Why wait for the feds? States should unite to reform GST

Jim Chalmers, accompanied by NSW treasurer Daniel Mookhey, Victoria’s Jaclyn Symes, Western Australia’s Rita Saffioti and Queensland’s David Janetzki.

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For my sins, I’ve acted as a GST and state tax adviser for the past 25 years. My career began with the introduction of GST.

Yet even now I’m continually amazed that the states have failed to grasp the opportunity to drive meaningful tax reform – if only they can reach unanimous agreement on common issues.

There are many possibilities, but three of the most obvious are reforming road user charges, applying GST to short-term accommodation, and removing known GST roadblocks to new housing supply.

A 26-year-old federal law provides that “the rate of the GST and the GST base are not to be changed unless each state agrees to the change”. Under an intergovernmental agreement, all GST revenue is distributed to the states, making it effectively a state tax. This “lock mechanism” was a political device to reassure voters the GST rate and base could not be easily changed. But this lock can be removed simply by repealing the old law. Instead of treating the GST lock as a handbrake on GST reform, the states should use it as a tool for action.

Take the above examples. All states want a new road user charge to replace declining fuel excise as electric vehicles become common. But Victoria’s road user charge was ruled unconstitutional by the High Court in late 2023. Other state-based vehicle registration duties and fees inevitably will face similar challenges.

Why wait for Canberra to fix this? For too long the states have abdicated responsibility for tax reform. They could – and should – band together and agree on a GST reform package to present to the federal government.

By imposing the new charge as a taxable supply under the GST Act, the revenue would flow to the states under existing intergovernmental agreements.

The GST Act could be amended to include a new taxable supply, made on first registration and on renewal, of the “right to use a motor vehicle on public roads”. The act already contains special rules for supplies by state agencies, so this is not novel.

More radically, the tax could combine a fixed rate (based on vehicle weight) with a variable rate (based on kilometres driven) instead of a flat 10 per cent rate.

For example, a small car consuming six litres per 100km and driven 15,000km generates about $457 in fuel excise, equivalent to 3.05c a kilometre.

Registration for a small car in NSW is about $438. Under new GST rules the fixed cost could start at this level, with future increases used to replace registration duties. By default, private vehicles could be assumed to travel, say, 50,000km. Owners could provide odometer readings to reduce their tax.

The GST would be collected through state registries, payable in monthly instalments. Interest could apply to late payments. The states also could legislate that a vehicle’s registration cannot be transferred until all outstanding GST is paid.

Fuel tax credits, currently available to GST-registered taxpayers using fuel off-road, could continue for the variable GST component if a vehicle is used off-road. Net GST revenue collected could be distributed to the states pro rata, based on gross collections from the new charge.

Fuel excise on petrol and diesel for passenger vehicles should be abolished; the same tax should apply to all vehicles, regardless of engine type. Setting national rates to replace varying state rates is a challenge. One option is to adopt the highest current state rates. Lower-rate states could use some of the excess revenue for subsidies to maintain parity.

Second, the states could extend GST to short-term accommodation in residential premises. Tasmania, Victoria and the ACT have imposed their own short-term accommodation levies and other states will follow. A national approach, via GST, would allow the Australian Taxation Office to administer the tax.

Finally, with a national housing crisis, why not pursue GST reforms to ease pressure on new housing supply?

Currently, build-to-rent and retirement village operators cannot claim upfront GST credits on new projects. If such premises were treated as commercial residential premises, upfront credits would be available, with GST applied at a reduced rate to rents.

Alternatively, the states could agree to allow such operators to claim upfront GST credits on new projects, with those credits – plus a notional interest cost – repaid over, say, 10 years (or earlier if the project is sold).

The states rarely agree, which is why the GST lock has been so effective. But the reality is, Canberra has little incentive to undertake tax reform for the benefit of the states if they can’t first agree among themselves.

The states must come together to drive reform. If they don’t, a reformist federal government could simply repeal the lock and take back control of GST revenues.

Matthew Cridland is a partner at K&L Gates.