start date should be deferred by one year?
Thursday, September 16, 2010
Predictions - post election
Canberra’s been a hive of activity lately and last night I was fortunate enough to be part of a panel there at an Institute function. Naturally, the impact of the election result has been at the forefront of everyone’s mind, so the topic was particularly relevant: Post Election: The Economy, Markets and the Health of Small Business.
Dr Shane Oliver, Chief Economist for AMP Capital gave us the good news that the global economy is unlikely to move back into recession and that Australia is in a very strong economic position relative to the rest of the world.
I spoke about what the new era of federal government will mean for the business sector. My predictions sadly aren’t as optimistic as Shane’s but for what it’s worth, this is what I think will be happening over the next few years.
Firstly, complex policy-making will be difficult to work through parliament. There is clearly a mood in Canberra that is quite different to that which existed prior to the election; there’s a mood of caution about policy and major decisions.
Secondly, government announcements will be viewed with some trepidation until we know the position of the minor parties on any given issue (especially tax and corporations laws). The Greens and the Independents will become increasingly relevant players in terms of policy development, and all major stakeholders (such as the Institute) will need to work closely with them.
Finally, the government will work towards putting a price on carbon across the economy sometime in the next two years – it seems to me the community’s concerns in this area have been made quite clear in the way the election results played out.
A minority government is new for us all and only time will tell if my predictions are accurate, but I’d love to hear back from readers – will these changes be good or bad for the country? What do you think the next few years will look like?
Dr Shane Oliver, Chief Economist for AMP Capital gave us the good news that the global economy is unlikely to move back into recession and that Australia is in a very strong economic position relative to the rest of the world.
I spoke about what the new era of federal government will mean for the business sector. My predictions sadly aren’t as optimistic as Shane’s but for what it’s worth, this is what I think will be happening over the next few years.
Firstly, complex policy-making will be difficult to work through parliament. There is clearly a mood in Canberra that is quite different to that which existed prior to the election; there’s a mood of caution about policy and major decisions.
Secondly, government announcements will be viewed with some trepidation until we know the position of the minor parties on any given issue (especially tax and corporations laws). The Greens and the Independents will become increasingly relevant players in terms of policy development, and all major stakeholders (such as the Institute) will need to work closely with them.
Finally, the government will work towards putting a price on carbon across the economy sometime in the next two years – it seems to me the community’s concerns in this area have been made quite clear in the way the election results played out.
A minority government is new for us all and only time will tell if my predictions are accurate, but I’d love to hear back from readers – will these changes be good or bad for the country? What do you think the next few years will look like?
Friday, July 2, 2010
As easy as MRRT
Let me start by saying I’m feeling a bit sheepish looking at my last entry date on this blog. All I can say in my defence is it’s been hectic in the tax world!
Over the last few weeks the whole world, it seems, became besmirched in the resource super profits tax wrangle that emerged following the government’s package of tax reforms announced on 2 May.
Today, though, our new Prime Minister, Julia Gillard, revealed a re-design of the tax, putting an end to the speculation and uncertainty for many Australian businesses.
Fresh with a new name – the Minerals Resource Rent Tax – the new tax boasts several concessions which were deal-breakers up until now, including a reduction in the headline rate from 40% to 30%, an applicability to only iron ore and coal, and an uplift factor of the government bond rate plus 7%. In addition, oil and coal seam gas will be rolled into the existing Petroleum Resources Rent Tax and taxed at 40%.
While the changes mean the government loses $1.5bn of expected revenue, today’s announcement is a major win for investment certainty for Australian businesses and their shareholders.
From day one, it was clear the initial announcement of the proposed resource tax did not strike the right balance between delivering a better return to the community and protecting investment in the mining sector. But it looks as though today, we have finally achieved a much better balance of those objectives.
My feeling is that real progress can now be made in moving to the next stages of consultation around the detailed design features of the new tax. Key to this will be working through the details of how existing projects will be transitioned to the new regime.
Importantly, the government also said today it will retain other aspects of the tax package unveiled as part of its response to the Henry tax review; specifically, the corporate tax rate cut and the superannuation guarantee increases. This means taxpayers can now make fully informed, long term decisions about the impact of those changes.
The decision to wind-back the original 2% corporate tax rate cut to 1% is a shame, but in reality it is appropriate given the importance of getting the design of the new resource tax right. We’ll keep putting the case to the government to reduce the tax rate further once the budget bottom line improves a little.
Tax reform is never easy, but what the last two months have shown us is that early engagement around policy proposals in a more open and consultative manner is always better than a 'surprise launch' of tax reform announcements.
If the goal is long term tax reform, then we must heed the lessons from experiences like this. Wouldn’t you agree?
Over the last few weeks the whole world, it seems, became besmirched in the resource super profits tax wrangle that emerged following the government’s package of tax reforms announced on 2 May.
Today, though, our new Prime Minister, Julia Gillard, revealed a re-design of the tax, putting an end to the speculation and uncertainty for many Australian businesses.
Fresh with a new name – the Minerals Resource Rent Tax – the new tax boasts several concessions which were deal-breakers up until now, including a reduction in the headline rate from 40% to 30%, an applicability to only iron ore and coal, and an uplift factor of the government bond rate plus 7%. In addition, oil and coal seam gas will be rolled into the existing Petroleum Resources Rent Tax and taxed at 40%.
While the changes mean the government loses $1.5bn of expected revenue, today’s announcement is a major win for investment certainty for Australian businesses and their shareholders.
From day one, it was clear the initial announcement of the proposed resource tax did not strike the right balance between delivering a better return to the community and protecting investment in the mining sector. But it looks as though today, we have finally achieved a much better balance of those objectives.
My feeling is that real progress can now be made in moving to the next stages of consultation around the detailed design features of the new tax. Key to this will be working through the details of how existing projects will be transitioned to the new regime.
Importantly, the government also said today it will retain other aspects of the tax package unveiled as part of its response to the Henry tax review; specifically, the corporate tax rate cut and the superannuation guarantee increases. This means taxpayers can now make fully informed, long term decisions about the impact of those changes.
The decision to wind-back the original 2% corporate tax rate cut to 1% is a shame, but in reality it is appropriate given the importance of getting the design of the new resource tax right. We’ll keep putting the case to the government to reduce the tax rate further once the budget bottom line improves a little.
Tax reform is never easy, but what the last two months have shown us is that early engagement around policy proposals in a more open and consultative manner is always better than a 'surprise launch' of tax reform announcements.
If the goal is long term tax reform, then we must heed the lessons from experiences like this. Wouldn’t you agree?
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