GST rethink: Why Australia needs reform now

The goods and services tax (GST) has been a fulcrum in Australia’s tax system since 2000. Designed to be a broad-based, 10 per cent consumption tax, the GST, together with new wine equalisation and luxury car taxes, was meant to replace the sales tax system.

The GST was also designed as a mechanism for the federal government to transfer growing levels of guaranteed funds to state and territory governments.

However, the GST has been beset by complexities, and the economic landscape is very different now compared to 25 years ago. A quarter of a century after its introduction, there are plenty of eyes on the GST as the answer to some of the tax system’s inefficiencies and inequities.

“Australia’s tax base is being eroded by a declining share of consumption taxed under GST, coupled with a fall in revenue from other consumption taxes like tobacco excise and fuel,” explains Jenny Wong, tax lead, policy and advocacy, CPA Australia. “This highlights the urgent need for alternative, resilient revenue streams, with the GST a primary candidate.”

The federal government hasn’t ruled out raising the GST rate. Fifteen is the most commonly proposed percentage level, backed by bodies like public policy organisation the Grattan Institute. While many food products and health services were initially carved out of the GST, there’s now the potential to broaden the range of goods and services to which the GST applies.

Why change is required

There are baked-in inefficiencies in the GST base that were necessary to gain Senate support to pass the A New Tax System (Goods and Services Tax) Bill in 1999.

This includes the tax-free status of some goods and services but not others (a remnant of the previous sales tax system), and the inconsistent treatment of beverages, food and health products. The question is whether it is time to reassess these exemptions.

“Effort was made to design the GST to achieve fair and equitable outcomes for both businesses and consumers,” says Ken Fehily, partner and director of GST specialists firm Fehily Advisory. “But they’re no longer working as effectively as intended. A major overhaul is well overdue and needed.”

Reforms to GST on social housing and supported housing, and the Australian Taxation Office’s (ATO) differing treatment of build-to-rent developments at scale, also need to be addressed. These complexities create barriers for developers and consumers.

 

"Australia’s tax base is being eroded by a declining share of consumption taxed under GST coupled with a fall in revenue from other consumption taxes like tobacco excise and fuel. This highlights the urgent need for alternative, resilient revenue streams, with the GST a primary candidate."

 

“A comprehensive review of how GST applies to residential housing is essential to ensure it supports access to affordable housing,” says Fehily.

The administration of the GST is another area requiring attention. The system is governed by a multitude of complex statutes, including the Taxation Administration Act 1953, A New Tax (Goods and Services Tax) Act 1999 and many associated regulations that make compliance daunting.

“The ATO has frequently been surprised by unfavourable judicial outcomes regarding its decisions on GST interpretation and administration. Likewise, wins for the ATO have often caused significant unexpected problems for businesses. We need faster and clearer guidelines, a more straightforward approach and legislative fixes,” Fehily says.

International comparison

A glance at the way other countries apply their consumption taxes shows there is plenty of scope for Australia’s rates to increase, with the GST’s contribution to overall tax revenue in Australia relatively low compared to international standards.

The latest figures released by the Organisation for Economic Co-operation and Development (OECD) show value-added taxes accounted for 11.5 per cent of Australia’s total taxation in 2022, the lowest in the OECD [see below].

Globally, the trend has been for standard broad-based consumption taxes to rise, while specific taxes on consumption like tariffs have generally decreased.

“Australia’s 10 per cent GST rate is the lowest among OECD countries that have a consumption tax, contributing a significantly smaller share to tax revenue compared to the OECD average,” Wong says. “Many comparable nations are already relying more heavily on consumption taxes.”

Countries like the US that lack a national consumption tax tend to compensate with tariffs. “These are considered to be a less efficient way of collecting revenue from consumers,” Wong adds.

Clear direction needed

Experts say it is essential to consider raising the GST rate or broadening the base of goods and/or the services to which it applies. While this may be politically contentious, it could lead to personal income or corporate tax rate cuts, creating a more equitable tax landscape. Any increase would need to be handled carefully.

“In the current cost-of-living environment, if the government went down the path of raising the GST rate or if the base is broadened, it could be quite politically sensitive,” says KPMG Australia tax policy lead, Alia Lum. “Compensation for lower-income households will be an important part of the package.”

 

"Changes to the GST rate and base require all states and territories to agree unanimously. As a matter of constitutional power, the federal parliament could change that legislation. But as a matter of federal practice, a conversation around the GST should be a conversation with the states."

 

The federal government would wear the political cost of any rise in the GST.

“I don’t think any federal government is going to see that as a good idea, “says economist Saul Eslake. “A prerequisite for any reform to the GST would have to be breaking the nexus between revenue from the GST and payments by the federal government to the states and territories.”

There is a view that GST reform would be most powerful if it enabled other tax reforms at the state level.

“The GST is the only guaranteed and untied revenue the states and territories receive. Their other major sources of revenue are generally the worst taxes from an economic perspective,” says Grattan Institute CEO, Dr Aruna Sathanapally. These include stamp duties and payroll tax.

“The GST legislation and intra-government agreements passed in 1999 say changes to the GST rate and base require all states and territories to agree unanimously. As a matter of constitutional power, the federal parliament could change that legislation.

But as a matter of federal practice, a conversation around the GST should be a conversation with the states,” says Sathanapally.

GST reform is interlinked with broader changes needed to improve the tax, economic and welfare systems. Fehily believes this needs to be underpinned by a cohesive, shared vision about what the community wants Australia to look like by 2050.

“Without a clear direction, we risk stagnation or aimless ad hoc changes driven by political interests,” he says.

With no substantial tax reform undertaken in Australia for many years, the need for a staged approach is a popular view.

“The government should develop a five- to 10-year plan that includes improvements in administration, as well as permanent compensation and personal income tax relief for lower earners,” says Wong. “While raising the GST may not be appropriate at this time due to the cost of living, we should still consider a pathway for future adjustments.”

A plan for implementing GST reform

CPA Australia has proposed a five-step plan to broaden the GST to reduce overreliance on income taxes over the next two years.

1. Achieve consensus from state and territory governments that GST reform is critical to future federal, state and territory budgets and must be part of economic and productivity reforms.
2. Identify what a broadened tax base should look like and model the revenue effects of changes to the rate.
3. Assess the impact of changes on business and society.
4. Develop tax settings that best rebalance the tax base to increase GST’s contribution and reduce the income tax burden on individuals and businesses while adjusting the transfer system to support the most vulnerable.
5. Design a thorough implementation program to ensure that individuals and businesses are prepared for the changes.

Value-added taxes (VAT) as percentage of total taxation in 2022

In Organisation for Economic Co-operation and Development (OECD) countries, the share of VAT in total tax revenues ranges from less than 15 per cent in Australia, Canada and Switzerland to more than 25 per cent in Chile, Colombia and Portugal.

The OECD average for value-added taxes is approximately 20.8 per cent. Countries such as New Zealand and Denmark have successfully integrated higher consumption taxes into their tax systems, which could serve as a potential model for Australia to enhance its tax revenue.