Coopers & Lybrand has published a summary of Consumption Taxes Worldwide for the past two years. This edition updates information gathered, or changes notified, since the last publication of this survey.
Prepared by: David R Vos, Partner - Indirect Taxes, Coopers & Lybrand, Sydney
The Current Debate
Tax Reform is a hot topic in Australia at the present time. Many are talking about Tax Reform in a rather glib fashion, few seem to want to explore into the detail and understand the degree of complexity, uncertainty and problem with the current Australian tax system both at Federal and State levels.
The recent High Court decision in respect of State Business Franchise fees further brings to risk the stability of the current tax system within Australia.
The three tiers of Government in Australia raise the following :-
- Federal - 75.9%
- State - 20.3%
- Local - 3.8%(see endnote 1)
Much of the current debate in Australia surrounds the following issues:-
- Whether there is too much reliance on direct tax and not enough on indirect taxes ie (whether it is more preferable to rely on the taxing of income or whether greater reliance ought to be placed on taxing spending). Here it is important to consider whether there is an over reliance on PAYE tax payers. After all this section of the community contributes over 50% of total Federal taxation revenue. Also it is necessary to consider the narrow base for imposition of sales tax and the general shrinking indirect taxes base.
- Many are concerned that there is an increasing cash economy and that persons operating in this economy are outside of the tax net. Others are concerned at the inadequacy of national savings and sustained programs to encourage savings, both by Government and the private sector.
- Despite incurring in excess of 40% of Government spending, States only have the right to impose taxes to half that amount. This has been further exacerbated by the recent High Court decision in respect of franchise fees which has further eroded by 15% the State tax base. This vertical fiscal imbalance is of concern particularly to the States because they do not want to annually seek hand outs from the Federal Government to balance their budgets. Conversely, it can be argued that if this imbalance is not kept in place, then there may not be an ability by the Federal Government to control a national direction for economic stability.
- Australia's taxes, particularly since 1985, have become quite complex. This complexity is further exaggerated by most taxes being self assessing. As a result, it is incumbent on all tax payers in Australia to understand their taxation liability and to correctly meet it in a timely and a cost efficient manner. This therefore places on business, a significant cost of compliance and it is suggested that such complexity has created for business and tax administration, a level of activity that is not primarily productive.
In summary, the debate in respect of tax reform can be brought down to the following points:-
- Whether a greater reliance ought to be placed on taxing spending rather than income.
- Whether States ought to have greater taxing rights or whether it ought to be moved further into the Federal sphere.
- The cost of compliances causes businesses a significantly increased burden and deploy resources away from otherwise productive activity.
- The indirect taxes base is too narrow and needs to be broadened and
- Attempts ought to be made to target the black economy so as to ensure that all those which ought to be in the tax net are brought therein.
- Australia ought to benchmark its tax system against world's best practice.
The Overseas Experience
Over 140 countries in the world have a broad based consumption tax.
Of countries which impose a broad base consumption tax the clear majority of those countries have a value added tax (also known as a goods & services tax). Each year there are at least five more countries introducing a value-added tax.
Broadly speaking, broad based consumption taxes can be imposed as a single stage tax on the retail supply of goods and/or services or imposed on all supplies of goods and/or services but allowing businesses to claim a credit for the tax charged by other businesses. In the latter case this is the classic "invoice credit system" or value added tax as it is also known.
It is important to understand that broad based consumption taxes are inevitably taxes on spending by private individuals - personal consumption expenditure.
Australia is the only developed country in the world which imposes a wholesale sales tax.
Australia's taxes on goods and services is significantly lower than the OECD average.
Australia's indirect taxes base is urgently in need of repair:-
- The State base has been eroded by the State Business Franchise decision in the High Court and could be in further jeopardy if other state taxes are found to be invalid under the current terms of the Australian Constitution.
- The majority of indirect taxes in Australia is imposed on a narrow group of goods - 65% of sales tax and excise is imposed on motor vehicles, parts therefore, petroleum, alcohol and tobacco products.(see endnote 2)
- Over half of the sales tax collections in Australia is imposed on business inputs.(see endnote 3)
- The key to any reform of wholesale sales tax is that the current exemption for wholesale sales tax on business inputs used by goods producers (ie primary producers, manufacturers and miners), wholesalers and significant service providers to those industries (eg transport industry) ought to be expanded to cover all business inputs used by those persons. There is a substantial amount of wholesale sales tax currently imposed on the costs of manufacturers, wholesalers and service providers to manufacturers and wholesalers and that wholesale sales tax is built into the price of goods produced and sold in Australia. This makes our exports more expensive and less competitive on the world market and it even makes our locally produced goods dearer than imported substitutes. This is because almost all other countries in the world have adopted a VAT which enables businesses to claim a credit for tax paid on business inputs.(see endnote 4)
- The current wholesale sales tax system is of advantage to the Australian Taxation Office because less than 1500 sales tax payers pay in excess of 75% of total sales tax. On the other hand 67% of sales tax remitters lodge returns on a quarterly basis.(see endnote 5) The introduction of a broad based consumption tax will create more work for the Australian Taxation Office and also for business. However, once systems and procedures are set up, the ongoing administration of such a tax becomes relatively simple to maintain. The Revenue Authorities will have a greater control on the tax base (by being able to monitor tax payments by individual businesses) and most businesses will have positive cash flows in respect of the tax thus offsetting any increased cost to administer collection and payment of the tax.
It is unfortunate that the discussion of reform to the tax system has become such a politically sensitive issue for both major political parties. Australian's are suffering as a consequence. At different times both the Liberal/National Party and The Australian Labor Party have sought to introduce a broad base consumption tax. It is now time for the debate to move on. We need to focus on reform which is both practical and achievable in the current context.
As indicated above most countries in the world have adopted a broad based consumption tax. They can not all be wrong. Australia has a right to a broad based consumption tax. Clearly, any broadening of the indirect taxes base must take into account its impact on low income earners, welfare recipients and the like.
1. Source: Government Financial Estimates, Australia 1995-1996, ABS Catalogue No. 5501
2. Page 20 Draft White Paper, "Reform of the Australian Tax System", June 1985
3. "Some Issues in the Consumption Tax Debate", Business Council of Australia, March 1991 (prepared by Monash University)
4. "A Tax Relief System for Australian Exports", Business Council of Australia, Authors TM Dwyer & JT Larkin)
5. Australian Taxation Office, taxation statistics 1994/95, p147
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