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Chapter 7

Industry Sectors

FINANCIAL SERVICES

7.1 Under the government's proposed GST, health insurance and exports of financial services are to be zero-rated. In the remainder of the financial services sector a defined range of 'financial supplies' are to be input taxed, while services outside that defined range are subject to the 10 percent GST. [1]

7.2 The Government explains the basis for this approach, as described in the Government's ANTS package, [2] is that some financial services are structured in a way that makes it extremely difficult to subject them to GST. In principle, all services should be taxed in the same way other services are treated. The Government estimates that the overall cost effect of the various ANTS proposals on the banking sector will be -2.8% [3] It should be noted that in calculating this figure of -2.8%, Commonwealth Treasury treated the abolition of Financial Institutions Duty (FID) and the Debits Tax as reducing the costs to banks by the extent of the relevant revenue forgone. The banks were then assumed to pass on those benefits in full to their customers.

7.3 The Committee received submissions from the Australian Bankers Association, the Mortgage Industry Association of Australia and the National Credit Union Association Inc. In addition a number of other credit union organisations also provided submissions and appeared before the Committee. The Mortgage Industry Association and the National Credit Union Association submitted that the way the proposed GST is currently structured both groups feel that their members will incur a disproportionately higher GST cost compared to the banking sector. The inevitable result of this will be an increase in fees and charges and/or interest rates, as set out in the evidence below:

Senator Conroy: Therefore, the only way for you to recoup your margin as it stands at the moment is to increase interest rates on your existing home loans.

Mr Symond: Yes. That would be the unfortunate consequence in the way the GST is formulated in its present form. [4]

7.4 Mr Taylor from Credit Union Services Corporation (CUSCAL) told the Committee that:

Credit Unions could seek to increase their fees or interest rates to cover this extra tax … [5]

7.5 The NCUA told the Committee that these inequities arise largely because the legislation fails to recognise the different structure of the credit union system which has been developed over the past three decades and which is due to the small size of individual credit unions. [6]

7.6 The Association pointed out that they had established Cooperative Credit Union Service Organisations (CUSO's) which are owned by a group of credit unions enabling them to act collectively to achieve economic scale in order to deliver many of the retail services essential to their businesses.

7.7 The CUSO's perform services similar to that provided by bank head offices to their branches. However under the proposed GST legislation the provision of services within the credit union system would be subject to GST while the same services within a bank structure would not be because the credit unions are separate legal entities and not branches. [7]

7.8 An example of the problem that this causes the credit unions as compared to the banks was explained to the Committee by reference to the purchasing of computer facilities. The example was given that if a bank and a credit union were to spend $5 million on hardware and $5 million on software the consequence would be that there would be a one-off GST of $500,000 for a bank but for the credit union it would be a first year cost of $1.2 million and then an ongoing cost of $200,000 because the GST is being applied to the credit union at multiple stages. [8]

7.9 The credit unions told the Committee that this problem was also encountered when the GST was introduced in Canada a decade ago. In Canada the inequity was resolved through the Canadian government's recognition of the special credit union structure and the use of a GST grouping methodology to overcome this problem. Under this system credit unions that are considered to be closely related may elect with other credit unions to have all taxable supplies to be exempt. In this way they have overcome the separate entity problem.

7.10 Another serious concern for credit unions is that the credit union institution is subject to GST on fees it incurs as a result of credit unions account holders' transactions such as through the withdrawal of funds from a bank owned ATM. In this situation credit unions will be charged a fee by the owner of the ATM and the GST would be payable for example at 10 cents on a $1 withdrawal fee.

Because a withdrawal fee charged to another financial institution is not considered a financial supply, if the credit union then charged the member the same fee of $1 for the transaction, it is understood it would be deemed to be a financial supply and therefore GST could not be applied to it, so the credit union would be wearing the GST with no way of recovery. This same scenario is replicated in all instances where a financial institution incurs a fee for a customer initiated transaction, whether it be cheques, EFTPOS, direct entry, ATM and so on. [9]

7.11 The Mortgage Industry of Australia also pointed to anomalies for their industry with the application of the GST. They are particularly concerned about the input taxing that applies to the financial services sector. They believe that the most desirable situation for a GST regime is one in all in, that is that all financial suppliers should be within the GST net. The consequence of input taxing according to the MIA is that it skews the tax system with very significant economic consequences.

7.12 A key concern is the bias that it causes against outsourcing. When financial suppliers outsource they incur a cost increase of 10% because of the GST. The Association saw that this was a disadvantage to all financiers other than the major banks because all financiers are obliged to outsource whereas the major banks do not have to do this due to their inhouse services and also their ability to spread the cost of such services over millions of accounts to recoup the GST. [10]

Financing is a margin business. Our margins are always being squeezed. If outsource supplies cost 10 per cent more because of the imposition of GST, it is clear that there will be a substantial reduction in outsourcing and thousands of Australian businesses and Australian employees will suffer. Once it is decided that the financial supply will be input taxed, you have decided that a business is going to pay the GST, so the question is deciding where or which business will pay it. That is the problem with the current structure. There should be an opportunity for any business that provides financial supplies, directly or indirectly, to be input taxed. As soon as you allow any business which is directly or indirectly providing financial supply to be input taxed, you remove the bias against outsourcing.

That proposal simply places smaller financiers,all the credit unions, all the cooperatives, associations throughout Australia, all the intermediaries that the Mortgage Industry Association of Australia represents (Aussie is the largest) and the thousands of businesses that provide supplies to those businesses,on an equal footing with the four major banks. It enables those financiers and intermediaries to obtain services at the same cost as the major banks and it enables those businesses to maintain competition with the major banks.

7.13 The Mortgage Industry Association pointed to the competitive advantages that they had brought to the home loan market through forcing stronger competition with the banks. They believe that the structure of the GST as it currently stands will dilute their ability to be competitive as against the banks significantly. The result of this will be that consumers will move out of the mortgage provider area and back to banks because banks will be put into a better position to increase interest rates as well as fees and charges and would be able to do so in advance of the GST component.

7.14 Mr Symond of Aussie Home Loans told the Committee that when Aussie Home Loans began seven years ago there was a 4.5% profit margin to the banks on home loans. Today it is less than 2%. However if you do not have competitors such as Aussie Home Loans then that profit margin will creep back up because of the structure of the financial system. [11]

7.15 The Australian Bankers Association provided a submission to the Committee in which they indicated their strong support of the reform of Australia's tax system.

7.16 The ABA supports the introduction of a GST to provide for the abolition of a range of state and territory taxes (in particular the financial institutions duty and debits tax) which they advised produce inefficiencies in the financial system which flow through to the overall cost of financial services to both business and consumers.

7.17 In relation to the GST and financial services the ABA in their submission advise that all taxes give rise to compliance costs and distortions in the market and the GST is no exception.

Input taxation denies financial institutions the ability to claim a rebate for tax paid on input. The financial institution therefore incurs GST which adds to its overall cost structure and must therefore be incorporated into their pricing. Taxing financial services on this basis also denies businesses a rebate for the GST which has been implicitly added to their interest rates and fees. [12]

7.18 The ABA submission also picked up on the point made by the credit unions and Mortgage Industry Association that input taxing financial services will affect the efficiency of their sector. In particular there are economies of scale in financial services that not all institutions will be able to take advantage of.

7.19 The ABA also referred to outsourcing which has become a major trend in the financial services sector. The ABA submission described that the economic decision for the financial institution is whether or not the cost of outsourcing is less expensive than the cost of providing the service internal to the organisation. Should they outsource however under input taxation the payment for services provided by the outsourcing company will be subject to GST and the financial institution under current arrangements cannot claim a rebate for the tax paid. This leaves the financial organisation in the position of deciding whether to outsource or to insource a function, a decision that depends on whether the cost of outsourcing plus the GST is less than the cost of insourcing. The ABA described this decision as an undesirable distortion to the efficient operation and competitiveness of the financial system.

7.20 Despite their concerns the ABA states that the introduction of the GST is preferable to the retention of transaction taxes.

7.21 The ABA submission also states that the GST bills contain a number of technical deficiencies which follow from the inadequacy of the industry consultations in respect of the bills and that some amendments will be necessary to ensure that they operate in a practical manner and unintended consequences are avoided.

The effect of GST on Bank Fees and Charges

7.22 It has been argued that banks will face a net increase in costs as a result of being input taxed. The finance industry estimates these costs may reach as high as $600 million. [13] Given the current lack of competition, bank fees and charges present an easy outlet for banks to shift these costs onto consumers.

