Federal Treasurer Rejects State Counterpart’s Call to Increase GST

New South Wales Treasurer Dominic Perrottet addresses the media during a press conference at NSW Parliament House in Sydney, Australia on March 17, 2020. Mark Metcalfe/Getty Images

NSW treasurer Dominic Perrottet has proposed to the federal government a bold tax reform plan to boost Australia’s economic recovery following the severe economic disruption caused by the bushfires and COVID-19 pandemic that includes reforms to the GST and other taxes.

NSW Treasury released a draft report delivered by former Telstra chief executive David Thodey.

“At a time of economic stress for Australians, we need to change the tax mix so that the burden on taxpayers does not rise, but the value that we get from those taxes increases,” the report says.

Replacing Stamp Duty With Broad-Based Land Tax

Addressing the National Press Club in Canberra along with Thodey, Perrottet said stamp duty was “by far the most inefficient tax” that had become an “impediment for transactions to occur.”

“It stifles economics and jobs growth for all states right across the nation. And it‘s time, I think, that we did something about it,” he said.

Currently, homebuyers pay more than $40,000 in stamp duty on a $1 million home in NSW and $55,000 in Victoria. On the other hand, only one in 20 NSW homeowners are making an annual contribution through property stamp duties to pay for schools, roads, and hospitals, according to the report.

The report recommended stamp duty on property transactions should be phased out and replaced gradually with a “fairer and more efficient” broad-based land tax.

This includes a voluntary opt-in under a lengthy transition period, allowing buyers to choose between huge one-off upfront stamp duty payments or paying an annual land tax.

The move would encourage transactions, promote mobility, and improve housing affordability in the long term.

“The increase in purchasing power of prospective buyers from abolishing transfer duty would be offset by the new annual land tax bills ... also removes some of the barriers to homeownership by lowering the deposit hurdle,” the report says.

Increasing or Broadening GST

Stamp duty is NSW’s second-largest revenue stream, bringing around $7 billion, or 24 percent of annual tax revenue in 2018-19, due to the property boom over the last few years.

Abolishing stamp duty will impact government revenue and Perrottet said this could be offset by increasing the GST rate or by broadening the tax’s base.

“GST is one of our most effective taxes, and it has a relatively low economic cost, but we definitely do not use it as much as many other nations,” he said. “The GST provides about 12 percent of tax revenue in Australia, whereas somewhere like New Zealand, it is 30 percent of their broad-based tax base.”

The report has recommended either increasing the GST rate above 10 percent or broadening its base to include fresh food, education, and health. It also emphasises the tax increase has to come with the redirection of some portion of the revenue towards lower-income earners in order to maintain fairness.

“This is because the GST increases the cost of household goods and services, which lower-income households spend more of their income than wealthier ones,” it explains.

The reports also highlighted the need for unanimous support from the states and the federal government for GST reform.

Reserve Bank Governor Phillip Lowe indicated the government should look again at the way “we tax income generation, consumption and land ” in boosting the economic recovery from the COVID-19 crisis.

In calling for support from his colleagues, Perrottet, who flagged the intention to scrap stamp duty in April, said the momentum for change across sectors is strong right now.

“And for the first time in many years, it appears that we have the mechanisms to deliver quite genuine reform … it is a good opportunity, and we need to grab it.”

Treasurer Rejects Call to Increase GST

While welcoming the report, Treasurer Josh Frydenberg has ruled out plans of GST reform for now, during an interview with Peter Stefanovic of Sky News on July 2.

“We’ve got no plans to increase the GST,” he said.

He explained the government’s focus now was getting people back to work and reopening the economy. He also emphasised that the government has a track record of “lowering tax.”

The NSW Review of Financial Relations was commissioned by Perrottet last year after he was tasked by Prime Minister Scott Morrison to conduct a review into federal financial relations.