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Australia Canvasses Options For GST Reform

by Mary Swire,, Hong Kong

29 June 2015

The Australian Government has released a draft discussion paper on the future of the country's federal tax system, which explores options for goods and services tax (GST) reform.

Changes to the GST rate or base require the unanimous support of states and territories, as well as the endorsement of the Commonwealth and the passage of relevant legislation by both federal houses of Parliament. Under the horizontal fiscal equalization (HFE) regime, all GST revenue (less the cost of administration) is passed to the states and territories.

The commonwealth Government raises 82 percent of total tax revenue, the states and territories raise 15 percent, and local governments the remaining three percent. Commonwealth transfers (including the GST) comprise about 45 percent of total state and territory revenue. By contrast, in Canada, the central Government raises only 45 percent of the total tax revenue.

The paper notes: "The current state of federal financial relations, and the degree of the Commonwealth's financial power in the system which makes states and territories dependent on it to finance their spending responsibilities, contributes to the complexity of our federal system. It creates perverse incentives that make genuine intergovernmental partnership difficult." The mismatch between revenue and expenditure responsibilities between the different levels of government is known as vertical fiscal imbalance (VFI).

The paper considers options for reforming GST revenue distribution. The methodology could shift from full equalization to a less comprehensive equalization, by establishing a GST relativity "floor," which would set a minimum level of GST to which any state or territory would be entitled.

Alternatively, when assessing how to distribute the GST, the Commonwealth Grants Commission (CGC) could take account of a lower proportion of the revenue bases and expenditure undertaken by the states and territories. Finally, the GST could be distributed using a simple equal per-capita formula.

The paper also acknowledges that expanding the GST would not in itself reduce the level of VFI, as, unlike personal income tax, it cannot be regarded as state and territory "own-source revenue." The High Court has determined that under the Constitution only the Commonwealth can levy this type of tax. This reform would, however, offer additional revenue autonomy for the states and territories.

According to the paper, "options could include a change to the current GST arrangements so that not all the additional GST flowed to states and territories, allowing some proportion to be used for compensation. There could be a reduction in other Commonwealth grants to states and territories." Consideration would also need to be given to the fiscal equalization implications, while the capacity of states and territories to broaden their overall revenue take may be limited.

The discussion paper forms part of the broader White Paper on the Reform of the Federation process. The White Paper will seek to clarify the roles and responsibilities of the states and territories, to ensure that, as far as possible, they are sovereign in their own capacity. The White Paper will be released by the end of 2015.

TAGS: tax | value added tax (VAT) | government committee | goods and services tax (GST) | Australia | legislation | Canada | revenue statistics | tax reform | individual income tax | services

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