In late June 1999 the States and Territories signed the Revised Intergovernmental Agreement on the Reform of Commonwealth-State Financial Relations, known as the IGA. The original IGA had been agreed by Heads of Government at the 1999 Premiers’ Conference, but was subsequently amended to accommodate the wishes of the Australian Democrats.
The major implications of
the IGA will be the introduction of a 10% goods and services tax (GST) on
1 July 2000 and the abolition of wholesale sales tax and a number of
State and Territory own-source taxes.
In addition, the annual Financial Premiers’ Conferences will be replaced
by Ministerial Council meetings comprising State and Territory Treasurers and
chaired by the Federal Treasurer.
All of the GST revenue will be passed on to the States and Territories, replacing Financial Assistance Grants as the major component of Commonwealth grants. The IGA makes this conditional on the States and Territories fulfilling a number of obligations, primarily abolishing a number of own source taxes and establishing a new First Home Owners Scheme.
The GST will be collected and administered by the Australian Taxation Office (ATO). The cost of the administration will be divided between the jurisdictions on a per capita basis. States and Territories will enter into a formal contract agreement with the ATO, and in accordance with the guidelines set out in the IGA, this allows for an outcome based contract and oversight by the Ministerial Council.
This chapter discusses some of the main implications of tax reform for the ACT’s financial position, and outlines in broad detail how the GST will affect the operations of the ACT government.
From 1 July 2000, the Commonwealth will cease to apply wholesales sales tax. In addition, the temporary arrangements for the taxation of petrol, liquor and tobacco under the safety net arrangements, that were announced by the Commonwealth on 6 August 1997, will cease. The States and Territories will each need to pass their own legislation in order to cease the following taxes:
· bed taxes from
1 July 2000 (not applicable in ACT);
· financial institutions duty
from 1 July 2001;
· stamp duty on quoted
marketable securities by 1 July 2001; and
· debits tax from
1 July 2005, subject to review by the Ministerial Council.
Furthermore, the States and Territories have agreed to adjust gambling taxes to take into account the GST that will be paid by the providers of gambling services. For the ACT, the total revenue reduction as a result of these changes will be $114.1m in 2000‑01, and $159.8m in 2001‑02.
In addition, the following taxes will be reviewed by the Ministerial Council by 2005:
· stamp duty on non-quotable
marketable securities;
· stamp duties on conveyances
of non residential property;
· stamp duties on credit arrangements, instalment purchase arrangements and rental (hiring) agreements;
· stamp duty on leases;
· stamp duties on mortgages,
bonds, debentures and other loan securities; and
· stamp duties on cheques,
bills of exchange and promissory notes.
The introduction of the GST
is expected to increase the cost of building a house, an activity that was
previously largely tax exempt. This is
also expected to increase the value of existing houses, making it more
expensive for homebuyers to enter the housing market. This was recognised in the IGA, and the States and Territories
agreed to introduce a new First Home Owners Scheme (FHOS) to provide a $7,000
payment to offset the effect of the GST on the cost of home ownership to new
market entrants. The cost of the FHOS
to the ACT is estimated at around $12.2m per year.
The cost of the FHOS will be
met by the States and Territories, however this additional cost is recognised
in the IGA. The revenue guarantee
arrangements provided for in the IGA will ensure that, even after funding the
FHOS, States and Territories will be no worse off under the reformed taxation
system than they would otherwise have been.
One of the more important
elements of the IGA, from the States’ and Territories’ perspective, is the
revenue guarantee. The Commonwealth has
guaranteed that the budgetary positions of individual States and Territories
will be no worse off under the revised arrangements than they would otherwise
have been. This will be achieved by the
Commonwealth making ‘top-up’ payments to ensure that each jurisdiction receives
their Guaranteed Minimum Amount (GMA), and, for the first two years, transfers
from those jurisdictions that receive more than their GMA to those that would
otherwise receive less.
The calculation of each
jurisdiction’s GMA is a complex process which relies on estimates of what would
have been otherwise collected from taxes that will now be abolished, hence the
estimates cannot be verified. Other
costs to the States and Territories arising from the IGA include the cost of
the new FHOS and the loss of Wholesale Sales Tax (WST) equivalent payments from
Government Business Enterprises as a result of the abolition of WST. For the ACT the loss of WST equivalents is
worth around $4m per year, which is incorporated into the ACT’s GMA.
Two further significant
complications to the calculation of the GMA relate to the ‘growth dividend’ and
the ‘embedded savings’. The growth
dividend is the amount of additional state tax revenue that will be generated
by the boost to economic growth arising from tax reform itself. As this additional revenue to States and
Territories would not have otherwise occurred, the GMA is reduced by this
amount, which for the ACT is estimated at $1.3m in the first year.
