GST ructions adds to taxing times for Coalition

FEARS are mounting that the government is losing control over its reform narrative and further eroding its political capital.

Some business leaders and politicians in the Coalition argue that the GST should be broadened to include fresh food.

FEARS are mounting that the government is losing control over its reform narrative and further eroding its political capital after several Liberal MPs broke ranks to push their own cases for changes to the GST.

Already tension is growing within the party over the kind of changes that should be made to the GST, which is set at 10 per cent and excludes items such as fresh food, health and education.

At the same time, business is concerned that the debate is becoming too fractured and needlessly alienating the public.

“The risk of various proposals, to broaden the GST base or raise the rate, being raised in isolation is that there is no overall narrative,” says Robert Jeremenko, a senior tax consultant at The Tax Institute.

“That is missing at the moment and the government needs to addressing this sooner rather than later.”

Mr Jeremenko, who was tax adviser to Peter Costello when Mr Costello was federal treasurer, says the discipline and control over the economic debate exercised by his former boss was critical in successfully carrying the GST over the line.

“Hopefully the discussion (tax white) paper will start to set the scene,” he says. “There is going to need to be a concerted effort by political leaders that means the government must continue to argue the need for change, keeping that narrative front of mind for the public so this debate can be one that every stakeholder gets involved in with the right spirit.”

The Liberal MP for Hume, Angus Taylor, shares Mr Jeremenko’s concern. He worries that the public has been overwhelmed with technical details about possible GST changes without being convinced of the need for reform in the first place.

“Tax reform, like all reforms, is only possible if we make a strong case that cuts through, so let’s not put the cart before the horse,” Mr Taylor says. “Before we pursue a major restructure we have to convince Australians that there is a problem that has to be solved.”

Taylor has been joined by Queensland LNP MP Bert van Manen, who held off Peter Beattie in the seat of Forde at the 2013 federal election.

Mr van Manen has warned that the discussion about the issue is “getting ahead of the game” as Labor seeks to enshrine the GST debate at the heart of the Queensland state election.

With Labor opposing any change, the government must be careful not to prematurely kill off the prospect of GST reform before it starts to seriously look at the tax package it will take to the next election. Too many MPs speaking out about GST changes could simply hand Labor further ammunition.

Already, since the new year, three separate and conflicting arguments evolved from government MPs on the GST. This has muddied the waters for reform in the absence of any overarching government position.

The first argument to emerge was the case for broadening the base with Trade and Investment Minister Andrew Robb, Victorian MP Dan Tehan, West Australian senator Dean Smith and veteran Queensland senator Ian Macdonald all taking up this line.

No one is willing to argue for the rate to be increased despite the fact that equivalent taxes in many countries are higher, with many nations levying imposts at around or above 20 per cent.

According to the OECD’s Consumption Tax Trends Report, 164 countries levy a general consumption tax, or VAT. However, in Australia, the report found the GST accounted for just over 12 per cent of total tax revenue in 2012. This was the second-lowest proportion in the OECD after Japan.

Australia’s GST rate was also found to be about half of the developed world average rate of 19.5 per cent. Even New Zealand has dared to tackle the issue, increasing its GST from 12.5 per cent to 15 per cent in 2010.

Economists typically advocate broadening the base in Australia, rather than lifting the rate, to avoid further distorting consumption choices. The proposals from government MPs have not touched on the rate, pointing to an unwillingness to argue the case for a direct tax-rate rise. Instead, Mr Tehan was the first MP this year to put the issue of broadening the base on the table.

Mr Tehan argued that extending the GST to food, health, education and financial services would raise more than $15 billion, money that could be used to relieve the tax burden on companies and individuals. He was joined by Senator Smith, Senator Macdonald and Mr Robb in his support for a broader GST.

The Australia Institute also argued for a more progressive approach by extending the GST to private health insurance and education in a bid to capture higher income earners. The move was estimated to raise $2.3bn a year. The proposal was attacked by the Association of Heads of Independent Schools chief executive Geoff Ryan, who argued parents who sent their kids to private schools saved the government $4.3bn a year.

The second argument to emerge was the case for distribution reform being pushed by WA MPs and spearheaded by Senator Smith. He is pushing for a per capita distribution model with checks and balances to form the centrepiece of the white paper submission from WA parliamentarians.

In principle, the West Australians have a good case given their paltry share of GST revenues. The 2014-15 WA budget forecasts the state’s share of national GST revenue is expected to fall from $2.5bn last year to $799 million by 2017-18. And, in its 2014 update, the Commonwealth Grants Commission confirmed that the state was receiving only 4.2 per cent of total GST revenues.

Senator Smith is now pushing for distribution reform before the issues of the rate or base are addressed.

It is a position that is condemned by many of his Liberal colleagues who argue it is untenable for distribution reform to be looked at without growing the size of the overall pie.

“In giving priority to GST distribution reform the starting point should be a thorough examination of the merits of a per-capita distribution model that includes a mechanism that would compensate smaller states,” Senator Smith says.

Senator Smith says the advantage of targeting distribution reform is that an agreement between the states and territories is not required. This is in direct contradiction to Tony Abbott’s claim that there can be no movement on the issue until all the states and territories come to the table, which is not technically necessary.

“GST distribution is totally within the remit of the federal government,” Senator Smith says. “Issues like the base and the rate require agreement between the commonwealth and states and territories. It makes sense to tackle GST distribution first and the base and rate second.”

Mr Tehan has gone public in rejecting this approach. “Fixing the financial distortions in the GST carve-up could not be properly addressed without examining its expansion,” he says.

A distribution model based strictly on relative population would see WA gain about $3.6bn in GST revenues according to the recent Commonwealth Grants Commission update. But this would see billions taken away from the smaller states, with the Northern Territory being the biggest loser.

Under this population model, the NT would lose $2.5bn, with its annual share being cut from $3bn to about $500m.

The ACT’s share would go from $1.1bn to $900m; Tasmania’s share would go from $1.9bn to $1.1bn and South Australia’s would go from $4.9bn to $3.8bn.

The final argument is the least contentious and is being pursued with the formal approval of government and aggressive enthusiasm of its champion, new Assistant Treasurer Josh Frydenberg.

Mr Frydenberg has campaigned to reduce the $1000 threshold at which GST is currently applied to online overseas transactions. The move enjoys broad support from business, industry and retail groups who have long argued for a levelling of the playing field.

However, the WA government has expressed caution about the move and sought to link the issue to gaining a better distribution deal for the state. Australian Retailers Association executive director Russell Zimmerman has accused it of holding “every retailer in the state and the rest of the country to ransom”.

Currently, the proposals being canvassed by government MPs lack a sense of cohesion and are in conflict with one another. Abbott has refused to rebuke his MPs for putting their views forward and last year put the GST squarely on the agenda in his speech at the commemorative dinner for Sir Henry Parkes in Tenterfield.

“The commonwealth would be ready to work with the states on a range of reforms that could permanently improve the states’ tax base — including changes to the indirect tax base with compensating reductions in income tax,” the Prime Minister said.

Having opening the floodgates, the consequences of Tony Abbott’s reluctance to further engage with the issue after setting alight the GST fuse are now becoming more apparent. The political stakes are high and Labor has sought to make mileage out of the confusion within Liberal ranks.