Should a review of GST be on the table?

Varun Kumar

16 September 2020

As we come out of COVID-19, revenue collection will be high on the Government’s agenda, primarily to fund the cost of stimulus funding. On numerous occasions, our leaders have stated that they are against increasing taxes and want to encourage consumer spending in Australia. There are media reports of personal tax rate cuts being brought forward to reinvigorate the economy.

Our GST system is complex and needs improvement. There have been some minor adjustments, such as making certain foreign suppliers of goods and services in Australia being liable for GST (i.e. the Netflix tax) but there is scope to make some targeted changes to improve the efficiency of the GST system.

Overview
The Federal Government levies GST on behalf of the States and Territories and changes to the GST rate or base legislatively require the States and Territories to support such changes. This political conflict is why GST has become a no-go zone for many Federal Governments.

In addition, the GST collected is distributed by the Federal Government to the States and Territories based on a complex model which does not consider where GST revenue is raised. Each State and Territory then adds their local taxes (stamp duty, payroll tax, land taxes) to their GST distribution for their respective budgets.
Two different options to increase GST revenue are increasing the GST rate and broadening the GST base. These are considered in further detail below.

Alternative option 1 - increasing the GST rate
Currently, Australia relies heavily on tax collections from companies and individuals, with one of the highest top marginal tax rates and company tax rates in the world. In contrast, Australia’s GST rate of 10% is well below the OECD average of 19.3% (as per OECD Consumption Tax Trends 2018).

GST accounted for 15.6% of revenue collection within Australia during the 2017-18 income year. In other OECD countries, the amount of GST contributes to overall tax collection is closer to 21% (as per OECD Consumption Tax Trends 2018).

The following shows a breakdown of the source of tax collection in Australia during the 2017-18 income year:

Source: ATO Taxation Statistics - 2017-18

Increasing the current GST rate to a higher rate will increase tax collection within Australia and will proportionately reduce the reliance on taxation of individuals and corporates. Interestingly, a study (A GST reform package) by the Grattan Institute in 2015 shows that if the rate were increased to 15% (without expanding the base), it would contribute over $27 billion to the Australia economy (based on collections in the 2015 income year).

Low income households would need to be adequately compensated for such an increased GST rate, either through income tax cuts or through welfare measures.

Alternative option 2 - broadening the GST base
The other option available is to broaden the GST base. Numerous supplies are not subject to GST because they are either:

GST-free supplies, including supplies of healthcare, education and fresh food; or
input-taxed supplies, including financial supplies and residential rent.

Whilst studies have shown that there will be a substantial impact on revenue collection if the GST base were broadened to include GST-free supplies, it brings about some more conceptual questions, such as do we want to levy taxes on education and health? Or whether we want low income households to pay GST on fresh food?
Other countries have lower concessional rates of GST/VAT on certain items such as fresh food, and this may be another option for Australia.

Broadening the GST base may also assist with some of the complexities of the Australian GST system. For example, why should a prepared meal available in the supermarket be GST-free if not refrigerated but be subject to GST if it is either refrigerated or frozen?

Alternative option 3 – rate and base adjustments
Alternatively, a smaller increase in rate (say 12.5%) whilst broadening the base will help raise significant revenue for the Government. As per the same study conducted by the Grattan Institute in 2015:

On the other hand, a 15 per cent GST would raise more money than broadening the base. This is attractive given the need for Commonwealth and state governments to address their revenue shortfalls in the most efficient way. If higher revenues are a priority, then a simultaneous rate increase to 12.5 per cent and base broadening – which would raise about $35 billion a year – would be the most efficient way to achieve them.

Where to next?
Whilst this has been a hot topic for several years, it is an area Governments prefer not to touch because of the impact it will have on everyone (including their voter base). While we do not necessarily believe that the GST rate should be increased or base broadened, we do believe that given the current economic position and pressure on government revenue, everything needs to be on the table.

The calls for GST reform are getting louder and recently the NSW Government recommended in their report NSW Review of Federal Financial Relations - Supporting the road to recovery:

State Governments, in consultation with the Commonwealth, should assess and agree options for lifting the GST rate and/or expanding the base over the medium to longer term to offset erosion and move away from more harmful Commonwealth and state taxes.

An increase in GST collection may also encourage the Government to repeal some taxes that do not contribute much to the Australian economy. Fringe Benefits Tax is a prime example of an inefficient tax as it contributes less than 1% of total tax revenue but adds considerable stress to employers with its strict documentation and compliance obligations. It may also assist the States and Territories to reduce or repeal some of their taxes - imagine living in a world without payroll tax in Australia!

There is no easy answer to this, but one thing is certain – we are looking for a simpler tax system and if GST reforms lead to the repeal of some of the inefficient taxes within Australia, it is something that should be seriously considered.