7.23 ACA noted that bank fees and charges have risen dramatically in the recent past and warn that if left unchecked and unabated, bank fees and charges will present an ideal vehicle for transferring costs to consumers. Those least likely to be able to afford increasing bank fees and charges – those on fixed or low incomes – will be further harmed if GST input taxation results in cost increases for the banking industry. [14]

7.24 The ACA in their submission encouraged the government to:

a) Place a price cap on all bank fees and charges until 2001-02, with a parliamentary oversight committee to monitor fees and charges on an ongoing basis.

b) Ensure compulsory provision of fee free bank transaction accounts based on income levels rather than social security benefits or any arbitrarily chosen criteria. [15]

Impact on General Insurance

7.25 Insurance Council of Australia (ICA) is the representative body of the general insurance industry in Australia. The insurance industry's capacity to accept the transfer of risks from its policy holders and thus underpin a large range of domestic and business activity makes it unique. It also means that when far reaching reform is implemented by government, such as the tax reform package, it affects not only the business of insurance companies as operating entities, but can also alter the nature of virtually every product and service which the industry provides.

7.26 ICA has significant concerns about the impact of GST arising from:

• The proposed transitional arrangements involved in introducing the tax; and
• The longer term impact of the tax on the affordability of general insurance products producing economic and social distortions.
•  

Outstanding Claims Provisions

7.27 An outstanding claims provision (OCP) is the amount that an insurer puts aside to meet the cost of claim payments as they arise. It consists of the projected costs of all known claims, together with an allowance for claims which will have been incurred but have not yet been reported. [16]

7.28 Section 20 of the Transition Bill provides that an insurance company cannot claim an input tax credit for any claim payment where the event causing the claim occurred prior to 1 July 2000. For instance, if the family home is burned or robbed, it is the insurer's role to provide a new home or replace lost items irrespective of when the disaster occurs. Equally, irrespective of when the `event' occurred the replacement cost of housing construction or perhaps jewellery or a computer will, after 1 July 2000, attract GST.

7.29 In effect, if the event causing the claim occurred prior to 1 July 2000 but a payout is not made until after 1/7/2000, the payout will attract a GST but the insurer will not be entitled to claim input tax credit for the payout.

7.30 Failure to allow an appropriate input tax credit means insurers' Outstanding Claims Provisions will increase to cover the expected increase in claims payouts caused by the imposition of a GST. The cost implications on general insurance have been actuarially estimated and these estimates show a significant, inequitable extra cost of approximately $1.5 billion for the total private and public sectors.

7.31 ICA claims that this anomaly creates an additional, and retrospective cost to the insurance industry, that is outside the normal parameters of business risk. The insurance industry would not normally have allowed for this cost in product pricing or in claim reserving. Further, this extra cost represents a straight transfer of insurance company shareholders' funds to taxation revenue, and in the case of insurers with an emphasis on long term risks, a significant reduction in their solvency.

7.32 ICA assert that this anomaly may be an unintended consequence of the proposed GST, ICA proposed that appropriate input tax credits be granted for outstanding claims provisions at 1 July 2000, based on independent actuarial advice, so as to achieve a neutral effect.

Unearned Premium Reserve

7.33 The Transition Bill provides that insurance companies are liable for GST on the unearned portion of premium income as at 1 July 2000. An unearned premium reserve (UPR) is that part of the premium that has not yet been earned. Premiums are accounted for on an “accrual” basis, which means that the earning of the premium is matched against the period that it covers. At a point part-way through the policy year, part of the premiums will have already been matched or “earned”, the balance is held as a UPR and will gradually be released over the remainder of the period. [17]

7.34 ICA estimates that the industry will have approximately $10 billion in UPRs as at 1 July 2000, thereby creating a GST liability of approximately $1 billion.

7.35 ICA suggests that other time-based agreements, such as maintenance contracts, would not be as adversely affected by this anomaly, as it would be a simple matter for the supplier to progressively adjust the price over the 12 months prior to the implementation of GST. Insurance premiums are complicated by the fact that they comprise agents or brokers commission, fire services or duty diseases levy and stamp duty.

7.36 ICA recommends that the proposed legislation should not mitigate against an insurance company collecting pro rata GST on unearned premium and unassociated charges.

Effect on Under Insurance and increase reliance on Government Funded Relief Measures.

7.37 ICA noted that research shows that approximately 2 million Australian households either have no home insurance at all, and of those insured, 43 per cent are significantly underinsured. ICA also predicts that with the additional impact of a GST, without an offset in existing taxes on insurance, there will be more underinsurance and non-insurance. Low income earners will be particularly sensitive.

7.38 Further, there is a cascading effect whereby stamp duties which apply to the base premiums and levies, will be included in the calculation of GST – in other words, a tax on a tax. The overall impact on general insurance will be an increase in premiums.

7.39 ICA noted that the existing rate of non-insurance and under-insurance will be exacerbated by these cost increases. As these cost impacts cause even more people to drop out of the insurance safety net then there will be an increased reliance on government funded relief measures.

Tourism

7.40 Tourism is regarded as one of Australia's most important industries contributing $16 billion in export earnings and over a million jobs. To put the industry in perspective the Tourism Task Force (TTF) compared the performance of the tourism industry against coal exports at $9 billion, gold exports at $5.5 billion, wool $4 billion and wheat $3.3 billion.

7.41 Significantly tourism is one of the few industries to generate substantial new jobs over the last decade. Approximately 1.028 million people are employed in this industry. Another feature of the tourism industry is that the employment is highly decentralised. Over 60% of Australia's hotel rooms with private bathroom facilities are outside capital cities. [18]

7.42 Notwithstanding the success of the industry over the last decade the Tourism Council of Australia (TCA) described to the Committee the difficulties the industry is facing as a consequence of the Asian financial crisis.

It is well known that the Asian financial crisis has impacted strongly on the industry in recent times and it is expected that 1998 figures will show about a four per cent decline in international arrivals. That equates to about $665 million in lost revenue. Equally, the domestic market, which represents 75 per cent of our industry, remains flat, with stagnant growth recorded over the past 10 years, and is not expected to exceed one per cent to the year 2007. At the same time, the number of Australians travelling overseas has been growing at about eight per cent per year over the last decade. [19]

7.43 The TCA believe that tax reform is fundamental to Australia's future economic growth and development. They support a GST with a rate of 10% and a tax base that is comprehensive with minimal exemptions. The TCA also seek a package which addresses Commonwealth/State relations so that discriminatory indirect taxes are removed at a state level and that has no tax mix switch. They advised the Committee that operators in the industry are looking for transparency and certainty so that they can promote their businesses and make appropriate investment decisions. [20]

7.44 In relation to the ANTS package the TCA is suggesting that the tourism industry be treated equally to other traditional export industries and receive a zero rating for product bought outside Australia by non residents. This tax treatment is not sought for international visitors when in Australia, but rather when transport and accommodation are purchased for example in conjunction with an international airline ticket as part of a package sold overseas.

7.45 The TCA is also seeking the introduction of a rebate system for tourism shopping which has no threshold price and is not limited to purchase from a single business. This differs from the government's ANTS proposal that such rebates be restricted to purchases of at least $300 made from any one business within 28 days of departure. [21] Finally the TCA recommends that GST refunds be available at airport refund kiosks and also supports the maintenance of the existing open bag and closed bag systems for the $1.5 billion tourism shopping sector.

7.46 The Tourism Task force also states that it supports tax reform. However they suggested two major changes to the ANTS package. The TTF has as its main recommendation that the legislation be amended to ensure that all packaged elements purchased offshore by non residents be GST free. The Task Force made it clear that they did not seek that tourists travelling within Australia be able to show their passport in order to avoid paying the GST. Additionally the Task Force sought amendments to legislation to ensure that all forms of transport in tourism packages purchased offshore by non residents be GST free in the same way as ANTS proposes for airline services.

7.47 Additionally the TTF sought amendments to the legislation to ensure long-haul domestic airfares (and land and sea passenger transport) are GST free. The aim of this recommendation is a recognition that Australia's geography means the impact of tax reform on tourism falls heavily on regional Australia.

