Chapter 5
Local Government Services
5.1 Under the tax reform proposals the States will take responsibility
for the payment of general purpose assistance to local government currently
made by the Commonwealth. In the document Tax Reform: not a new tax,
a new tax system it was stated that:
The Commonwealth will make the payment of the GST revenue conditional
on the States making these payments in accordance with existing conditions
on the payment of general purpose assistance to local government…Maintaining
the growth in general purpose assistance to local government on a real
per capita basis would constitute one of the conditions to be met by the
States in order for them to receive GST revenue. These payments will ensure
that local government is no worse off on this front. [1]
5.2 This Chapter considers the terms of reference dealing with the scope
and effectiveness of the proposed taxation arrangements on Local Government
human services.
Impact on Local Government services and activities
5.3 Organisations representing Local Government raised concerns that
the tax reform proposals will negatively impact on the provision of adequate
and equitable services to local communities. These organisations considered
that this would occur through:
- the loss of the Commonwealth's direct commitment to national standards
in relation to local services and the real risk of unfavourable and
inconsistent treatment of Local Government by State Governments;
- the lack of attention to the capacity of Local Government to meet
the increased demand for local community services;
- inappropriate taxation of regulatory services and those provided solely
for community benefit [2];
- higher costs of compliance and administration as a result of the GST;
and
- lack of clear legislative basis to ensure that certain services are
GST-free. [3]
5.4 The Australian Local Government Association (ALGA) stated that Local
Government should not be required to levy a GST on nominal charges for
community service activities and facilities. [4]
The Municipal Association of Victoria (MAV) and the Local Government and
Shires Association of NSW (NSW LGSA) also raised this matter. The NSW
LGSA stated that in a reply to a letter of 17 September 1998 sent by it
to the Prime Minister, the Federal Director of the Liberal Party of Australia,
Mr Lynton Crosby wrote:
The non-commercial activities of Government will be outside the scope
of the GST. This means that where a service is provided free of charge
or for a nominal charge, the GST will not apply. However, the Government
intends to apply the GST to the commercial activities of all level
of government in the normal manner. [5]
5.5 ALGA informed the Committee that the Minister for Regional Services,
Territories and Local Government had explained subsequently that the undertakings
in the letter were not correct. The GST Bill does not conform to Government
assurances that all activities of Local Government for which a nominal
fee is charged, but would usually be considered non-commercial, will remain
GST-free. [6] However ALGA added:
We assumed it was the case and in our approach to the whole issue
we presumed that what we were told and the information contained in
that letter were accurate. We believe that is an issue of concern
and that, in one way, we had been misled into believing that those
nominal charges would be free of GST. Now we are finding in the legislation
package that, in actual fact, they will be subject to the GST. [7]
5.6 ALGA and other evidence noted that the imposition of a GST on Local
Government regulatory and community service activities would `unnecessarily
raise the cost of community services and may discourage their provision.
It would put Councils in the position of either absorbing increased costs
or passing on costs by increasing fees'. [8]
The Association stated that the first option is impractical in the current
operating environment for most Councils and the second option is undesirable,
as it would lead to inequitable outcomes for people in the community reliant
on these services. [9]
5.7 ALGA noted that many Council charges, other than rates, are likely
to be subject to a GST:
They cover those community services that, under the legislation,
are likely to have a GST applied to them. Therefore, the consumers
and the users of those services will have to pay additional costs.
