16 September 2015

Address to TTPI Crawford School

Note

'An Efficient and Resilient GST'

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Introductory remarks

Good morning everyone, it's wonderful to join such an eminent audience to open this discussion about GST reform.

I understand you will be discussing questions that are fundamental to reforming the GST, including issues around integrity, design and the economic effects of the GST in the real world.

These issues go to the heart of the Government's broader discussion about reforming the tax system generally and the GST specifically.

In thinking about where to go next with reform, it's important to reflect on how we got to where we are.

Not a new tax, a new tax system

History of the GST

Examining how to apply a value-added tax in Australia has come a long way since it was first proposed in the Asprey Review in 1975, and it's been considered in one way or another by governments on both sides of politics ever since.

On 13 August 1997 the Howard Government formally put a goods and services tax on the national tax agenda in announcing broad principles of taxation reform which included consideration of a broad-based indirect tax to replace some or all of the existing indirect taxes.

In 1998, of course, the GST formed a key part of the Howard Government's re-election platform after the release of their comprehensive tax reform plan on 13 August 1998. One year after being placed on the national tax agenda.

Following the re-election of the Government in October of that year, legislation to implement the GST was introduced to Parliament in December 1998. After a further six months of negotiations and discussions in the Senate, the complete legislative package was ultimately passed in June 1999.

Today, the nation is again having a serious conversation about tax reform and what can be done to make a better tax system that delivers taxes that are lower, simpler and fairer.

You all know, of course, that the introduction of the GST represented a fundamental reform to Australia's taxation system, removing a range of inefficient taxes from the Australian landscape and replacing them with a simpler and less distortionary tax. As the accompanying tagline at the time noted, it was "not a new tax" it was "a new tax system".

Before the introduction of the GST, the wholesale sales tax system was a complicated patchwork. It consisted of rates as high as 45 per cent and only applied to about one fifth of consumption. These taxes were inefficient, distortive and outdated. In fact, at the time, Australia was the last developed economy that still used them.

It's no exaggeration that the agreement that led to the introduction of the GST and the removal of the various duties, levies and other inefficient taxes was historic.

At the time, however, the Howard Government did not have a Senate majority and Labor was opposing the GST. The Government was also negotiating with state and territory governments of different political persuasions, including Premiers Jeff Kennett in Victoria, Peter Beattie in Queensland and Bob Carr in New South Wales.

In the end, good tax policy prevailed - with an agreement being struck between the Commonwealth, states and territories regarding distribution of the GST; and a further agreement being struck between the Government and the Australian Democrats to gain the necessary support to help the legislation pass through the Senate.

Inefficient taxes the GST Replaced

It's worth recalling in a little more detail the inefficient taxes that were removed as a result of the introduction of the GST.

This was real reform focussed on delivering a more sustainable and efficient source of revenue and a simplification of state-based taxes. More than 30 state and territory taxes were abolished across the country!

These taxes included the Wholesales Sales Tax; Financial Institutions Duty; debits tax; stamp duty on marketable securities; and the accommodation sector 'bed taxes'.

In addition, some jurisdictions have also abolished a number of stamp duties, including stamp duties on non-real non-residential conveyances; credit arrangements, instalment purchase arrangements and rental (hiring) agreements; stamp duties on leases; mortgages, bonds, debentures and other loan securities; and bills of exchange and promissory notes.

These taxes had narrow bases, applied at different rates and were unnecessarily complex and inefficient.

The removal of these inefficient taxes with the introduction of the GST was aimed at driving growth by increasing the incentives to work and save, reducing input costs for industry, boosting capital productivity and creating a more stable foundation for government finances.

Modelling at the time showed that the cost of inputs for Australian industries were anticipated to fall by 3.2 per cent on average, thanks largely to the removal of the inefficient wholesale sales tax regime, while the cost of supplying exports was also expected to fall by 3.5 per cent, providing a vital boost to Australia's international competitiveness.

While much has already been done in this space, we cannot be complacent.

Just this week, Deloitte released a paper outlining a range of potential reform options. Deloitte's modelling shows that a substantive reform package that includes the GST could have the potential to add up to 2 per cent to national income.