7.48 The Inbound Tourism Organisation of Australia also told the Committee that tourism products and services that are pre-purchased offshore should be zero rated. [22]

…under the legislation now before the Senate, the government fails to treat tourism as a genuine export and denies our industry access to one of the major advantages of the GST system for exports, which is zero rating. Why the government has deliberately chosen to discriminate against our industry we do not know. However, the government's decision in this regard is of major concern and our submission concentrates on this issue, which is of vital importance to our future. [23]

7.49 All tourism bodies told the committee about the price competitiveness and price sensitivity of their industy. The TTF advised the committee that:

The GST means that the price competitiveness of destinations such as Western Australia, the Northern Territory, Tasmania and tropical North Queensland will be reduced against their overseas competitors. Australians will fly over Australian destinations heading for much cheaper South-East Asian destinations. Of course, their airline ticket will not attract a 10 per cent GST overseas but it will attract the same GST in Australia. To counter this, long haul domestic destinations should be spared some of the worst impact of the government's proposals. Long haul domestic transport should be GST free. National advertising should promote travelling within Australia and operators in remote regions should be funded to band together to improve their marketing and product. [24]

7.50 The tourism industry is an important contributor to employment and regional development. The committee notes that the report of the Senate Employment, Workplace Relations, Small Business and Education References Committee specifically examined the employment impact on the tourism industry. [25] A study commissioned for that Committee by Professor Peter Dixon from the Centre of Policy Studies specifically modelled employment effects. The central simulation of the study predicted job losses of 4.3% or 19880 jobs. Significantly the report reveals that the ANTS package will, on balance, have negative implications for employment in regional areas as compared to the capital cities. [26]

7.51 The TTF had modelling undertaken by Decisive Tourism Consulting. This work was subsequently reviewed by the Tasman Institute. The study showed that 59000 full and part-time jobs around Australia could be lost as a result of falling spending by inbound and domestic tourists.

7.52 The Tourism Council of Australia did not provide an estimate of the job losses from within the tourist industry but told the Committee that with regard to net gains or job losses or gains there is no doubt the GST part of the package will impact on tourism's competitiveness and price. However, the TCA told the Committee that the effect of the ANTS package on jobs is hard to qualify. [27] They did acknowledge that there will be opportunities for the industry through increased demand, personal income tax cuts, other stimulants to the economy and relative exchange rates which will have a significant impact on tourism flows through the world. [28] It should be noted that Treasury expects the ANTS package to result in 'a moderately stronger exchange rate over time.' [29] That would tend to be a negative for Australia's tourism industry not a plus.

7.53 In modelling job shifts in the tourism industry assumptions have to be made about the average elasticity applying across all inbound tourism. Mr Carmody, a consultant to the TCA, told the Committee that he believed the figure used to be too high. Mr Carmody explained the TCA's views in relation to price sensitivity and elasticity effects as follows:

You have reminded me that I must say something about price sensitivity too. I think that is an issue that got slipped through yesterday and I really want to put it back in focus. The other part was mainly domestic tourism demand, although there may have been an element of diversion of demand to outbound travel as well. As far as I can tell from the TTF's submission, that rested on the assumption that the only thing domestic travellers faced was the adverse price effect of the GST package; they did not have any net benefit from higher real disposable income that was allocated to tourism. I think that was at least as extreme an assumption as the assumption that all increases in disposable income would go to tourism.

I want to make this point about price elasticity too, because I think there was a misleading impression given yesterday that the reason why we should not tax tourism exports is that they are price sensitive. There is an efficiency argument for tax design that says that, if you can do it, you should take the tax burden off items that are price sensitive in demand and put it onto items that are price insensitive in demand. That way you minimise efficiency or dead-weight losses and you do less damage to the structure of the economy.

That is all very well if you take efficiency in isolation, but it seems to me that you cannot ignore equity considerations as well. If you are not going to raise revenue from taxing price sensitive products, you are going to have to raise it from taxing insensitive products-that includes the necessities of life-getting a higher tax burden than you get from luxuries. That seems to me to be politically just unacceptable.

The argument for zero rating tourism has to do with the fact that tourism is an export. It has nothing to do with the price elasticity of tourism demand. The consequences of not doing something in relation to tourism exports is reflected in the price sensitivity of demand, but the argument in favour of zero rating tourism exports is because they are exports, not because they are price sensitive. [30]

7.54 The TTF representative made the following observations in relation to the possible employment effects of a GST on the tourism industry:

Our chief findings are that the impact of the reduction in spending across the tourism sector as a result of this package will cost Australia 59,500 jobs of which 34,100 will fall in the domestic sector and 25,400 in the inbound sector. In comparison to the size of their work forces, the Northern Territory, Tasmania and Queensland will be most disadvantaged by job losses. Importantly, regional tourism will also be heavily impacted.

I cannot understate to you the importance of job losses in rural and regional Australia. If you lose your tourism job in Sydney or in Melbourne, you have a good chance of picking up a job elsewhere in any number of other industries. If you are a waiter in a [bed and breakfast] in south western Tasmania or if you are a retrenched miner and you have put your redundancy pay out into a barra boat in Cairns, you have all your nest egg in one basket. One tourism operator in Cairns, who unfortunately cannot appear before you tomorrow, told me that if you do not have a job in tourism in Cairns you do not have a job. That is a bit colourful, but it does not understate the impact of the package. [31]

7.55 The suggestion is that not only is tourism a large employer in the Australian economy, it is a large employer of the high unemployment groups, such as youth and Australians living in regional and rural areas, including indigenous Australians.

TRANSPORT

7.56 Transport services are not currently taxed. The ANTS document estimates that transport costs to consumers will generally increase:

• road transport by 2.6 per cent;
• railway by 5.8 per cent; and
• pipeline and other transport by 5.8 per cent. [32]

Under the government's proposed tax package 10 percent GST is to be imposed from 1 July 2000 on all fuel sales whether the fuel has previously been subject to excise (e.g. petrol, diesel) or is not subject to excise (e.g. LPG). At the same time the GST is introduced, the government proposes to 'reduce excises on petrol and diesel so that the pump price of these commodities for consumers need not rise.

7.57 All GST registered businesses will then effectively pay less for petrol and diesel brcause they will be able to claim input tax credits for the GST payable on fuel used for business purposes. Some GST registered businesses will receive further rebates of diesel excise they have paid through a new diesel fuel credit scheme which is to be 'delivered through the GST system' [33]

7.58 This new diesel credit scheme will reduce the effective rate of tax on diesel fuel used in 'heavy transport' (defined as vehicles with a gross vehicle mass over 3.5 tonnes) and rail to 18 cents per litre. GST registered businesses which purchase diesel and like fuels for off road business use (including light fuel oil for marine business use, and bunker fuel) will qualify for a full rebate of all the excise paid.

Impact of Reduced Fuel Costs on Rail and Road.

7.59 The Australasian Railway Association (ARA) which is the peak industry body for the rail sector in Australia and New Zealand submitted that the loss of rail business as a result of the proposed new tax system, will have significant economic, environmental and social impacts. The environmental impacts have been discussed in Chapter 3 of the March 1999 report on the Inquiry into the GST and a New Tax System by the Senate Environment, Communications, Information Technology and the Arts References Committee.

7.60 ARA notes however that the proposed tax system will have the following economic impacts:

• Increased road demand and the states' call on Federal road funds
• Loss of business for rail industry manufacturers and suppliers
• Loss of rail business export opportunities. Australia's strong export market in rail products has only been possible because of a healthy domestic rail industry
• Increased cost of rail investments and longer recoupment period
• Adverse effect on employment in regional Australia [34]

7.61 ARA argues that the proposed reduction in the effective rate of diesel fuel excise to 18 cents per litre will benefit road transport more than rail thereby resulting in an undesirable modal shift from rail to road usage. ARA also suggested in their submission, that for the sake of equity, all users of diesel fuel must pay the diesel fuel excise and a road user charge for heavy vehicles. This charge must cover the costs of road use in the same way that rail pays an access charge for use of the rail network. Rail, unlike road, pays genuine mass distance based track access fees. Without a user charge on fuel, ARA maintains that road operators would only pay $458 in truck registration charges to move 1,000 tonnes of freight from Melbourne to Sydney whereas rail will pay $5,585 in track access fees to move the same 1,000 tonnes. [35]

7.62 The Road Transport Forum [36] countered this charge by pointing to a study by Swan Consultants that found:

Removal of the tax (ie The excessive level of Indirect Tax) and its replacement by an increase in income tax was simulated to boost output of the Australian economy over the longer term by about $600 million per year and to create an addition 2,300 jobs. Exports would rise by $240 million. [37]

7.63 Based on this research the RTF told the Committee that the trucking industry is taxed two and a half times the average of any other industry. [38]

7.64 ARA commissioned a study to examine the impact of reduced diesel fuel costs on the interstate freight market for which there is a degree of competition between rail and road. These traffics are highly price sensitive and consequently modal split is strongly dependent on freight rates. The study also interviewed freight forwarders and road transport operators to assess their response to a reduction in road freight rates relative to rail.

7.65 The three contestable freight areas examined were intermodal (general freight that can be carried by rail or road), shipping containers and Trailerail (a system that enables semi-trailers to quickly convert to rail wagons).

7.66 The study concluded that rail will suffer a competitive disadvantage from the proposed changes to diesel fuel excise. It will suffer traffic losses in all contestable markets. The study also concluded that the proposed changes will likely result in 1-1.5 million tonnes of freight being diverted from rail to road at a cost to rail of between $16 and $27 million per year.

