Australian Goods and Services Tax (GST)

Raphael Cicchini, Manager, GST Policy Unit 26 October 2004

Overview
Why did Australia introduce a GST? How does Australias GST work? Types of GST treatment and GST in the international context Administration of the GST Transition to the New Tax System

Why did we introduce a GST?

The wholesale sales tax was: Out of date
The tax base (goods) is a declining proportion of economic activity.

Internationally uncompetitive
WST cascaded through production hidden tax on exports & import competing firms.

Complex and distortionary

The WST applied at at least 6 different rates.

Australias GST
GST introduced on 1 July 2000. Broadly, it is a tax on private consumption in Australia. The GST replaced the WST and a range of State indirect taxes. Applies at a flat rate of 10% to a broad base of goods and services and other supplies (such as property and rights). However, there are some exceptions. All GST revenue goes to the States and Territories.

How does the GST work?

The GST is essentially a value added tax The (registered) supplier remits the full amount of GST on supplies they make but is allowed to claim a credit (input tax credit) for GST they paid on their inputs. In this way, tax is only applied to the value added. The consumer or end-user ultimately bears the tax. See following example:

$11,000 METAL SHOP

Added value = $10,000

$22,000 CAR MANUFACTURER CAR RETAILER

Added value = $10,000

$33,000 FINAL CONSUMER

Added value = $10,000

GST $1,000 ITC $1,000 GST $2,000 ITC $2,000 GST $3,000

Australian Taxation Office

ATO collects:

1,000 1,000 + 2,000 2,000 + 3,000 = 3,000

Types of GST treatment

Taxable Input taxed (exempt) GST-free (zero-rated) Out of scope Taxable import

Taxable:
Supplier must remit GST on the supply. Supplier is entitled to an ITC for GST paid on inputs that are used in their business. Eg supplies of furniture.

Input taxed:
Supplier does not remit GST on the supply. But is not entitled to ITCs for GST paid on inputs used in their business. Eg financial services and residential rent (but reduced input credits for financial services)

GST-free:
Supplier does not need to remit GST on the supply But is still entitled to an ITC for GST paid on inputs used in their business Eg. basic food, health, education, exports

Out of scope:
The supply is not taxable therefore the supplier does not need to remit GST. Eg supplies made by unregistered businesses.

Taxable import
Goods are subject to GST if they are imported into Australia and entered for home consumption.
Regardless of whether the importer is registered. Eg the import of presents is a taxable import.

However, to reduce administrative costs, a low value threshold applies in determining whether GST is collected on taxable importations.

Administration of the GST

Registration for GST is compulsory if your annual turnover is:
$50,000 or over for businesses; or $100,000 or over for non-profit entities.

Return (BAS) is lodged either monthly, quarterly or annually

concessional options for entities with a turnover of less than $50,000 or $2 mill p.a. quarterly for entities with turnover less than $20 million per annum monthly for larger businesses any business can opt to be monthly

Administration of the GST

If the tax collected on sales exceeds total input tax credits, then the net difference will be paid to the Tax Office. If input tax credits exceed the tax collected on sales, a refund can be claimed. Special rules, insurance, gambling, vouchers, charities

Transition issues
Credits for stock on which you paid wholesale sales tax Motor vehicles input tax credits and operating leases Long-term non-reviewable contracts Other

Credits for stock on hand

As part of the introduction of the GST, credits were provided for WST paid on inventories held for sale. However, it was not possible for revenue reasons to provide credits for WST paid on all capital assets. Also, it would often be difficult for businesses to substantiate the amount of WST paid on an older asset.

Phase-in of input tax credits for motor vehicles

Generally, input tax credits can not be claimed for GST paid on new vehicles purchased between 1 July 2000 and 22 May 2001.
Addresses concerns about the deferral of purchases in the lead up to the GST. However, there are some exceptions.

Operating leases
A special (notional) input tax credit is available for certain vehicles purchased prior to 2 December 1998 and sold after 1 July 2000
In recognition that they would bear the unanticipated cost of GST and would not be able to pass this cost on in their other prices. Equal to the lesser of 1/11th of the amount the lessor paid for the motor vehicle or the amount of GST payable on the sale price.

Long-term contracts
Long-term non-reviewable contracts continue to remain GST-free until 30 June 2005 unless there has been a review opportunity. At this time, suppliers under these contracts will be able to adjust their prices to take account of the GST.

Other transitional issues

Trading past midnight on 1 July 2000 Supplies of rights that were granted before 1 July 2000 but exercisable at later date Construction agreements made before 1 July 2000 Compulsory third party schemes Special credit for rental car businesses Coin-operated machines

Other issues
Any changes to the GST base (10% rate or things subject to tax) require State and Territory approval. Compliance costs for businesses.

GST revenue
40,000 35,223 35,000 30,000 23,788 8.5% 14.1% 13.1% 30,699 12% 33,297 14% 16%

26,898

25,000 $ m ill 20,000

10% 8%

15,000 10,000 4.1% 4.1%

5.8% 3.8%

6% 4%

3.5%

5,000 2000-01 2001-02 GST revenue (mill) 2002-03 Grow th rate GST as %GDP 2003-04 2004-05

2% 0%