If ever there was a topic that tax advisers would agree on, it is that GST and state taxes, such as stamp duty and payroll tax, are in desperate need of reform. In commemorating the 20th anniversary of the implementation of GST, it’s an appropriate to time to reflect on the current state of play for indirect taxes:
- GST receipts are stagnant as the general public shift their spending to non-taxed items;
- stamp duty collections are rapidly dwindling due to falling house prices and generous exemptions to first home buyers; and
- payroll tax revenue is expected to markedly drop due to growing unemployment and underemployment rates.
Looking specifically at GST collections, the recently released “NSW Review of Federal Financial Relations” report (the Report) notes that Australia's GST is the second-lowest revenue raiser out of all advanced economies, forcing federal and state governments to resort to more damaging and inefficient taxes on personal income, business and property transactions such as stamp duty and insurance taxes. This is being exacerbated by the fact that consumers are buying more GST-free items such as rent, health and education, such that only about 55% of all consumption is now being taxed, compared to closer to 65% in its first year in 2000-01.
The consensus is that the status quo is highly inefficient and that there needs to be a “tax mix switch” away from distortive taxes such as stamp duty and payroll tax towards more effective and stable taxes such as GST and land tax. This may involve increasing the rate and / or broadening the base of GST and abolishing (or gradually phasing out) stamp duty and payroll tax in favour of a broadened land tax regime.
The Report identifies that the main challenge in achieving reform is generally not economic or equity factors – it’s usually political. Tax reform that might make the overall tax burden lower, fairer and more efficient may never see the light of day because it will inevitably result in winners and losers, which governments are loathing to create.
The Report makes 15 recommendations towards reforming both state and federal taxes, including:
- State and Federal Governments working together to agree on options for lifting the GST rate and / or expanding the rate over the medium to longer-term to offset “harmful” taxes such as stamp duty and insurance duty.
- Broadening the base of state land taxes to help offset the loss or reduction in stamp duty revenues.
- Exploring the potential for a personal income tax “sharing model” whereby revenue from income tax collections is quarantined to the state in which the taxpayer resides.
- Abolishing all insurance taxes such as insurance duty and emergency service levies to help with the perennial issue of underinsurance and affordability.
- A national approach to reforming payroll tax, which has been “hollowed out” in a race to the bottom by state governments through high thresholds and generous concessions.
- A fairer system of road user charging away from registration and licences fees and towards congestion charging and time / distance-based pricing, including on electric vehicles.
Many have argued that meaningful tax reform can occur only if we are standing on a “burning platform”, whereby a failure to change will result in long-term economic damage. The coronavirus-led recession of 2020 provides the opportunity to make and accept difficult tax reforms to boost economic recovery but the question now is whether governments are prepared to take on that challenge.
HOW CAN RSM HELP?
Should you require further information in relation to GST and state taxes reform, please reach out to your local RSM advisor.