7.67 ARA concludes that loss of rail freight to road will inevitably lead to fewer rail freight services. In the Melbourne-Adelaide corridor it will likely result in the complete cessation of intermodal rail freight services and a significant reduction in shipping container services. [39] Fewer rail freight services means that the unit costs of remaining services increase. Rates have to be increased to cover these increase unit costs leading to further loss of traffic.

7.68 Rail presently pays 34.9 cents per litre diesel fuel excise. Under the new tax system, fuel excise for heavy trucks will drop 25 cents per litre or 58%. Fuel excise for rail will drop 16.9 cents per litre or 48%. ARA views the 10% differential in favour of road transport as detrimental to rail's competitiveness with road. ARA goes on to suggest that completely exempting rail from diesel fuel excise will improve export competitiveness and increase rail's competitiveness in the general freight market. It will also lower passenger operators' costs.

7.69 The results of the study also point to the impact on the landbridging services which rail operators provide for shipping containers between capital cities. These services provide intercapital transit times faster than ships and facilitate connections to more frequent sailing from busier ports. This service is vital as the range of container sizes and weights make them generally unsuitable for road haulage. The returns from road haulage of containers are not sufficient for road transport companies to justify investing in new equipment to capture this market.

7.70 However, ARA points out that the proposed changes to diesel fuel excise will improve the viability of road haulage of shipping containers and justify road hauliers capturing a significant proportion of east coast shipping containers presently hauled by rail.

7.71 Trailerail services carry high value, time sensitive products between Melbourne and Perth in transit times that are competitive with road. Trailerail services are more susceptible to changes in rail and road rates. The estimated loss of trailerail traffic to road is between 15% and 25% and the potential revenue losses to this business are between $1.8 to $4.8 million per year or around 12% of Trailerail revenue. [40]

7.72 ARA referred to the role of rail in the rural economies. Rail is an integral part of the distribution process for a wide range of regional produce and bulk export commodities. Australia's railways haul 70% of the nation's grain including 80% of export wheat from inland production areas to processing plants and ports hundreds of kilometres away. Farming groups are therefore strong in their support for the removal of diesel fuel tax on rail, as it will significantly improve the competitiveness of Australia's grain industry and other export commodities hauled by rail.

7.73 The Road Transport Forum, on the other hand, argued that comparisons between one transport mode against another, are futile and often very misleading. It maintains that there are a number of fundamental issues which need to be considered:

• Firstly over 80% of all freight carried by road transport goes no more than 80 kilometres from its origin to its destination and could not in almost any circumstances be carried by rail;
• Secondly, as much as any other part of the economy, the road transport industry benefits from an efficient rail industry;
• Thirdly, effective competition between road and rail is mainly medium volume long distance transport – most independent assessments conclude that, in general, this area of genuine competition is relatively small;
• Fourthly, road transport companies are most often concerned by the destabilising effects of periodic “rail reform” measures more than by any sustained or genuine competition from rail.

7.74 The Road Transport Forum has acknowledged the importance in taking a balanced approach to claims that might be made about intermodal competition. In the end the Australian community will be best served by a neutral even handed public policy approach that relies on competition between and within modes to achieve the best outcome.

Consequences for road transport

7.75 The ANTS package details benefits to road transport from the tax package amounting to $1.5 billion combined with other measures the Government believes that there will be a reduction in road transport costs of 6.7%. For rural and regional Australia the Government asserts the benefit will be even greater due to their reliance on road transport. [41]

7.76 The RTF believe that the tax reform package (through the abolition of sales tax and reduction in diesel fuel tax to 18 cents per litre) would reduce typical road transport costs by between 19% and 16%. These cost reductions need to be balanced against the impact of the proposed GST. In net terms the RTF estimate that typical road transport costs would fall by about 5%.

7.77 The RTF went on to explain that because of the very competitive nature of the road transport industry there can be little doubt that cost savings attributable to the tax package will be passed on. The proof of this can be demonstrated by the impact on oil prices during the recent Gulf War. The RTF advised the Committee that both cost increases and reductions were passed on fully by the transport industry. The RTF believe that the same pattern would be repeated with the implementation of the reforms for road transport embodied in the tax package.

Key issues for motorists

7.78 The Royal Automobile Association of South Australia (RAA) have noted several issues which are of concern and need to be addressed prior to implementing tax reforms. Some of these issues are :

• Applying the GST to petrol. RAA points out that the application of GST on top of petrol excise constitutes a “tax on a tax” which is contrary to the Government's undertaking when introducing the tax reform package.
• The current treatment of petrol excise under ANTS will widen the disparity between city and country petrol prices. The Australian Automobile Association (AAA) in responding to the Government's tax package also expressed concern that the discrepancy between regional and city petrol prices would almost certainly be wider than now, simply because of the GST as it is applied to the retail price which is generally higher in the country. AAA also noted that the package is silent on the exact reduction in excise when the GST is introduced. AAA maintains that regardless of the magnitude of the reduction, the direct effect of reducing excise and applying a 10 per cent GST will widen the gap between petrol prices in the country and in the city.
•  

The Effect on public transport patronage

7.79 The proposed tax changes will increase rail passenger fares by 10% while simultaneously reducing the price of motor cars. In addition, GST registered businesses will be able to claim GST input tax credits on petrol for business use of motor cars, saving around 7 cents per litre on current prices. The combination of these factors will be an increase in car use in urban areas at the expense of public transport. [42]

7.80 The Public Transport Users Association (PTUA) expressed its concerns over the increased private car usage that would result from a decline in public transport usage. It is the view of the PTUA that government – federal, state and local – need to encourage public transport usage through both financial incentives and other measures such as service improvements. Increasing the cost of public transport travel relative to private travel achieves precisely the opposite and sends completely wrong messages to the community.

Transitional Measures for Motor Vehicles

7.81 Avis Australia, Hertz Australia and Thrifty Car Rental explain how the motor vehicle transitional measures will result in multiple instances of double taxation and why they will be inequitable and counter productive. The Transition Bill contains provisions to deny the allowance of input tax credits in respect of the acquisition of motor vehicles. In particular, no input tax credits will be allowed during the first year of GST and they will be allowed to the extent of 50%only during the second year. These measures are intended to avoid disruption to the demand for new motor vehicles-through businesses deferring their acquisitions of motor vehicles until after 1/7/2000-in the period prior to the introduction of the GST.

7.82 The car rental companies currently bear sales tax on the motor vehicles they acquire, State Government stamp duty which is paid to effect the issue of a registration certificate for the vehicles, as well as State Government hiring arrangement duty. These imposts represent significant costs to the car rental companies and other businesses.

7.83 The transition measures do not provide provisions to alter the amount of sales tax payable on vehicles in the period leading up to the introduction of GST. Further, there will be no credits available to businesses which possess motor vehicles on which sales tax has been paid, with the exception of cars which are held for the purposes of resale and which therefore have GST paid thereon. Further, hiring arrangement duty is proposed for abolition from 1 July 2001 and stamp duties imposed on motor vehicle registration is not to be abolished. [43]

7.84 The car rental companies argue that the measures proposed will result in “significant and blatant double taxation” for then as well as for other users of motor vehicles for business purposes.

At the time GST is introduced, the car rental companies will possess a significant number of vehicles on which sales tax will have been paid. These vehicles will be rented after the introduction of GST at rates which will be calculated by reference to the cost of the vehicles, including the sales tax which has been paid. The rental charges will themselves be subject to GST. Accordingly, GST payable on rental fees, to an extent, will represent GST on the sales tax which has previously been borne by the car rental companies. This is double taxation.

In respect of vehicles acquired ……after the introduction of GST, the GST paid will not be allowed as an input tax credit during the first year and will be denied to the extent of 50% during the second year. As explained in the above paragraph, the car rental companies will need to calculate their rental fees so as to recover the cost of the rental vehicles ( these costs will include a component which represents unrecoverable GST). Accordingly, the GST payable on rental fees, to an extent, will represent GST on the GST which has previously been borne by the car rental companies. This is double taxation. [44]

7.85 The car rental companies submit that the imposition of double taxation in these and a multitude of other instances is unacceptable and will impose significant hardship on the business users of motor vehicles. They also argue that the Government, in introducing measures to avoid hardship being experienced in the motor vehicle manufacturing and distribution industries, have simply transferred the hardship from the industry to others. Further, similar measures have not been introduced in relation to any other types of goods such as computers, telecommunications equipment, construction equipment, etc. even though demand patterns for these others goods will also be affected by the GST.