People who use pools provided by the council, particularly in isolated
areas and rural and remote areas of Australia, will have to pay extra
GST. We have concerns about the simple use of facilities like cemeteries
and crematoriums supplied by local authorities; charges associated
with libraries…Meals on Wheels; community transport and all these
things. [10]
5.8 It was also noted that some Councils provide more community services
than others. Councils in Victoria, for example, provided a significant
range of community services while those Councils in rural and regional
Australia also stepped in to provide services where no other public or
private sector organisation in the community had done so because of lack
of profitability. [11] For example, the MAV
noted:
We bring people into an elderly citizens centre and provide maybe
60 or 70 meals every lunchtime. There would be a notional fee charged
for those individuals to cover some of the costs because, as you would
understand, providing something like six million or seven million
meals a year across the state [of Victoria] is a massive cost to local
government. [12]
GST: Impact on Local Government
The MAV cited the example of the nominal fees charged by councils for
services in Victoria: `We have had a quick look at a range of fees that
are collected in Victoria. We calculated 217 fees across a range of
services of which about 117 will have a GST applied to them. I will
run through some of them. They include baby capsule hire; bus hire for
children; school holiday programs; adult day care centres for the aged;
aged service bus hire; gentle exercise programs for the elderly that
are held at leisure centres and in centre based activities; lawnmowing
services for the aged poor; neighbourhood centres; podiatry services;
the provision of the servicing of senior citizens, and it is picked
up on fees charged for membership; and social support activity programs'.
Source: Committee Hansard, 12.3.99, p.1206, MAV.
5.9 The Association also raised the problem of services provided by Councils
similar to HACC funded services which are GST-free – `that is, separate
from the services which councils provide outside the HACC framework which
would have a GST on them'. MAV further added:
There is a component of the HACC agreement which deals with home
based maintenance, but councils provide services that are different
from that agreement and maintenance outside the agreement. They would
be the ones that would be affected by a GST where there was a fee
charged. Our understanding is that the ones that have components that
fall under the HACC agreement will be exempt. [13]
5.10 ALGA pointed out that if community services were provided by a charity
at a nominal fee, then the service would be GST-free. [14]
However, under the provisions of the legislation, the 50 per cent nominal
value rule does not apply to Local Government services – only to
charities, even though many of the Local Government services are provided
on a not for profit basis:
We believe we provide services which are going to be similar to those
of charities in terms of our welfare activities and that sort of thing.
The charities are given a concession. In effect, in the legislation
where their activities are provided at under 50 per cent market cost,
they are deemed to be non-commercial activities for the purpose of
the GST.
Local government services that would be provided in exactly the same
sense, and local government being not-for-profit organisations, the
nominal charge would be subject to the GST. It comes back to the question
of a commercial/non-commercial divide. We were given the expectation
that non-commercial charges of local government would not be subject
to a GST. [15]
5.11 It was suggested that some Councils would be faced with a choice
– either provide services free of charge, exempting them from charging
a GST on nominal fee services, and increase Rates to cover the additional
cost, or withdraw or scale down some services. However, it was noted that
some Councils charge nominal fees `to prevent unfettered access to services'
and that `nominal charges actually have some value in themselves'. [16]
5.12 The Association cited the example of Local Government involvement
in the area of public housing that will be adversely affected by the tax
changes. The Association noted that Local Government has an extensive
role in supporting community housing through its planning functions and
for some Councils, the direct provision of housing, including housing
for the aged and crisis accommodation, particularly for lower income groups
in the community. As residential rents will be input taxed Local Government
will not be able to claim input tax credits for acquisitions used to carry
out those activities. The Association noted that the impact `will be to
significantly increase the cost of providing low cost housing'. [17]
5.13 Local Government is also involved in many other areas of service
delivery where the GST will have an impact. The Committee has discussed
the problems for providers of aged care, disability services, child care
and health care in other Chapters of the report. Local Government, as
a provider of welfare and community service, will be similarly effected.
Local Government will, at the same time, have to deal with problems arising
from the GST in its own sector.