The other significant
complication arises from the reductions that the Commonwealth expects in the
cost of government purchases as a result of the abolition of WST. Although governments are generally exempt
from WST, suppliers to the government generally are not, and they recoup their
WST costs in the prices they charge. The
Commonwealth expects that, in the first year, the ACT will realise $8.5m of ‘embedded
savings’ after the abolition of the WST, and this amount is subtracted from the
ACT’s GMA. The concept of embedded
savings is discussed in more detail later in this chapter.
The GST will address one of the major structural problems currently facing the Federation. It will provide States and Territories with a growth tax, that is, one that will see revenue increase in line with economic growth. State and Territory tax revenues have generally fallen as a proportion of Gross State Product in the past, with any increases due to increases in the tax rates. By contrast, revenues from the GST will increase in line with increases in spending in the economy, which will provide States and Territories with a more stable and robust revenue base.
Although States and Territories will require revenue guarantee payments from the Commonwealth in the short term, in the longer term the new tax system will provide significantly more funding than the current tax system. On current modelling, the net benefits to the ACT are likely to start accruing in 2003‑04. Over the 2000‑01 to 2009‑10 period, on current early projections, the ACT is expected to gain an additional $216.1m from the GST, above what it would have if the current system had continued. This compares favourably with the other smaller jurisdictions. Tasmania will be $150.8m better off over the same period, and the NT $43.69m better off.
The GST will be levied at a
rate of 10% on most purchases of goods and services. A purchaser will pay an additional 10% on top of the cost of a
good or service. The provider of the
good or service must remit this 10%, or 1/11th of the total sale
price, to the Australian Taxation Office (ATO) on a monthly or quarterly
basis. The provider should reduce the
amount of this payment to the ATO by the total of any GST they paid when
purchasing their inputs. This is known
as an ‘input tax credit’.
The concept of input tax credits ensures that the effective incidence of the GST falls entirely on the final consumer. Any GST paid by intermediaries in the supply chain is refunded. This is an important difference from WST, where no refunds are available at intermediate steps. This causes a WST cascade through the supply chain, and often results in taxes being levied at several points.
There are two types of exemptions to the general rate of 10%. They are items that are ‘input taxed’ and items that are ‘zero rated’. Input taxed items do not have an additional 10% added to the final purchase price, but the provider is not entitled to claim input tax credits, and hence will seek to recoup the costs of GST paid on inputs through an increase in the sale price. This treatment is appropriate where it is difficult to calculate how much additional value has been added by the final provider, and has been adopted for financial services and housing.
Zero rated items also do not
have an additional 10% added to the final purchase price, but the provider is
entitled to input tax credits, and hence there is no increase in the final sale
price. This treatment has been adopted
for food and some health and education services.
Many of the details of the
GST are still being finalised by the Commonwealth and it is too early at this
stage to state precisely what the impact of the GST will be on the ACT
Government. The general principles and
their effects are discussed below.
All government operations will be subject to GST. However, due to constitutional limitations on taxing powers, each jurisdiction and the Commonwealth will undertake to pay the GST. Taxes and charges of a regulatory nature levied by all levels of government will be exempted from the GST through a Commonwealth Treasurer’s Determination. Under the legislation the Commonwealth Treasurer can make determinations at any time allowing some flexibility to accommodate any new taxes and charging regimes introduced by governments.
Where the government
provides a service in exchange for payment, this transaction is subject to GST,
which will be collected by the government to remit to the ATO. Similarly, where the government makes a
purchase, this will generally be subject to GST, which will be paid by the
Government to the provider for remittance to the ATO. GST paid by the government in this manner will be refunded by the
ATO as input tax credits, where the supplier is registered for GST. The ACT Government will be encouraging all
of its suppliers to register.
The major exception to this
general rule is in the area of housing, which is input taxed so no input tax
credits are available. This will
increase the cost of providing public housing in the ACT by an estimated $6m
per year. The ACT negotiated additional
funding from the Commonwealth of $5.9m per year for three years, under the
Commonwealth State Housing Agreement, in order to cover this cost. Other States and the NT will be similarly
reimbursed.
The general rule for the GST treatment of grants made by the Government to non-government bodies is that they are GST free. However, this is heavily qualified by the narrow definition adopted for grants. Any conditions on the grant, or any service received in exchange for the grant, will be seen as evidence that the grant is not in fact a grant, but consideration for services received. This would result in the services being treated as a taxable supply, and hence the transaction would be subject to GST, assuming that the recipient is registered for GST.