7.86 The car rental companies also highlighted the consequences of business users of motor vehicles deferring their acquisitions over a prolonged period. Results from their analyses indicate the following :

Under the proposed transitional arrangements a business will save between 7 and 12% by waiting until 1 July 2000 to acquire a new motor vehicle (this represents the difference between the amount of sales tax currently payable and the amount of GST payable from 1 July 2000). From 1 July 2001 a further 5% will be saved (as businesses from this date will be entitled to 50% input tax credits). From 1 July 2002 a further 5% will be saved (as businesses from this date will be entitled to full input tax credits). [45]

7.87 The car rental companies assert that this multi-stage incentive for business to defer vehicle acquisitions over a prolonged period of time will only service to impose greater hardship overall and may ultimately do greater damage to the motor vehicle industry. They also submit that it would be far better to accept a short lived and temporary disruption to purchasing patterns.

7.88 Some of the alternative transitional measures which would not unfairly penalise business users of motor vehicles, as suggested by the car rental companies include:

• Phasing down of sales tax rates payable on motor vehicles in the period leading up to the introduction of GST. This would assist with ensuring both private and business users of motor vehicles have less or no incentive to defer their acquisitions until after GST is introduced.
• New Zealand progressively lowered sales tax rates in the lead up to the introduction of its GST.
• Allowance of sales tax credits for motor vehicles on hand at the time GST is introduced. This would ensure that a business does not have to attempt to recover the sales tax borne via business revenues which will themselves be subject to GST. Such credits could be restricted to the sales tax borne on vehicles acquired within a specified period of time before introduction or calculated by reference to written down values.
• Exempt the Rental Car Industry from the Transitional Measures. The car rental companies are particularly concerned that as they have very little opportunity to defer their acquisitions, they will be hardest hit by the transitional measures as they currently stand. The car rental companies regularly turn over their fleet of rental stock, say every 10 to 12 months for commercial reasons as these companies must always have relatively new vehicles available. Furthermore, in the period leading up to GST, the car rental companies anticipate a significant increase to their fleet numbers to cope with demand for rental vehicles from visitors to the Sydney 2000 Olympics. [46]

Building Industry

7.89 Australia's major housing industry group appeared before the Committee – the Housing Industry Association. The Master Builders Association of Australia which represents the building industry more broadly defined also gave evidence.

7.90 The MBA described themselves as strong supporters of the tax reform and in particular supported the thrust of the reform package of the federal government. However the MBA told the Committee that they were keen to deal with some fundamental transitional factors so as to smooth the introduction of the GST. The MBA commissioned Econtech to advise it on the effects of the government's proposed ANTS package and its impact on the housing and construction industry. The modelling showed that the proposed ANTS package would lead to a reduction of 8.4% in the cost of business investment which in turn will induce an estimated permanent rise in the level of business investment of 6.7%. The expected increase in the capital intensity of production is expected to produce a boost to the GDP of 1.8%. [47] The MBA went on to say that in the context of the building industry as a whole the long term effect of the tax plan will lead to an increase in activity of 0.9%. It is for that reason that they are strong supporters of the total package despite the expected adverse consequences for housing construction activity. The MBA's concern stems from the boom bust nature of the building industry. They referred to the New Zealand experience where construction projects were brought forward to beat the introduction of the GST.

7.91 The Housing Industry Association had a different view about the impact of the government's tax package to that put by the MBA. The HIA expressed their concerns as follows:

HIA, whilst commending the government for making a bold attempt to redesign Australia's taxation system through a new tax system,ANTS,has voiced concerns about both the economic and social impact of the proposed new tax system on housing. The GST will raise a net additional $2.6 billion a year in indirect tax from the housing industry, and this significant increase in indirect taxes on the housing industry will impact on the level of building activity and jobs across the country. Importantly, it will have a significant effect on the industry's clients.

Central to HIA's concerns is the inadequacy of the compensation arrangements for new home buyers and householders undertaking renovations and additions activity. According to independent work commissioned by HIA, the cost impact of the tax package on the supply price of new residential building and existing private rental accommodation will be significantly greater than the cost estimates provided by the federal Treasury.

The Econtech study, which I will table today, indicates that in the long term, that is, after about 10 years, new house prices will rise by about five per cent and dwelling rents by more than three per cent. HIA estimates that, in the shorter to medium term, the cost increases can expect to be higher.

The government has recognised part of the impact of the GST on housing affordability by providing for a FHOS grant of $7,000. However, the payment is available only to about 15 per cent of the industry's clients. Additions to the rental stock, especially relevant to low income earners, comprise a further 20 per cent of new homes purchased, while previous owner-occupiers comprise the majority of about two-thirds. There is no compensation for those householders, nor is there compensation for householders undertaking alterations and additions, or repairs and maintenance, which are necessary to maintain the quality of the housing stock.

7.92 The HIA suggested an alternative plan to address the cost impact of the GST on new home buyers including rental purchases by making compensation available to home buyers purchasing new dwellings. HIA pointed out that this approach was adopted in Canada and that suitable caps and collars can be put in place to ensure that the compensation is targeted fairly. The detail of the HIA's plan is as follows:

The new home rebate would help to contain increases in the cost of new housing, mitigate general inflationary pressures, and simplify compensation requirements for tenants in rental housing. HIA's fair compensation proposal has three elements. Firstly, there is the exemption of stamp duty for first home buyers under a revamped first home owners scheme. Secondly, there is a targeted GST rebate on new houses and renovations. Thirdly, there is a mechanism to link the GST compensation to contracted building work in the formal economy to avoid tax leakage which otherwise will occur.

7.93 The HIA also had concerns about the compliance costs to their members as a consequence of the new tax package. The HIA has researched the practical impact of the new tax arrangements on a range of businesses including plumbers, joiners, bricklayers, small house builders and multi-unit developers. They have found that the cost for a small and medium size business of converting to computerised accounts in order to comply with the new tax system would be in the order of $2,500 to $4,500. These costs include computer software, training, allowances for the loss of productive time involved in compliance but do not include hardware costs. [48] On the basis of this compliance cost estimate the HIA is seeking the government to top up the $500 million set aside to support businesses to switch over to the new tax system as this amount would not be adequate for the one million small to medium size businesses in Australia under 140,000 in the housing industry.

7.94 Dr Silberberg of the HIA summarises the HIA's position as follows:

The proposition that HIA puts to this committee, and has put to the government, we consider to be a very fair and reasonable one. We are not asking for additional GST revenue to be forgone. It is primarily a cost neutral set of proposals. Those proposals do not disadvantage the national economy. Indeed, they improve them. In response to your question, I would have to say that HIA could not support the tax package in its entirety were the compensation arrangements for the housing sector not to be amended.

7.95 The economic consequences to the housing industry of the government's proposed tax reforms was the subject of modelling work by the HIA. HIA commissioned Econtech to model the long-run impact of their revised proposal. They indicated to the Committee that their plan through better targeting cut the price rise for residential construction from 6% to 1.9%. It also reduced the rise in dwelling rents from 3% to 0.3% and cut the fall in residential construction expenditure from 2.4% to 0.7%. The overall economic benefit to the economy of their plan saw a long-term impact on the CPI being cut by 0.7% and national economic growth boosted from 1.8 to 1.9%.

7.96 In questioning Senator Murray sought information from the HIA about the impact on the poor and lower income sector. The area that Senator Murray was concerned about was the suggestion that rental stock had actually grown considerably as against the CPI. As a consequence the welfare groups are arguing that urgent and remedial action is needed for poor and lower income people who are not catered for appropriately in the government's package. Dr Silberberg responded as follows:

Senator, the highest incidence of housing related poverty occurs, regrettably, in the private rental sector, and those groups would be most vulnerable to increases in housing costs through higher rents. It is significant that Murphy's estimate of the dwelling rent inflation is about 50 per cent higher than the Treasury estimate. How that impacts distributionally is likely to be quite harsh on lower income people in the rental sector, many of whom are committing very high shares of their household income to dwelling rent. They are at risk, they are vulnerable, so the safety margin in your compensation mechanism needs to reflect that.

Increasing rental assistance will not insulate lower income tenants adequately because it does not cover fully the increase in private rentals. One of the attractions of our particular proposal is that, by cutting significantly the inflationary impact on the private rental sector, it would mitigate significantly the compensation requirement for private tenants.

Primary Sector

Banana Industry

7.97 The Banana Sectional Group Committee (BSGC) of Queensland Fruit and Vegetable Growers is the representative body of Queensland banana producers. The Queensland industry comprises about 800 banana producers. The industry is concentrated in the wet tropics region of Far North Queensland, basically between Townsville and Cairns and particularly the towns of Tully and Innisfail. The Far North accounts for about 90 per cent of Queensland's banana production, which is about 75 per cent of Australia's total production. The remainder of the industry is in the south-east region, in the Caboolture district to the near north of Brisbane, the Sunshine Coast hinterland and there are some new developments in the Bundaberg district.