5.14 Organisations representing Local Government also expressed concerns
about the impact on service provision in rural and remote areas. ALGA
emphasised that Local Government, particularly in these areas, is often
the only provider of many services, and without Local Government involvement
these services would not be available to these communities. [18]
The Association noted that Aboriginal Community Councils will be particularly
disadvantaged because they already have low revenue raising capacities
and serve Indigenous communities that are often in dire need of a range
of services because of their poor socio-economic position. [19]
The Northern Land Council also expressed concerns `relating to the future
funding of Aboriginal development and essential services given the proposed
transfer of GST revenues to the Territory government'. [20]
Compliance and administration costs
5.15 Organisations representing Local Government stated that they would
face increased costs associated with compliance and administration as
a result of the proposed tax changes. [21]
The MAV estimated that the start-up costs of administering the GST to
be up to $1 million per Council and up to $100,000 per annum after
that. [22] For every dollar of GST revenue
raised by Local Government, 25 cents would be spent by the municipality
on collection. [23]
5.16 It was noted that Local Government is at the moment largely exempt
from wholesale sales tax. Thus the GST represents a new tax system for
Local Government and systems would need to be implemented to deal with
this. ALGA also emphasised that compliance cost issues needed to be examined
from the point of view of the GST revenue obtained from activities supplied
by Local Government from `nominal' charges. For example, the cost of accounting
for and collecting GST on the admission charge for the local swimming
pool will add significantly to the cost of running that pool for the local
Council. [24]
5.17 Local Government also rejected the Government's estimates of savings
as a result of the GST. First, Local Government is largely Whole Sales
Tax (WST) exempt and secondly, the claim that cheaper diesel would result
in large revenue gains was disputed. [25]
Financial Assistance Grants
5.18 ALGA also noted that Local Government has concerns about the future
funding of Councils through the proposed change in financial assistance
grants. It was noted that many Councils, particularly in rural and regional
areas, rely on financial assistance grants for more than 50 per cent of
their income. The grants have been declining markedly over the last few
years in their real per capita value and as a share of taxation revenue.
ALGA stated that even though the Government has guaranteed that the present
system will continue, `the financial assistance grants will still be inadequate
and they will remain inadequate'. As a result:
That does have an impact on our ability to provide services to the
community. There is a question mark about the viability and the certainty
of funds for councils that are applied through the financial assistance
grants, which is proposed to be delegated to the states. We believe
that will have a potential impact on our ability to provide community
services in the future. [26]
5.19 A further matter of concern raised by ALGA was the adequacy of the
arrangements to control the State's application of the financial assistance
grants:
The mechanism, as we understand it…is that there is not going
to be any legislation relating to that, that it is going to be an
intergovernmental agreement and that intergovernmental agreement is
going to be overseen by a ministerial council which comprises the
federal Treasurer and the treasurers of the states. We are not convinced
that the interests of local government and local communities in financial
assistance grants can be adequately covered under the system. The
incentives are just not there for the state governments nor the Commonwealth
to press that agreement after the initial period. [27]
5.20 The Government proposes to enforce maintenance of current payment
arrangements through a Memorandum of Understanding. Local Government is
deeply concerned about the long-term decline of its funding at the hands
of the States and places little faith in a MOU.
5.21 The Committee notes that the Select Committee on the New Tax System
has taken extensive evidence from Local Government on Commonwealth/State/Local
Government relations. The Committee believes that it is of the utmost
importance that attention is drawn to implications for Local Government
funding as a result of the reforms that the Government is proposing.
Conclusions
5.22 The Committee believes that the capacity of Local Government to
provide a range of human services to local communities and their ability
to respond to future community needs and expectations will be compromised
as a result of the proposed tax changes, particularly the transfer of
Local Government funding to the States, and the application of a GST on
community services and facilities.
5.23 The tax reforms will impose additional costs on Local Government
at a time when there is increased demand for community services. The ability
of Local Government in rural and remote Australia to continue to supply
much needed community services could be at risk.
5.24 Of particular concern is the inequitable treatment of community
services supplied by Local Government for a nominal fee. Because a fee
is applied, these services will be taxed. The outcome of this will only
be to the great detriment of those using Local Government services - prices
will have to go up or services will be cut. There will also be a great
impost on Local Government - compliance costs will increase or services
must be subsidised 100 per cent. Either of these outcomes will have a
detrimental impact on Local Government revenues.
5.25 The Committee finds it very disturbing that were these services
provided by a charitable organisation they would be GST-free, yet when
they are provided by Local Government they are taxed. What is the difference
between a meal provided to pensioner at nominal cost by a charity and
one provided by Local Government? The Committee can discern none.
5.26 In imposing the GST on nominal amounts the Government has clearly
betrayed a promise it made to Local Government during the election campaign.
