The GST Debate

The Conversation has this week taken a closer look at the GST debate in Australia, posing the question: is reform necessary?

Though the GST has been in place for some 13 years, debate continues over the efficacy of its revenue, scope and capacity for collecting and distributing revenue. The general consensus, with support from the State governments, seems to be that reform is desperately needed. 

Advantages of the GST

The Australian GST was modelled on the VAT (value-added tax) system used in the EU, though with a lower flat rate of 10%. The aim of the GST was to eliminate a number of state taxes and charges and to minimize the problem of tax avoidance. VAT taxes are useful in a number of respects - they place the costs of collection on consumers, they are more difficult to avoid, and they are often regarded as fairer on the basis that they tax spending rather than income. The GST is also useful in that it allows the government to extract revenue from tourists, at least to some degree.

Time for Reform?

It has been suggested that the scope of the GST should be broadened. At present, it exempts educational services and supplies, fresh food and beverages, and some other items, listed in Chapter 3 of the A New Tax System (Goods and Services Tax) Act 1999. These exemptions have the potential to cause confusion, and add to the complexity of the system. Removing exemptions would help to keep the mechanism simple and transparent, as well as cheap to collect. This change could be paired with targeted social services to offset the increased burden on consumers.

Another suggestion is that the rate should be increased. The OECD Going for Growth report of 2012 argues that the low GST rate makes the Australian system less efficient. In the OECD, VAT taxes raised about 7% of GST, compared to 4% of GDP raised in Australia by the GST. While this shows there is room to raise the level of GST, this would need to be offset by reductions in personal and company tax. 

The removal of exemptions along with an increase in the flat rate would likely be enough to bring the GST receipts to a target of 7% of GDP - a significant increase in government revenue. 

To keep current with GST related developments including ATO rulings, why not inquire about our GST Point in Time Service, just one of a range of Australian Legislation services provided by TimeBase. Contact us to trial the service for free.