There have been fresh calls for the GST to be raised, but some experts are saying now's a good time to review other unpopular taxes like stamp duty.
Yesterday, a report by big four accounting firm Pricewaterhouse Coopers (PwC) called for the goods and services tax (GST) to be raised to 12.5%, after 20 years of it sitting at 10%.
PwC modelling found broadening the GST and raising it to 12.5% could yield up to an extra $40 billion a year in tax revenue.
Buying a home or looking to refinance? The table below features home loans with some of the lowest variable interest rates on the market for owner occupiers.
Smart Booster Home Loan
- Discount variable for 1 year <=80% LVR
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Monthly repayments: $1,476
- Discount variable for 1 year
- No ongoing fees
- Unlimited redraw facility
Base criteria of: a $400,000 loan amount, variable, principal and interest (P&I) owner-occupied home loans with an LVR (loan-to-value) ratio of at least 80%. If products listed have an LVR <80%, they will be clearly identified in the product name along with the specific LVR. Monthly repayments were calculated based on the selected products’ advertised rates, applied to a $400,000 loan with a 30-year loan term.
Previously, prominent think-tank Grattan Institute called for a 15% GST.
GST currently yields about $70 billion per year under the 10% figure with five exemptions - fresh food, education, health, childcare, and sewage/water/drainage.
Should stamp duty get the axe?
PRD Real Estate chief economist Dr Diaswati Mardiasmo said if stamp duty were to get axed, there would need to be a transition period.
"Stamp duty being abolished is definitely something that needs to be considered, as it can deter many home buyers, particularly non-first home buyers and investors," Dr Mardiasmo said.
"The government will need to recoup this loss too though, and one of the ways to do so is to replace it with a wider/broader land tax.
"There would need to be a transition period – and we would need calculate whether paying a land tax annually is more beneficial in the long run than paying a one of stamp duty, especially considering that land values are evaluated on a yearly basis.
"The benefit of abolishing stamp duty is upfront – that is, it reduces property transaction costs.
"This alone can stimulate more dwelling purchases by non-first home buyers (many states have waived stamp duty for first home buyers up to a certain property price threshold) which can result in increased housing supply and have a roll-on effect to housing affordability."
Potential GST rise a blow to households during COVID-19
Tax expert and author Dr Adrian Raftery - aka Mr Taxman - questioned if other taxes would be reduced to compensate for a rise in GST.
"GST is a consumption tax and although the rich probably consume three to four times more than the less affluent in the country, there is no doubt that they earn way more than three to four times," he said.
"I think there are a lot of people struggling right now during this economic crisis and the last thing they need is a 2.5% hike on their food bill."
PwC research indicated those on the highest income quintile earn seven times as much as those on the lowest quintile.
The PwC report also found tax yields from the GST have failed to recover from the global financial crisis of 2008.
Dr Mardiasmo said revenues have taken a further hit during COVID-19.
"Australians are spending less on items that do attract GST, therefore government income from that stream has seen a declining trend, and our national accounts have shown a decline in March quarter 2020," she said.
"Federal and state governments did spend large supporting COVID-19 - in total Australia spent approximately 15% of its GDP to support COVID-19, one of the highest among G20 countries - therefore, in a way, there is a need to recoup the spend."
Dr Isaac Gross, a lecturer in economics at Monash University, wrote in The Conversation that Australia "needs" a six-month GST holiday to help households, citing other countries such as the UK that have done similar in previous crises.
A six-month GST holiday would cost the government approximately $35 billion, according to Dr Gross.
Wider tax reform needed, too
Dr Mardiasmo said an increase to GST needs to form part of a wider conversation on tax reform.
"GST is one of (the) government's income sources to fund infrastructure projects, which is crucial for our nation," she said.
"People may significantly protest over purely an increased tax, especially at the moment when many businesses and people are still recovering from COVID-19 - our economy is not in full swing yet to pre-COVID-19 levels.
"However if the Australian people see a simplified tax system, and at the right time, there could be a really positive outcome for the government.