This broken promise means that every activity for which Local Government
levies a fee or charge, including meals for seniors, swimming pools, school
holiday programs and public transport services will attract a GST.
5.27 The Committee considers that the compliance costs for Local Government
will be significant. At the present time Local Government is largely exempt
from WST. Compliance with the GST will require new accounting systems
and equipment and staff training. It is questionable as to whether there
will be any significant revenue gain from applying GST to nominal amounts.
5.28 A further matter of concern is the security of funding of Local
Government activities. Government grants have declined markedly over the
last few years in their real per capita value and as a share of taxation
revenue. The proposed devolution of grants to the States adds another
element of uncertainty. The Government has promised that funding will
be secure under a Memorandum of Understanding. Given the Government's
broken promises to Local Government on the exemption of nominal fees from
the GST, the Committee considers that there is no guarantee that funding
will be maintained.
5.29 Without such a guarantee the ability of Local Government to continue
to hold its unique place in Australian government and to provide much
needed services to the community will be undermined.
Footnotes
[1] Tax Reform: not a new tax, a new tax
system, p.84.
[2] Local Government regulatory activities include
building regulation/inspection, zoning/planning, pollution regulation
etc. Community service activities include aged and disabled housing/public
housing, childcare centres, health centres, meals on wheels, parks and
gardens, swimming pools etc. See Submission No.631A, p.7 (ALGA).
[3] Submission No.631A, pp.1-12 (ALGA); Submission
No.900, p.2 (WAMA); Submission No.596, pp.3-4 (CCCLM); Submission No.887,
p.2 (Local Government and Shires Associations of NSW). See also Committee
Hansard, 12.3.99, pp.1201-03 (ALGA).
[4] Submission No.631A, p.1 (ALGA). See also
Committee Hansard, 11.2.99, p.744 (VLGA).
[5] Submission No.887, p.4 (LGSA).
[6] Submission No.631A, p.1 (ALGA). See also
Committee Hansard, 12.3.99, p.1202 (ALGA).
[7] Committee Hansard, 12.3.99, p.1202
(ALGA).
[8] Submission No.631A, p.1 (ALGA). See also
Submission No.742, p.6 (VLGA); Submission No.900, p.6 (WAMA); Submission
No.605, p.9 (MAV).
[9] Submission No.631A, p.1 (ALGA).
[10] Committee Hansard, 12.3.99, p.1201
(ALGA).
[11] Committee Hansard, 12.3.99, pp.1207,
1212 (ALGA).
[12] Committee Hansard, 12.3.99, p.1206
(MAV).
[13] Committee Hansard, 12.3.99, pp.1214,
1215 (MAV).
[14] Committee Hansard, 12.3.99, p.1202
(ALGA).
[15] Committee Hansard, 12.3.99, p.1216
(ALGA).
[16] Committee Hansard, 12.3.99, p.1208
(MAV); p.1210 (ALGA).
[17] Submission No.631A, p.10 (ALGA). See also
Committee Hansard, 12.3.99, pp.1212-13 (ALGA).
[18] Submission No.631A, p.5 (ALGA). See also
Committee Hansard, 12.3.99, pp.1202, 1207 (ALGA).
[19] Submission No.631A, p.11 (ALGA).
[20] Submission No.1387, p.8 (Northern Land
Council).
[21] Submission No.742, pp.7-8 (VLGA); Submission
No.900, p.2 (WAMA).
[22] Submission No.605, p.9 (MAV).
[23] Submission No.605, p.4 (MAV).
[24] Submission No.631A, p.12 (ALGA).
[25] Committee Hansard, 12.3.99, p.1205
(ALGA). See also Submission No.605, p.4 (MAV).
[26] Committee Hansard, 12.3.99, p.1202
(ALGA). See also Submission No.1302, p.1 (City of Onkaparinga); Submission
No.1367, p.1 (Coorong District Council); Submission No.1303, pp.1-2 (District
Council of Renmark Paringa).
[27] Committee Hansard, 12.3.99, p.1221
(MAV).