7.98 In August 1998 BSGC engaged agricultural economists, the Centre for Agricultural and Regional Economics, CARE, of Armidale to model the likely impact of the new tax. The study modelled the effects of the government's tax reform package under three scenarios:

• a small banana farm which was in the southern region of Queensland. `Small' is defined as less than five hectares;
• a medium producer from North Queensland; and
• a large banana enterprise, also in North Queensland, and that was defined as over 100 hectares.

7.99 Mr Christopher Simpson and Ms Margaret Milgate, who appeared before the Committee in Brisbane, also represented the Queensland Fruit and Vegetable Growers and advised that even though the study was done on behalf of the banana industry, the results were common across the fruit and vegetable industry.

7.100 The study incorporated the basic assumptions set out in the government's tax package which are: the GST of 10 per cent across the board; the abolition of wholesale sales tax; the reduction of fuel excise and the inclusion of a GST, such that the pump price remains unchanged – diesel excise for off-road use remains fully rebated; an additional diesel rebate of 9.7c per litre for on-road diesel use for vehicles of GVM over 3.5 tonnes, leaving a road user charge of 18c per litre; changes to the social security system; changes to personal income tax rates in accordance with the proposed new scales; and changes to personal income tax rates in accordance with the proposed new scales; and changes in the tax treatment of trusts. [49]

7.101 In his opening remarks to the Committee members, Mr Christopher Simpson of the BSGC revealed the following :

Whilst elements of the package had a negative effect, such as the GST increases household costs, the net impact of the positive and negative effects when taken together is an improvement in financial performance. In more detail, the net disposable income of banana producers has increased for small farmers 4.9 per cent, medium 9.4 per cent split between two partners and, for the large enterprise, 8.4 per cent. In terms of total taxes paid, the small producer's taxes fell by 4.6 per cent, the medium producer's rose by 9.9 per cent and the large producer rose by 3.2 per cent. The household expenditures rose by between 3.5 per cent and 3.6 per cent for all of the enterprises and the benefits accruing from reduced fuel excises were relatively small. [50]

7.102 BSGC believes that benefits from reduced transport costs will be the major contributor to the expected improvement in financial performance in the banana growing industry, especially for the medium and large enterprises. BSGC also recognises that these benefits would be largely eroded if the savings were not passed on at the full 6.7 percent rate forecast in the government's reform package.

7.103 BSGC also expressed concern that major supermarkets may attempt to maintain shelf prices at their current levels after the GST has been added on. This would result in a reduction in the wholesale price paid to producers. BSGC believes that the pricing strategies that the supermarkets are likely to adopt post-GST should be examined in some detail.

7.104 BSGC considers that one of the administrative imperatives in the new tax package is:

That full price transparency, that is actual plus full 10 percent GST, be displayed to consumers at the retail point of sale. [51]

7.105 Banana producers are not price setters but are price takers and prevailing market prices are largely determined by the enormous duopolistic buying power of the supermarket chains. Producers have little ability to set their wholesale price, and similarly, no ability to ensure that the supermarkets pass the tax on to consumers.

7.106 BSGC quotes the following to emphasis its point :

In practice, the following scenario should be considered – using a hypothetical base retail price of $1.99kg. Banana priced at $1.99/kg pre-GST should be ticketed at $2.19 post GST (ie $1.99 plus 10% GST). However, because of their pricing strategies the supermarkets will often want to round prices down to maintain an appealing price-point (say $1.99/kg) irrespective of the GST. Such a pricing strategy would effectively reduce the base retail price to $1.79/kg and thus force a 10 percent price cut back through the marketing chain to producers. In effect, producers would be picking up the GST rather than it being passed on to consumers. [52]

7.107 BSGC also quotes a tax partner from a major accounting firm as saying that the GST is intended to be a tax on consumers, and consumers will receive an offsetting reduction in Personal Income Tax to compensate. As there is no wholesale sales tax on fruit to be removed, the full 10 percent GST will have to be passed on to consumers by being added to the retail price of bananas.

7.108 BSGC believes that the GST needs to be introduced with safeguards built in to protect banana growers and other commodity producers against the scenario outlined above. The safeguard needed is for the GST to be implemented in a transparent manner as an add-on tax to the retail price of goods such as state retail sales taxes in the USA, rather than as an inbuilt, invisible component of the retail price as proposed. BSGC also noted that the GST in New Zealand was introduced with an arrangement like this in place for the first 12 months.

7.109 Given the pricing effects findings of the CARE study, the BSGC is very concerned that the banana industry would be severely affected by the GST, as would be many other areas of primary production, particularly domestic market producers.

7.110 BSGC recommended to the Committee that the pricing strategies of supermarkets which they are likely to adopt post GST should be examined in some detail. In responding to questions from the Committee BSGC, particularly on behalf of the fruit and vegetable industry, confirmed that it would support the tax package particularly if safeguards of transparency were agreed to by the Government, and greater certainty given to the effect that cost reductions will be passed on to the industry promptly.

Australian Beef Industry

7.111 The Australian Beef Association (ABA) expressed grave concerns at the impact of the proposed GST on beef producers, processors and retailers. ABA questions the validity of economic modelling run by Canberra's Centre for International Economics in September 1998. In its submission ABA claims:

The models showed an 8.9% rise in the price of beef at retail level. Their forecast of a consequential 0.4% decline in consumption do not fit traditional price elasticity equations for beef (work done by F.H. Gruen and others…..in the 1970's gave an average fall in beef consumption of 1.33% for every 1% increase in price and indicate an 11.8% fall in consumption if the 10% GST equates to an 8.9% increase in retail price). Anecdotal experience in New Zealand points to a 10 to 15% fall in beef consumption following the introduction of their GST. In the light of the above the forecast fall in farm gate prices of only 0.6% in the Centre for International Economics post GST forecast appears ridiculous and ignores a potential reduction of $100 to $200 million in total domestic beef income. [53]

7.112 In a supplementary submission to the Committee, ABA quoted the NSW Meat Industry Authority in their claims that demand for beef rises and falls in direct response to fluctuations in cattle prices by around 1.15% for every 1% price rise or fall. Results from further studies show that beef consumption could fall by 11.8% as opposed to a fall of .4% predicted by the Government.

7.113 ABA claimed that on average, Australia could see consumption of domestic beef falling by $183,000,000 per year at current retail prices of $3 billion gross per year. If ABA's research figure of 11.8% decline in consumption due to an impostion of a GST prove to be more accurate, the real retail loss to the beef industry could amount to as much as $345,000,000 per year.

7.114 ABA noted the suggestion that any reduction of beef for domestic requirements will result in additional supplies for export. ABA claims that GST-free exports will still be priced at the same level as currently and will not return any significant profit to beef producers. Multinational companies, Japanese and Korean importers will continue to use the tender system in an attempt to price Australian beef exports at cost price in their effort to reduce tariff costs (50%) when sending beef to their home countries. Multi-nationals have another strong incentive to avoid other taxation in Australia by pricing exports at cost (non-profit) and making their profit in other jurisdictions and tax regimes.

7.115 ABA also expressed concern with regard to the substantial purchasing power of supermarkets. Three supermarket chains now sell over 40% of all retail beef in Australia and effectively set the retail price. ABA believes that these major supermarkets may attempt to conceal the GST component in the retail price instead of adding it on in an attempt to maintain sale volumes and depress the price of cattle by 10% to balance the system. This would involve in a reduction in the wholesale price paid to producers.

7.116 ABA asserts :

The whole concept of a GST is based on the GST being added on to sales. Adding 10% will NOT WORK for producers of food or any industry or commodity where the producer is a price taker. This tax will reduce the gross income of price takers by 10%. The beef industry cannot afford any drop in income. [54]

7.117 ABA reiterates the fact that income tax cuts are useless to the average beef producer. A.B.A.R.E. figures show that the beef industry as a whole has operated at a loss over the past fourteen years. In spite of increases in the volume of farm production and cost to consumers, farm incomes have fallen and farm debt increased substantially.

7.118 ABA expect that the average beef producer will suffer additional compliance costs of up to 300% with the introduction of the GST. ABA also noted their concerns with the potential confusion arising from the separation of paperwork for tax exempt export beef from taxed domestic beef from the same carcass.

7.119 Mr R Jeremy provided evidence from a research conducted by Pannell Kerr Forster, Chartered Accountants, which indicate that the sale of land and subdivisions thereof will have a GST impost if the property is not sold as a single going business concern. Pannell Kerr Forster states :

There is a specific provision in the GST Bill that provides a mechanism by which the sale of the assets of a business will be treated as GST free. Essentially this treatment will apply where there is a “supply of a going concern” and the vendor and a GST registered purchaser agree in writing that the GST free treatment will apply.

