Inquiry into the Tax Laws Amendment (2005 Measures No. 1) Bill
Report of Senator Stephens
and Senator Murray
Outcome of the Committee Hearing on 26 April
Submissions made to the Committee by key representatives and
advisers to the tourism export sector put forward strong arguments that the
bill in its current form would create significant adverse impacts.
The testimony of witnesses at the hearing on 26 April 2005 strongly supported the
arguments made in these submissions.
Taken together the oral evidence and the submissions present an
overwhelming case against passing the bill in its current form.
The hearings incorporated some rather unusual eventualities
that are worthy of being reported to the Senate through this report.
1. Senator Watson
appeared to be in receipt of some crucial information relating to the number of
foreign tour operators (FTOs) affected by the proposed measure. This information was not made available to
the Committee, nor was it produced in evidence or via submissions to the
Committee. Still, the large number of
FTO’s alluded to by Senator Watson
(some 400 according to the transcript), bolstered arguments made by some sector
representatives that the overall impact of the measure may have been
underestimated by officials from the Treasury.
2. The nature of the
questioning of witnesses by Senators Brandis and Watson
appeared to be favourable towards the bill being amended to deal with concerns
raised by inquiry participants. Senator
Brandis invited witnesses to propose
amendments to the bill (especially the ICAA).
3. Senator Watson’s
questioning of Treasury officials secured the response that the bill was more
far reaching than simply an integrity measure designed to close the loophole
whereby FTOs could claim input tax credits without paying GST on elements of a
foreign tour package. This directly
contradicts statements made by the Minister that the bill is an integrity
measure only, placing officials’ statements
at variance of those of the Minister.
4. Deloittes, in a
supplementary submission following the hearing, called for the bill to be
returned to the House and recommended that the revenue figures be
clarified. While such a course is not
expedient, we call on Treasury to issue a revised costing as a matter of
urgency.
Deficiencies in the current bill
There seemed to be broad agreement from industry
participants and professional and advisory bodies in relation to the adverse
impacts of the Bill. They can be grouped into three main
categories.
1. The scope of
bill.
The bill appears to go beyond redressing the concern that
the some FTOs are claiming input tax credits without a GST liability. Naturally, we support the policy intent of
closing this loophole. Still, this must
be done without the adverse unintended consequences that appear to flow from
the way the bill has been drafted utilising the critical definition of
‘connection with Australia’
for assessing the GST liability. This
appears to create the opportunity for goods/services that will not be consumed
in Australia to be subject to the GST through the imposition of GST on the
wholesaler’s margin which appears to fall within the definition of 'having a
connection with Australia' under the bill.
We find the best summary of the position is put by ICAA:
Given that GST is intended to be a tax on Australian private
domestic consumption, it is not inappropriate for the charges by the Australian
service providers of accommodation, meals, etc which are consumed in Australia
to bear GST which is not refundable to the foreign tour operator or to the
overseas tourist. However, it is most inappropriate from a policy perspective
that the reach of the GST should extend to tax the margin derived by a
non-resident of Australia on a transaction with other non-residents of
Australia, which occurs outside Australia. Such a margin has no contractual or
economic connection with Australia
and should not be subject to GST.[111]
2. Timing of
the Bill’s introduction and the lack of
consultation.
We accept that there is a significant element of forward purchasing
of rights in the supply of accommodation packages by foreign tour operators.
With respect to the recovery issue, the impact on the FTOs
arises mainly from the operation of advance pricing arrangements associated
with tourism marketing. As FTOs typically market their Australian tours, in
brochures and other mediums, at least 6 months in advance of the tour actually
taking place there is little or no opportunity for an FTO to increase the price
of tours offered with a commencement date on or after 10 February 2005.
Therefore, for the duration of the advance fixed price period, FTOs will, in
all likelihood, need to absorb the impact of the GST.[112]
Given these timing issues, and the complexity of aspects of
the bill, the proposed legislation should have been circulated in exposure
draft form. We contend that any revenue
leakage that may have occurred through the input tax credit claimed during the
period when the Bill was being considered in
draft form, would have been justified by producing clearer and more enforceable
legislation. Fiscal pressures cannot
ever be an excuse for imperfect legislation, especially when the Budget
remained in very substantial surplus.
3. The lack of
enforceability of the Bill
ATO officials admitted during the hearing that the ATO does
not have the legal power to conduct an audit on FTO operating a foreign
jurisdiction. This is an clear admission
that the law is not enforceable. A law
that is unenforceable a priori, is poor jurisprudence, a fortiori.
4. Possible
breaches of the Trade Practices Act
Concerns have also been raised about possible breaches of
the Trade Practices Act associated with advertising a price without the GST for
which the GST is subsequently added. The
Treasurer has in fact indicated recently that he will be legislating on
component pricing to ensure that a single inclusive price is advertised. This concern needs to be dealt with and the
Minister should respond to this issue in the Committee stage of the Senate’s consideration
of the bill.
Options to amend the Bill
Amendments to this Bill have
been proposed by industry experts. We
take this opportunity to thank those how have included such amendment in their
submissions. The proposed changes fall
broadly into two groups. The first is to
apply an input taxing model which effectively removes the FTOs from the GST
system leading to no GST liability and no input tax credits (ATEC, IACA,
Deloitte). The further rules based model
of PWC would apply a special definition of ‘connected with Australia’
for non-resident entities as an exception to the basic rule that applies in GST
law.
Both models could achieve the desired outcome of reducing
the scope the bill to the primary policy intent of closing the loophole
associated the FTOs getting input tax credits.
We can accept either model, and call on the Government to return to the
debate on the Bill in the Senate with an
amendments that gives effect to one of these two proposed models.
The proposed amendments involving the PWC model do solve the
problems in the tax law in a much better manner than the original bill and
should be supported.
However, Opposition and Democrats Senators note that this
opting out approach to the GST system for FTOs will not apply to domestic tour
operators. This is a distortionary outcome
in the tax law. The Government should
come forward with further amendments to address this.
Conclusions of Opposition and Democrats Senators
We are of the view that the proposed amendments are a
satisfactory manner to solve the problem addressed but:
1. amendments should have
been provided with greater time for review and with an supplementary
explanatory memorandum; and
2. the amendments will
create non-neutrality of treatment between domestic and foreign tour
operators. The Government needs to address
this concern.
Senator Ursula Stephens
Deputy Chair
Senator Andrew Murray
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