In practice virtually all
grants made by governments have some conditions attached to them, and will fail
to qualify as grants under the very narrow definition that has been
adopted. As a result, most grants will
constitute a taxable transaction. A
decision is yet to be made as to how funding to non-government bodies will be
varied as a result of the GST.
As noted above, the introduction of the GST will be accompanied by the abolition of the existing WST system. Rates of WST are generally much higher than 10%. This means that for some goods the 10% GST will often be offset by an even greater reduction in WST, and the prices of some goods will fall, while others will increase by less than the full 10% rate of the GST. The actual change in each price will depend on the level of taxes to be abolished that are currently incorporated in the price of each good and service.
Even though governments are
exempt from WST on goods they purchase, this exemption only counts at the last
point in the supply chain. WST paid on
prior steps in the supply chain is ‘embedded’ in the final price. For example, computers used by a supplier
will generally have had WST paid on them.
The supplier will build this into their cost structure when setting
prices, indirectly passing it on their customers, including the
government. The abolition of WST will
therefore create savings for governments, allowing the same services to be
delivered at lower prices.
The Commonwealth has
estimated that the ACT will achieve $8.5m of embedded savings in the first
year. In effect, this means that the
Commonwealth believes that the ACT could reduce spending by $8.5m without any
reduction in services, as a result of the lower costs of purchasing the goods
and services that are required in order to deliver government services. As noted above, this $8.5m has been deducted
from the ACT’s GMA, and if these savings are not realised the ACT will in fact
be worse off than it would have been if the current arrangements had continued.
The Econtech Savings Calculator is a model designed to identify the embedded savings so that governments will know the size of the price reductions that they should be seeking from their suppliers. It also recognises that not all savings will be available immediately, and that some will take time to flow through the supply chain, such as savings flowing from purchases of fixed assets. It calculates direct impacts, as well as those in the short, medium and long terms.
The model does not guarantee that these savings will be achieved. It merely suggests the magnitude of price reductions that governments should be seeking to negotiate with their suppliers. Preliminary results for the ACT have identified sufficient savings which would, if realised, allow the ACT to achieve the $8.5m savings target.
The areas of potential savings which this preliminary analysis has identified include reductions in the prices of government purchases of repairs and maintenance services (potential savings of around $0.8m), fuel ($0.6m), and telecommunications and other electronic services and equipment ($0.3m). If these and other savings can be achieved then agencies’ costs will decrease, allowing reductions in the levels of budget funding without any reduction in the levels of service provision.
The embedded savings will be
realised not just by governments, but by all businesses. As noted above, this will result in the
price of many items increasing by less than the full 10% GST rate, and on some
items prices will actually decrease.
The Australian Consumer and Competition Commission (ACCC) will monitor
prices to safeguard against profiteering from the introduction of the GST, and
to ensure that embedded savings are passed on to customers. The ACCC has offered to work with
governments and their suppliers to assist in identifying and realising the
embedded savings.
A significant difference
between the embedded savings realised by the private sector and those realised
by the general government sector is that savings realised by the private sector
must be passed on to customers in the form of lower prices. In the general government sector, as noted
above, the savings have been clawed back by the Commonwealth Government in the
form of a reduction in the GMA of each State and Territory. This has been recognised by both the
Commonwealth Treasury and the ACCC, and States and Territories will not have to
pass on price reductions that would otherwise result from the realisation of
embedded savings.
The Commonwealth Treasurer will make a determination under the GST
legislation exempting various State and Territory taxes and fees from GST. The ACT and other jurisdictions forwarded to
the Commonwealth their lists of taxes, fees and charges early last year for the
Commonwealth to consider. The
Commonwealth has not yet finalised the list of revenue items to be exempted,
although they have issued some general principles.
All fines and penalties are
exempted from the GST. In addition,
items of a regulatory nature will generally not be subject to the GST, but they
need to be determined as such by the Commonwealth Treasurer. This includes all license and registration
fees and permits to undertake activities, as well as compulsory levies. Items which will be subject to the GST will
generally be those for which a service is provided. This would include fees for use of such things as public land,
marriage celebrant fees, connection fees and fees for attendance of police officers.
While it is too early to determine its precise effects, the introduction of the GST will have significant implications for the business of government. Many areas of government will need to start taking account of the tax implications of their operations for the first time. Preparation for the GST will require a concerted effort by all ACT Government agencies in order to fully understand the tax treatment of each of their transactions, both within government, and with the private and not-for-profit sectors.