Deloitte's paper estimates an increase in the rate or base of the GST could raise between $112 billion and $152 billion in additional revenue over four years, which it then notes could be used to provide assistance to low income households.

The Government has no plans to change the rate or broaden the base of the GST.

While changing the GST requires the support of all the states, this shouldn't deter public debate and economic analysis about the merits of further reform. That's why we have not ruled out considering the GST during the Tax White Paper process.

And so it has been especially pleasing to see New South Wales, under Premier Baird, leading the debate on the need for state tax reform by way of a proposal to raise the GST rate to 15 per cent.

Consumption taxes

In a year in which the Government is considering how the tax system as a whole can be reformed, reforming the GST was always going to be a significant part of the national conversation. As it should.

Broad-based consumption taxes are relatively efficient. This means that they have lower negative impacts on economic growth and living standards than other less efficient taxes.

To provide some context of where our GST sits internationally the OECD's Value Added Tax (VAT) Coverage Ratio provides an international comparison on what percentage of consumption the GST is applied to.

Based on 2012 data, Australia's GST has a coverage ratio of 47 per cent, the OECD average is 55 per cent, and New Zealand has one of the best ratios in the world at 96 per cent.

Why is this the case for New Zealand?

New Zealand has a GST that applies to almost all goods and services. The exemptions that do exist, including private rents and certain financial services, are usually for technical reasons.

It is also worth considering that Australia's GST rate is one of the lowest among developed countries and is roughly half the average rate of OECD countries. By comparison, New Zealand's GST was introduced in 1986 at a rate of 10 per cent, increased to 12.5 per cent in 1989 and to 15 per cent in 2010. The 2010 changes to the GST in New Zealand were part of a broader reform package which included a 2 per cent reduction in the corporate tax rate (from 30 per cent to 28 per cent) and a 5 per cent reduction in the top marginal income tax rate (from 38 per cent to 33 per cent).

The experience in New Zealand together with our own experience following the introduction of the GST tells us that consumption tax reform can deliver significant and widespread benefits for the economy and facilitate wider reform of the tax system to improve our competitiveness and productivity.

The Government and I are keen to have this conversation about the future of our tax system and the GST, and ultimately we, as a nation, have to determine the most appropriate reform for the specific economic challenges we face.

Maintaining integrity

As part of the 2015-16 Budget, the Government announced the introduction of a tax integrity measure to apply the GST to digital products and services imported by Australian consumers from 1 July 2017.

This will help level the playing field between domestic and international suppliers and ensure that all suppliers pay their fair share of tax. It is expected that this initiative will raise $350 million over the forward estimates, with the additional revenue being directed to the states and territories to help fund essential services.

These changes are supported at an international level. The OECD has been developing guidelines that support business-to-consumer supplies of imported digital products and services being subject to GST. Australia has been actively involved in this work and our announced approach is consistent with what is being considered by the OECD.

You'd also be aware that there has been in-principle agreement to apply GST to low-value goods imported into Australia.

This significant reform means that, from 1 July 2017, goods imported by Australian consumers valued at or below $1,000 will now be subject to GST.

Together, these changes mean that, when a consumer is deciding whether to buy a good or service in a store or online, GST will no longer be a factor. This will help level the playing field between domestic and international suppliers.

The Commonwealth, states and territories have come together to agree in-principle to both of these important integrity measures.

It is possible to come together to deliver important reform. We've done it before, so it is now a question of what next.

Conclusion

This Government wants to create a tax system that supports the modern economy and encourages innovation and endeavour.

I'd like to thank the Tax and Transfer Policy Institute for providing an opportunity for us all to get together and focus on the need for reform of our tax system.

As I have said today, the Government is keenly focused on taxation reform and the conversation started with the Re:think discussion paper. The Government's options paper is expected to be released later this year with the White Paper, containing the Government's taxation reform agenda, to be released for consideration by the Australian people before the next election. I continue to encourage you to participate in the consultation process as we move to the next phase.

Reform is achieved when big ideas become reality and I look forward to your big ideas on the role GST should play in national tax reform.

Thank you.