To be a “supply of a going concern” it is necessary to satisfy the requirements of Section 38-325(2). This requires that all of the things needed to conduct the business be supplied and that the vendor continue to conduct the business until the date of transfer of the relevant assets.3

7.120 ABA have indicated a concern that many grazing properties may be sold in circumstances that would not satisfy this definition of a going concern, because the land is sold separately from the cattle and/or plant. In those circumstances the grazing business may also not continue to be carried on up to date of sale or may not be sold to a registered purchaser.

7.121 Pannell Kerr Forster adds :

There is no general exemption from GST for non residential land so that GST would apply to the sale of land in circumstances that do not involve the GST free going concern treatment as long as the supply of the land could still be regarded as being a taxable supply made in `carrying on” the “enterprise” of the grazing business.

In this regard we highlight that the meaning of “carry on”, as defined in Section 195-1, includes “doing anything in the course of the commencement or termination of the enterprise”. This is a wide definition and accordingly, in our view, there remains the real risk that the sale of a grazing property in the circumstances of the termination of the grazing business previously carried on on that property could both fall outside of the GST free treatment afforded the sale of a going concern but still be within the meaning of a taxable supply.4

7.122 Any leasehold cattle property with a tenure less than 50 years is also subject to GST. A large proportion of the cattle herd in Australia is running on some from of leasehold land. ABA envisages that many rural families that have struggled on low incomes for many years to preserve their asset (land) may have little or no equity upon sale of cattle property, if a GST is imposed in cases where the property is not sold as a single going business concern

7.123 ABA quotes the Livestock Transporters Association of NSW as confirming that savings from the GST such as the reduction of the cost of tyres and diesel fuel are unlikely to be passed on to their customers as other costs will increase. Several transport companies in Queensland have apparently confirmed this view.

7.124 In conclusion to its submission to the Committee, ABA noted the following points which emerged from their investigation of the GST :

The price taker (Primary Industry) will be severely disadvantaged.

Several other primary industry groups have recently realised the potential for the GST to damage their businesses, notably the Wine, Sugar and Banana Industries.

The Beef Industry will be particularly disadvantaged if not destroyed. The smaller farm business will feel the tax burden the greatest. Non viable farmers selling up their land will see the GST applied to their very last dollar. This tax discriminates severely against primary producers.

Tobacco

7.125 Representatives of the tobacco industry told the Committee that they did not oppose the introduction of a GST. Their concern was that unless the government reduces the tobacco excise to ensure the tobacco tax burden does not change when the GST is introduced, those who can least afford to pay tax will incur an increased tax burden and the government's financial position will be negatively impacted. [55]

7.126 The tobacco industry contends that tobacco is taxed highly in Australia by comparison with international standards. The industry's concern is that the government's tax package will see the GST applied over the top of the existing tobacco excise collections. Collections that the industry point out are set to be increased in November of this year.

7.127 The industry advised the Committee that tobacco incurs the highest level of tax of any goods and service in Australia. Mr Herskope compared the rate of taxation on tobacco to the two other industries of alcohol and gambling. Based on 1996 figures the wholesale sales equivalent rates for wine are 41%, gambling 42%, beer 91%, spirits 253% and tobacco 339%. The industry advised the Committee that in a recent press release dated 3 February stated that the changes from 1 November would result in an additional $440 million in taxes being collected. This $440 million figure represents a tax increase of around 10%. But the industry advised that when looked at in aggregate with the GST effect over the next 16 months tobacco will have incurred a further 25% or more in increased tax. [56] The industry is particularly concerned that the government has singled it out to apply a tax on a tax, that is the GST on top of the tobacco excise.

7.128 By comparison the industry pointed to the more equitable treatment of tobacco excises in New Zealand at the introduction of a GST when the excise on tobacco was effectively adjusted to minimise the price increases. The industry contended that this more equitable approach is the precedent that should be followed as part of the government's tax package proposal. The industry then turned to the consequences of price increases to future government revenue raisings from tobacco taxation. The industry contended that studies of the price elasticity demands of tobacco indicate a measure of –0.4. This is believed to be the measure that the federal Treasury regards as the correct measure. The industry advised however that the Allen consulting group believes that the actual measure of this elasticity using data for the period 1987-97 is more like –0.86 that is double the previous estimate. That means that tobacco consumers are far more sensitive to price rises than federal Treasury believes is the case. [57]

7.129 The consequence of this the industry contends is that future government revenues from taxation will grow at the very least much more slowly than in the past and quite possibly will fall. They believe that the era when governments have been able to use smokers as an easy source of tax revenue on this evidence has come to an end.

7.130 Finally the industry contends that a tobacco tax is unfair and that this position will be exacerbated over the next 16 months as tobacco taxes rise by over 25%. In particular they're concerned that low income earners who tend to smoke more than people with relatively high incomes and as a consequence spend much a larger proportion of their incomes on cigarettes and tobacco. The industry believes that this result is at odds with the stated aims of the government's tax reform policy to be fair and non-discriminatory between sectors of the economy.

7.131 The view of the tobacco industry in relation to the consumption patterns for tobacco as a consequence of the taxation arrangements is not supported by the Heart Foundation of Australia. In a submission to the Gibson Tax Consultative Taskforce, a copy of which was provided to the Committee by the Heart Foundation, the Foundation advised that the government's attempts to reduce tobacco consumption through tax increases have not been as successful as they might have been and that cigarettes have remained an affordable item for most Australian children. This has been a consequence of Australia's anomalous system of taxing tobacco products which has resulted in a proliferation of large “budget” brands, a phenomenon seen in no other country. The Foundation contends that the Australian government is currently forgoing at least $85 million per annum in tobacco excise in surcharge revenue that would be payable were all cigarettes taxed on an equal basis. The Foundation described taxes on cigarettes in Australia as antiquated, complicated and inefficient. The current two tier tax was one tier based on the weight of the tobacco product and the other on its wholesale value has developed haphazardly and without being subjected to any serious analysis or review. The Heart Foundation contends that adding GST to the retail cost of tobacco products with no compensatory decrease in excise duty would prevent tobacco products becoming more affordable.

7.132 The key recommendation of the Heart Foundation along with other Australian health and medical agencies is to move the tobacco taxation to a per stick system. Excise raised in this way should be automatically adjusted with CPI increases and that higher rates of duty should be payable on heavy cigarettes and roll your own tobacco. Further the Foundation recommends an increase in tobacco taxes by 5% per annum for at least the next decade.

Impact of the GST on the Distilled Spirits Industry

7.133 This section does not discuss the impact of the proposed tax changes for the wine industry. The wine equalisation tax proposed as part of the ANTS package is to be reported on separately by the Committee in a report to be tabled on 30 April 1999.

7.134 Bundaberg Distilling Company Pty Limited (BDC) is Australia's largest producer of rum. BDC has an annual turnover of rum sales in the order of $75 million.

7.135 Globalisation and the lessening of restrictions on international trade mean that BDC has entered a critical time in its history with increased competition from imported spirits manufactured in the United States and Europe and from a growing range of new alcoholic products on the market.

7.136 Rum is currently subject to a wholesale sales tax(WST) of 22%, an additional WST of 15% (in lieu of State franchise fees) and an excise duty rate of $37.47 per litre of alcohol (Lal). However, Australian produced brandy is currently subject to a WST of 22%, an additional WST of 15% (in lieu of State franchise fees ) and a concessional excise duty rate of $31.78 per Lal. Both rates are subject to automatic periodic CPI indexation, but the gap between the two rates is maintained.

7.137 The ANTS package outlined a raft of indirect tax changes relating to the alcohol industry. In relation to the taxation treatment of the class of alcohol beverages to which rum belongs (that is, beverages with an alcohol content of greater than 10%), ANTS proposed the following:

• Rum and other beverages in this category will be subject to the 10% GST.
• Beverages in this category will be subject to an excise that will be increased to make up for the removal of the 37% sales tax on these beverages.
• The rate of excise will be set such that the retail price of whisky will not need to change.
• The concessional brandy excise rate will increase but will remain below the rate applying to other spirits. [58]

7.138 The Distilled Spirits Industry Council of Australia Incorporated (DSICA) represents the major spirit and liqueur producers and distributors in Australia. JBB (Asia-Pacific) Pty Limited (JBB) is also a major spirits producer. References in DSICA's submission include DSICA and JBB.

7.139 DSICA believes that the proposed alcohol tax changes are necessary but do not go far enough to rid the system of inequities. DSICA's long term goal is to achieve a new revenue neutral volumetric alcohol taxation system which is based on alcohol content for all alcoholic beverages. It views the Government's tax proposals as a significant step towards this goal.

