State and federal governments are spending billions of dollars in response to the COVID-19 pandemic. But before too long attention will turn to funding and how Australia will repay the debt.
Tax reform will have an important role to play as part of broader structural reforms to boost productivity and get the economy firing again post-COVID-19; particularly for SMEs that are the engine room of the Australian economy.
Views are plentiful with experts posing several options for consideration including:
- a state land tax on the family home in return for stamp duty reform, and
- an increase in the GST rate or an expansion of the GST base.
What will tax reforms take into consideration?
A component of the tax reform will likely review the mix of taxes paid by both individuals and businesses to determine what is appropriate.
In foreign jurisdictions, there has been a gradual shift to greater reliance on consumption taxes like the GST, and less reliance on personal and company taxes.
However, the GST should not be treated in isolation; it must be considered in conjunction with state taxes, such as stamp duty and land tax.
It’s a complicated equation, and one that’s going to be important over the next six to 12 months and beyond.
Land tax and impacts to property owners
Discussions regarding land tax reform historically posit replacing stamp duty with a broader based land tax.
For that to work effectively it would most likely need to apply to the main residence as well as farmland, both of which are currently exempt from land tax. This change would give rise to numerous issues including:
- the treatment of stamp duty already paid on the acquisition of these types of properties; and
- how land tax would be funded by retirees and others who own their own home, but who already pay significant council rates on their properties.
Accordingly, any move to replace stamp duty with land tax would have to take place over a number of years to ensure the system fairly accounts for these situations.
At present, it’s unclear how state and territory governments would get the numbers to stack up without also having to rely on an increase in the GST take.
How much could GST increase?
In Australia, the goods and services tax (GST) is currently 10%, however, in other OECD countries from Europe, the Americas and Asia-Pacific, equivalent taxes average 20%.
That’s not to suggest the Australian government will look to double the country’s GST rate overnight, noting that many OECD countries with higher goods and services or equivalent taxes also have lower personal and company tax rates than Australia.
If the GST rate were to increase in Australia it’s most likely to go to 12.5% or possibly even 15%. Alternatively or in addition, the GST base could be broadened to include fresh food, education and health care. If this were to occur, it should be in conjunction with a reduction in income tax rates and the company tax rate to give Australia the competitive edge it requires to emerge from COVID-19.
For more information and advice about how your tax-related matters contact a Pitcher Partners representative.