Daniel Weight
Decisions by the Commonwealth in the 2014–15 Budget to reduce health and education funding to the states and territories by around $80 billion between 2017–18 and 2024–25 has set the scene for a renewed debate on the base and rate of the Goods and Services Tax (GST), despite the Coalition’s ruling out any changes to the GST during its first term.
Commentators have suggested that the Government’s intention is to create a circumstance where the states and territories, when faced with a substantial reduction in revenues, will request the Commonwealth to increase the rate or expand the base of the GST to fill the looming void in state and territory budgets.[1] The Treasurer, Mr Hockey, has denied that this is the Government’s intention, but any reform of the GST would be easier with the unanimous support of the states and territories.[2]
Process for changing the GST
The GST is levied by the Commonwealth, but the revenue from the GST is distributed to the states and territories. This arrangement is set out in the Intergovernmental Agreement (IGA) on Federal Financial Relations.[3] Clause A4(c)(i) provides that the Standing Council on Federal Financial Relations—chaired by the Commonwealth Treasurer—must approve ‘changes to the GST base and rate’, and clause A6 of that agreement requires that any such agreement be unanimous.
The first obstacle to changing the GST would appear to be gaining the unanimous support of the Commonwealth, states and territories for any proposal. However, it has been suggested that, despite the agreement set out in the IGA, the Commonwealth would be legally free to disregard the IGA and amend the GST legislation unilaterally. That is because legal experts suggest that the IGA is not legally binding, but merely a political agreement.[4]
Another political obstacle may be the Government’s pre-election commitment to not alter the GST in its first term. However, the Government has proposed to undertake a comprehensive review of the tax system in its first term that will include an examination of the GST.[5] The tax review could provide an opportunity to build political support—amongst both the general public and the states and territories—for altering the GST before the next election, which is due in 2016.[6]
Reform options
There are two areas of the current GST arrangements that are contentious. The first area is the GST base and rate. The second area is how revenue from the GST is distributed amongst the various states and territories.
GST base and rate
The ‘base’ of the GST refers to the range of goods and services to which the GST applies. Some substantial areas of expenditure are excluded from the GST. As part of the negotiations with the Australian Democrats that secured the passage of the GST legislation, the Howard Government agreed to exclude fresh food from the GST. Other exemptions, such as for health, education and low value imports, were always part of the original design of the GST. The cumulative cost of those exemptions is now estimated to be around $17 billion in forgone revenue in 2014–15, and broadening the base is often mooted as a possible reform.[7]
Another reform option is to increase the ‘rate’ of the GST from its level of 10 per cent. Currently, the total GST revenue is forecasts to be around $54 billion in 2014–15.[8] Increasing the GST by another five percentage points, for example, would be likely to increase revenues by around $25 billion.
GST distribution
Another area of possible reform is to the distribution, or share, of the GST revenues that each state or territory receives. Currently, the GST revenue is distributed according to the principle of ‘fiscal equalisation.’ This principle ensures that each state or territory has ‘the fiscal capacity to provide services and the associated infrastructure at the same standard, if each made the same effort to raise revenue from its own sources and operated at the same level of efficiency.’[9] The amount of GST received by each jurisdiction is determined by its ‘GST relativity’. A GST relativity of one would mean that a state or territory is receiving the same amount of GST revenue that it would if the money was distributed on an equal per capita basis.