"There has to be bilateral agreement between states to make it happen realistically.
"When talking tax reform it’s a matter of substituting one tax for another type, preferably a more effective and simplified one, as the government still needs income to fund all of their objectives - infrastructure development and social benefits being the major costs.
"The challenge is to create a tax system that is efficient, effective, and equitable – all at the same time."
Economist Lindsay David told Savings.com.au a property tax could be an alternative revenue stream to personal income tax.
"Basically replacing income tax with property tax would require the property tax rate to be high enough to cover what is lost in eradicating income taxes," he said.
"Just to be clear I neither support or think it's a bad idea, but looking at it objectively, it's an alternative way for the federal government to collect revenue.
"States already have a land tax so there are a few complexities in the model."
A 2% annual tax on household property wealth could cut income taxes on individuals as a unit pay in income taxes by ~60%. ~3.31% property tax could replace income tax.— Lindsay David (@linzcom) July 6, 2020
How Australia's GST compares
According to PwC's report, Australia's GST rate is the equal fourth-lowest among Organisation for Economic Co-operation and Development (OECD) nations.
Many European nations have GSTs or value-added taxes (VAT) over 15%, with Hungary's the highest at 27%.
While Australia's official rate is higher than Canada's at 5%, Canada has a provincial system - in British Columbia the sales tax is 7%, while in Ontario that rate is 8% (12% and 13% totals respectively).
In the United States, sales tax is down to the states, and states such as Delaware, Montana and Oregon have none, while other states such as New Jersey and Illinois have rates above 10%.
Will GST actually get hiked?
Officially, it is off the cards for now, but never say never.
The Australian Financial Review reported that Prime Minister Scott Morrison "has tasked Treasurer Josh Frydenberg and his state counterparts with developing tax reform options for the pandemic recovery".
Finance and political commentator Peter Switzer ruled it out.
"So what are the chances of this GST idea being on the agenda for the next election? My guess is zero," he said.
"Also for a GST change, you need the State Governments onside.
"That’s not easy and Paul Keating explained why when he was Treasurer when he came up with the line '…never stand between a premier and a bucket of money'.
"Selling a higher GST will make it easy for opponents to run a scare campaign but on some issues the Opposition wouldn’t have to say anything.
"Just imagine if you had kids at a private school where the fees are unbelievably high nowadays and 12.5% is added to those fees.
"A hell of a lot of Aussies would fear giving politicians the green light to reach into their lives and bank accounts via a broader and higher GST."
The entire market was not considered in selecting the above products. Rather, a cut-down portion of the market has been considered which includes retail products from at least the big four banks, the top 10 customer-owned institutions and Australia’s larger non-banks:
- The big four banks are: ANZ, CBA, NAB and Westpac
- The top 10 customer-owned Institutions are the ten largest mutual banks, credit unions and building societies in Australia, ranked by assets under management in November 2020. They are (in descending order): Credit Union Australia, Newcastle Permanent, Heritage Bank, Peoples’ Choice Credit Union, Teachers Mutual Bank, Greater Bank, IMB Bank, Beyond Bank, Bank Australia and P&N Bank.
- The larger non-bank lenders are those who (in 2020) has more than $9 billion in Australian funded loans and advances. These groups are: Resimac, Pepper, Liberty and Firstmac.
- If you click on a product link and you are referred to a Product or Service Provider’s web page, it is highly likely that a commercial relationship exists between that Product or Service Provider and Savings.com.au
Some providers' products may not be available in all states. To be considered, the product and rate must be clearly published on the product provider's web site.
In the interests of full disclosure, Savings.com.au, Performance Drive and Loans.com.au are part of the Firstmac Group. To read about how Savings.com.au manages potential conflicts of interest, along with how we get paid, please click through onto the web site links.
*Comparison rate is based on a loan of $150,000 over a term of 25 years. Please note the comparison rate only applies to the examples given. Different loan amounts and terms will result in different comparison rates. Costs such as redraw fees and costs savings, such as fee waivers, are not included in the comparison rate but may inﬂuence the cost of the loan.
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