7.140 DISCA noted that the current taxation arrangements applying to alcohol under the existing wholesale sales tax and excise duty regimes generally bear no relationship to alcohol content.

7.141 BDC's primary concern with the proposed GST package, apart from its concern that the spirits industry overall remains heavily taxed, is that Australian produced brandy will retain its current preferential treatment through being taxed at an excise rate below that applying to other spirits. BDC claims that the current preferential excise treatment accorded to Australian brandy discriminates against Australian produced rum.

7.142 BDC urges the Government to set the excise duty rate for Australian produced rum at the same concessional rate as for Australian produced brandy for the following reasons:

• A question of policy underlying brandy rate. The concessional rate for Australian produced brandy stems from the Government policy of assisting Australian produced brandy to compete in the spirits market and to assist the Australian wine industry. BDC notes that Australian produced rum is in a similar position, that is, Australian rum is a distilled spirit produced from ingredients produced in Australia, primarily sugar cane, and is therefore a vital component of Australian rural industry.
• A question of comparable economic benefits. Brandy and rum are the only two major spirits distilled in Australia. Both products support the primary industries of Australia, namely grape growing and sugar cane production respectively.
• Economic benefits. Through the local production of Bundaberg Rum, BDC provides direct and indirect economic benefits to the local economy through employment, primary industry development (investment programs) and tourism.
• Unfair competitive advantage. The perpetuation of the competitive anomaly between Australian produced rum and Australian produced brandy unfairly maintains the competitive advantage of Australian produced brandy over Australian produced rum. [59] There are important similarities between the Australian brandy and rum markets. Local producers for both brandy and rum face the same increasing competition from imports.
• Reduction in the rum excise to the concessional rate applicable to brandy would provide additional funds to Australian rum producers to develop export opportunities and or expand current export markets.
• A question of efficiency. The taxation system should not distort investment and manufacturing decision-making. The current excise duty arrangements in respect of rum and brandy create distortions in the market in respect of both manufacturing activity and consumer choice. The arrangements proposed under ANTS will not assist in rectifying this situation. [60]

7.143 BDC urges the Committee to recommend changes to alcohol taxation which would see a more equitable and efficient taxation system. In particular, BDC urges the Committee to recommend to the Senate that the excise duty rate for Australian produced rum should be set at the same concessional rate as for Australian produced brandy.

7.144 DISCA provided the following data in its submission. [61]

Estimated 1996/97 revenue collections from alcohol ($ million) [62]

7.145 DSICA noted that the contribution of spirits to total revenue (34.5%) is significantly disproportionate to its share of total alcohol consumption (17.1%). DSICA, in analysing the data states, that WST and excise duty, if expressed on a WST equivalent basis for comparison purposes, point to total tax on beer being 91% of its wholesale value, wine being 41% and spirits at 253%. [63]

7.146 DSICA supports the Government's proposal to impose a consistent tax regime on all alcoholic beverages under 10% alcohol content (other than beer, which will be entitled to a 1.4% excise-free threshold, and wine). DSICA particularly endorses the Government's decision that this approach will apply equally to alcoholic cider for the following reasons :

• Distortion of investment decisions. This will arise if the taxation regime is such that tax incentives to use different forms of alcohol bases in modern ready-to-drink alcoholic beverages results in a distortion in investment and manufacturing decision-making and consumer behaviour.
• Minor price impact on low alcohol cider. The application of the Government's proposal will not result in a significant price increase for average strength cider products (4.2% alcohol content). Industry estimates suggest that the Government's proposal will only result n a price increase of 17 cents per bottle of 4.2% alcohol content cider. Cider products of this alcoholic strength will continue to be price competitive with other ready-to-drink products.
• Responsible outcome for higher strength alcoholic cider (as high as 8.4% alcohol). Industry estimates suggest that the Government's proposal will result in a price increase of 69 cents per bottle of 8.4% alcohol content cider. DSICA believes that this is a responsible outcome, as all ready-to-drink products of high alcohol content should be taxed on an equivalent basis. [64]

7.147 DSICA supports the proposal to impose a (relatively) consistent regime on all beverages with an alcohol content greater than 10%. Imitation spirits, as noted by DSICA, enjoy a significant tax and price advantage over spirits and spirit based liqueurs. DSICA supports a move to subject imitation spirits to the same taxation regime as full strength spirits.

7.148 DSICA submitted that excise duty rates for spirits should no longer be subject to automatic CPI indexation increases from 1 July 2000 as a comprehensive GST regime will result in overall Government revenue growing as the economy grows. As the costs of production increase over time, in proportion to the general CPI increase in the economy, the wholesale and retail costs of alcohol products will continue to rise. These increased prices will lead to increased GST collection on and ongoing basis.

7.149 The Government has proposed that the excise on beverages other than wine, with more than 10% alcohol content, such as spirits and liqueurs will rise to offset the removal of the WST. The change in excise is to be limited such that the retail “off-premise” price of whisky will not need to change. [65]

7.150 DSICA commented on aspects of this exercise:

• That the new excise rate should be set to maintain a weighted average of the “on” and the “off-premise” price of spirits. DSICA submits that singling out off-premise prices as a benchmark while ignoring on-premise prices ignores a significant part of the spirits market. In order not to discriminate against those customers who seek to consume their beverages on-premise, DSICA submits that the Government should be setting the excise rate on spirits by reference to maintaining both the off and on-premise price, according to a weighted average of consumption/sales patterns. This will yield a result that is fair to both modes of consumption.
• That the Government's assumptions regarding business cost reductions underlying the method of calculating the new rate should be subject to industry consultation. DSICA advises that it has commissioned an economic study of the spirits industry to examine related issues. Based on the outcomes of this study, it will be seeking to contribute to the Government decision making process that is carried out to arrive at the new excise duty rate.
• That there will be a significant adverse cash flow effect on spirits producers as a result of increasing excise duties, which are collected earlier in the supply chain, and reducing non-excise duties collected later in the supply chain. DSICA believes that these adverse cash flow impacts should be taken into account in setting the new excise duty rates. Alternatively, due dates for collection of excise duty (currently weekly) should be extended to monthly or quarterly, consistent with existing WST collection arrangements. [66]

Footnotes

[1] ANTS p.96.

[2] ANTS, p.96.

[3] ANTS, p.169.

[4] Evidence, p.1580.

[5] Evidence, p.956.

[6] Evidence, p.1360.

[7] Evidence, p.1361.

[8] Evidence, p.1361.

[9] Evidence, p.1362.

[10] Evidence, p.1572.

[11] Evidence, p.1581.

[12] Submission No.641.

[13] Submission No.928.

[14] Submission No.928.

[15] Submission No.928.

[16] Submission No.964.

[17] Submission No.964.

[18] Submission No.472.

[19] Evidence, p.795.

[20] Evidence, p.796.

[21] ANTS p.92.

[22] Evidence, p.816.

[23] Evidence, p.817.

[24] Evidence, p.623.

[25] Senate Employment, Workplace Relations, Small Business and Education References Committee, Report of the Inquiry into the GST and A New Tax System, paragraphs 1.136-1.162.

[26] Senate Employment, Workplace Relations, Small Business and Education References Committee, Report of the Inquiry into the GST and A New Tax System, paragraphs1.37-1.48

[27] Evidence, p.796.

[28] Evidence, p.796.

[29] ANTS p.161.

[30] Evidence, p.808.

[31] Hansard, Brisbane, 24 February 1999, pp 411-412.

[32] ANTS, p.172.

[33] ANTS, p.86.

[34] Submission No.83A.

[35] Submission No.83.

[36] Submission No.302.

[37] Swan Consultants 1994, p.iii.

[38] Evidence, p.348.

[39] Submission No.83A.

[40] Submission No.83A.

[41] ANTS, p.86.

[42] Submission No.83.

[43] Submission No.716.

[44] Submission No.716.

[45] Submission No.716.

[46] Submission No.716.

[47] Evidence, p.319.

[48] Evidence, p.832.

[49] Hansard, Brisbane, 2 March 1999, p.1400.

[50] Hansard, Brisbane, 2 March 1999, p.1400.

[51] Hansard, Brisbane, 2 March 1999, p.1400.

[52] Submission No.713.

[53] Submission No.459.

[54] Submission No.459A.

3 Submission No.459A.

4 Submission No.459A.

[55] Evidence, p.1969.

[56] Evidence, p.1970.

[57] Evidence, p.1972.

[58] ANTS p.87.

[59] Submission No.879.

[60] Submission No.879A.

[61] Submission No.643.

[62] Figures are based on Committee of Inquiry into the Winegrape and Wine Industry, Final Report, AGPS, June 1995 (see Table 11.5 at page 258)

[63] Submission No.643.

[64] Submission No.643.

[65] Submission No.643.

[66] Submission No.643.

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