Malcolm in the Middle: The Goods and Services Tax

The ever controversial and infamous GST (Goods and Services Tax) has recently been thrown back into the spotlight of political debate over the last month, with the idea of tax reform emerging, argued and tossed aside in about the same time frame. For many members of Parliament, the mere mention of changes to the GST stirs memories of jilted media coverage and lackluster voter reception, particularly when the idea is touted as an election issue (as the 1998 Federal Election revealed, despite Howard’s victory).

Last week, the Turnbull Government publicly announced it would be taking a GST increase off the table in its quest for taxation reform. The announcement means the Federal Government will need to look elsewhere for budgetary savings, despite the already narrow range of options the Government has so far considered for changes or increases; such as Superannuation, the aptly named ‘Death Tax’ or Negative Gearing. The reasons for this backpedaling on the GST appears to be twofold;

1. Strong Opposition from Labor and Consumers: The Government’s GST debate comes fresh out of a year of Abbott Government economic reforms that were received poorly and were widely protested in areas such as University loan changes. Additionally, talks of cutting weekend penalty rates are still fresh in consumer’s minds, with the two possibly compounding to form a ‘too much, too soon’ perception amongst voters and businesses. Not all public reception was negative however, with State Government’s supporting an increase and many in the public health sector lauding the loss of potential funds needed to address the ailing healthcare system.

2. Treasury’s own Assessment: New Treasury modelling has shown that without tax reform, the economy will stagnate and slow. However, in a twist of fates, raising the GST will reportedly do nothing to deliver growth. One estimate suggests that a GST increase would result in a GDP reduction of 0.35% in the ‘long term’. The Treasury has warned that ‘these estimates illustrate the economic cost of relying on bracket creep, rather than spending cuts, to close the budget deficit’.

Now that a GST increase has been swept off the table, Australians are left wondering what the next proposal will involve, as Prime Minister Turnbull struggles against public and political animosity for certain tax reforms.

That being said, while an increase in the GST has been ruled out, the expansion of its base has not. On February 10, the Australian Treasurer Scott Morrison introduced the Tax and Superannuation Laws Amendment (2016 Measures No. 1) Bill 2016 into Parliament. Implementing a number of changes, the bill notably dabbles in the area of ‘cross-border’ GST. The bill amends the original GST formative legislation, the A New Tax System (Goods and Services Tax) Act 1999 to ensure that digital products and other imported services supplied to Australian consumers by foreign entities are subject to GST in a similar way to equivalent supplies by Australian entities. The change of law operates as follows:

1. A new taxing nexus will be introduced to tax supplies made to a recipient who is an ‘Australian Consumer’. This will generally capture supply of digital goods, services and other intangibles supplied from overseas to an Australian consumer.

2. No tax invoices nor adjustment notes are required to be issued for inbound intangible consumer supplies. This will relieve overseas vendors caught within the extended GST regime from some of the administrative obligations which fall upon domestic suppliers.

3. Where a business takes reasonable steps to determine if a consumer is an Australian Consumer, and after taking those steps, the business believes reasonably that the person is not an Australian consumer, liability will not apply. Usual business processes that provide a business with a reasonably belief about a consumer’s identity will be sufficient.

4. Businesses making sales into Austra

lia with an annual value under $75,000p/a will not need to register for GST.

1. The Minister will have the power to determine classes of goods that are GST free (for example where imposing GST would be inconsistent with Australia’s international obligations).

2. If passed, the new rules will apply to supplies that are attributable to tax periods starting on or after 1 July 2017.

Despite abandoning a GST increase, Prime Minister Turnbull and the Federal Government have taken a middle-ground position, expanding the base of the GST to capture more consumers and the modern ways they consume rather than a riskier debate about overarching increases to the GST. While it seems Australians are acknowledging that taxation reform is needed, it remains to be seen exactly what measures the Turnbull Government will put forward for serious consideration, and it’s another question entirely if the electorate will accept or reject those proposals. As Australia enters well and truly into its second decade of consistent growth; the 2014 Budget, a slowing China and a waning Mining Boom ring loudly in the ears of Australian consumers and businesses, factors that will no doubt play into the Government’s tax decisions leading up to the election.