The Institute of Public Affairs has published its State Business Tax Calculator as at 31 December 2009 entitled "Bearing the Burden 2009: The Size and Impact of State Government Business Taxes". This is available on the IPA Website ( http://www.ipa.org.au).
The report makes interesting reading and has attracted some publicity, such as the front page headline in The Australian of Tuesday December 29, 2009 "RANN FACES MORE BAD NEWS – SA TAXES THE NATION'S HIGHEST". Although such general claims require qualification, the level of taxes in South Australia affecting business does call into question claims about the cost-competitiveness of South Australia for a business, for example, the claim on the SA Government Defence Website1 that "Adelaide is Australia's most cost-competitive city for business and the third most cost-competitive in the world in its population, based on an international comparison of 102 global cities. Source: KPMG Competitive Alternative Study 2008".
South Australia recently reduced its payroll tax rates, which are a major business tax, in an endeavour to reinforce its cost-competitive claims for business. So, why does the IPA Calculator proclaim "South Australia the high tax state"?
THE IPA METHODOLOGY
The IPA State Business Tax Calculator is a quantitative model that measures the tax imposed on business by state governments. It calculates liabilities of a hypothetical "reference business" which it says is based on methodology used by the World Bank, and is a medium-sized business assumed to have:
- 60 employees;
- assets of $14 million;
- profit of $4.3 million.
The taxes included by the Calculator include payroll tax, land tax, land transfer duty (or stamp duty), insurance duty, motor vehicle duty and motor vehicle registration. It is said that these comprise up to 87% of the tax revenue collected by state governments. The Calculator can also incorporate workers compensation premiums in each state.
THE TAX LEAGUE TABLE
Under the heading "Main Results – State Business Tax League Table" the Calculator concludes that South Australia has the highest tax impact, and Western Australia the lowest tax impact, on a reference business with the tax liability for a year (excluding workers compensation premiums) calculated as:
|New South Wales||$244,457.00|
Although South Australia comes out badly in this comparison, being approximately 11% above the Western Australian liability, the tax imposts in each state are substantial.
HIT ON SMALL BUSINESS
The Calculator concludes that "Small businesses are discriminated against under current state business tax regimes" as "the state tax burden is disproportionately high on small firms with low profitability, but large firms are also affected because the value of their transactions tends to be high".
The Calculator also concludes that "Large businesses in South Australia and NSW bear the highest tax liabilities in the Commonwealth, deterring firms from expanding".
SOUTH AUSTRALIAN TAXES
Key findings of the Calculator, explaining the "High Tax State" title for SA are:
- "South Australia is reasonably competitive against other states on motoring taxes and payroll tax (including as a result of measures announced in the 2009-10 Budget)".
- "However, any competitive advantage in these areas is significantly diluted by very high property taxes, especially land tax (69 percent above the average)".
- "South Australia also levies the highest insurance duty liability compared to other jurisdictions".
Under the heading "South Australia Land Tax Grab", the Calculator assesses the land tax liability of a reference business as $35,381.00, which it says is about 69% above the average for the states and "a massive 536 percent above land taxes in WA".
South Australia also comes in second on the table of land transfer duty (stamp duty) burdens on business with a liability of $46,691.00 on a reference business (below the front runner Victoria with $52,860.00). South Australia also comes in second on other stamp duties liabilities with an estimated burden of $56,290.00 on a reference business, following Victoria with $62,477.00.
The results for motor vehicle registration fee liabilities have South Australia again in second highest place with a liability of $3,327.00, following Queensland with $4,129.00.
The Calculator has overall results for industry sectors, Construction, Transport, Retail, Financial Services and Professional Services. The results, including both tax liabilities and workers compensation premiums, show that:
- For Transport, South Australia is most expensive with a liability of $523,405.00, above an average of $431,862.00.
- For Construction, New South Wales has the highest liability for a reference business of $434,654.00. South Australia comes in third at $368,863.00, just behind Tasmania.
- In Retail, New South Wales is the highest ($303,036.00) and South Australia second ($302,631.00) above the average of $275,593.00.
- For Financial Services, South Australia again has the highest liability ($269,514.00) above an average of $250,862.00.
- For Professional Services, South Australia is again top ($262,155.00) with an average of $247,911.00.
THE CALL FOR TAX REVIEW
The Calculator concludes that taxes in South Australia are about 5% above the average for the States, and about 11% above Western Australia. Not surprisingly, the Calculator concludes that "To create an economic climate more conducive to economic development and innovation, the government should reduce its above-average tax liabilities on business".
The impact of state taxes, and the workers compensation premiums, in South Australia will vary depending on the business that is affected. However, many businesses will recognise the burdens described by the IPA Tax Calculator in many areas, particularly land tax and stamp duty (including stamp duty on land transfers) in South Australia.
WHAT CAN BE DONE?
With an election pending, the Government in South Australia is obviously aware of the bad publicity and concerns that have resulted from its tax regime, particularly land tax. Very few details have been released, but it has been announced2 that there will be cuts to land tax which are estimated to cost some $52 million per year and to mean that about 75,000 of the estimated 121,000 people liable for tax will not have to pay the tax.
It is, apparently, intended that the threshold will be indexed above $300,000.00, which will mean relief of $1,245.00 to an owner who will still be liable for the tax. The rate of tax will not be changed. This seems to be a cynical measure designed to largely preserve the tax base, but to upset fewer voters in the process. Funding for additional government spending is anticipated to come from increased receipts from GST, and from stamp duty on property sales, particularly from a strong housing market.
The Australian Financial Review3 calls State taxes like stamp duty, land tax and payroll tax "nuisance taxes" and says that they "drive small businesses, investors and property owners crazy". The article goes on to say:
The Henry Review, by Treasury Secretary Ken Henry, is intended to review the morass of State and Federal taxation. Apparently there are some 125 different taxes imposed by Federal, State and local governments or, if these are counted individually, rather than aggregated, the number is 256. Presumably Ken Henry has made recommendations to rationalise the tax mess, but the Federal government has, so far, declined to release the Henry Review.
One of the most glaring inequities of the State stamp duty, or property tax regimes is that although the majority of State revenue comes from a distribution of GST receipts from the Commonwealth, the amount on which duty is levied on a property transfer includes the GST component, so that tax is effectively paid on a tax recovered by the State Government.4 It is this kind of inequity which makes State taxes unpopular, but the addiction of State governments means that there is unlikely to be any real reform in the near future.
2 The Advertiser Friday January 29 2010 "Treasurer finds pot of gold in the nick of time".
3 The Australian Financial Review Wednesday 27 January 2010 "Some Taxing Issues".
4 Section 15A of the Stamp Duties Act 1923 (South Australia).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.