Table 1: Forecast GST relativities for the states and territories, 2013–14 to 2017–18
| |
NSW
|
VIC
|
QLD
|
WA
|
SA
|
TAS
|
ACT
|
NT
|
| 2013–14 |
0.96576
|
0.90398
|
1.05624
|
0.44581
|
1.26167
|
1.61454
|
1.22083
|
5.31414
|
| 2014–15 |
0.97500
|
0.88282
|
1.07876
|
0.37627
|
1.28803
|
1.63485
|
1.23600
|
5.66061
|
| 2015–16 |
0.96513
|
0.88240
|
1.09328
|
0.36355
|
1.29491
|
1.71346
|
1.23444
|
5.70038
|
| 2016–17 |
0.94732
|
0.87560
|
1.13192
|
0.34988
|
1.33452
|
1.68279
|
1.21322
|
5.67391
|
| 2017–18 |
0.95023
|
0.88592
|
1.12472
|
0.36364
|
1.32193
|
1.65697
|
1.19896
|
5.50247
|
Source: Australian Government, Federal financial relations: budget paper no. 3: 2014–15, 2014, p. 92, accessed 19 May 2014.
The National Commission of Audit recommended that the states and territories receive an equal per capita share of the GST revenue, but with additional payments to ensure that no state or territory would be worse off.[10] The states’ and territories’ views on this proposal appear mostly influenced by whether or not their jurisdiction would be better or worse off under the alternate method of distribution, with some supportive and others not.[11]
Discussion
Some commentators have supported reforms to the GST. For example, the chief executive of World Vision Australia, Tim Costello, has stated that increasing the GST is preferable to cuts to social programs and international aid.[12] However, support for reforms to the GST is not universal. Professor Sinclair Davidson, for example, has warned that, once changes to the GST gained public acceptance, politicians would repeatedly increase the tax take, rather than reducing expenditure. He claims:
Raising GST revenue is very easy – it is almost lazy. If community acceptance of changes to the GST were to occur, very quickly we’d find ourselves paying more and more in GST.[13]
Unilateral changes to the GST by the Commonwealth would appear to be legally possible, despite the IGA. However, building political support for any changes amongst at least some of the states and territories may be a less politically risky proposition for the Commonwealth. It is likely that states’ and territories’ views on both areas of possible reform—the rate and base, and the distribution of the GST—will be linked. This might mean that any support by a state or territory for an increase in the rate of the GST, for example, would be contingent upon reforms to the distribution of the GST that favoured that state or territory also being adopted.
[1]. P Martin, ‘Budget 2014: Hockey plays it cool on GST push,’ Canberra Times, 15 May 2014, p. 3, accessed 19 May 2014.
[2]. Ibid.
[3]. Council on Federal Financial Relations, Intergovernmental agreement on federal financial relations, 2011, accessed 19 May 2014.
[4]. P Wong (Minister for Finance), ‘Senior lawyers back Abbott’s ability to Increase GST,’ 19 August 2013, accessed 19 May 2014; see also M Farr, ‘Tony Abbott has power to increase GST without state support,’ news.com.au, 19 August 2013, accessed 19 May 2014.
[5]. M Kenny, ‘GST may be up for review: Abbott,’ West Australian, 18 May 2013, p. 1, accessed 21 May 2014.
[6]. Opinion, ‘Hockey lays down the gauntlet to the states,’ Canberra Times, 15 May 2014, p. 3, accessed 19 May 2014.
[7]. The Treasury, ‘2013 Tax Expenditures Statement’, Treasury website, pp. 168–180, accessed 19 May 2014.
[8]. Australian Government, Federal financial relations: budget paper no. 3: 2014–15, 2014, p. 91, accessed 19 May 2014.
[9]. Commonwealth Grants Commission (CGC), ‘What is fiscal equalisation?’, CGC website, accessed 19 May 2014.
[10]. National Commission of Audit, Towards responsible government: phase one, February 2014, p. 74.
[11]. P Coorey, ‘PM Rules out tax autonomy,’ Australian Financial Review, 3 May 2014, p. 5, accessed 22 May 2014.
[12]. P Hudson, ‘Costello shows worldly vision,’ The Australian, 19 May 2014, p. 10, accessed 19 May 2014.
[13]. S Davidson, ‘Increase the GST to 20%? Yes, but I wouldn’t recommend it’, The Conversation website, 12 August 2013, accessed 19 May 2014.
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