Chapter 5

Proposed GST on Food

Introduction

5.1 The Government's proposed GST provides for the zero-rating of food for human consumption in a number of cases, and for input-taxing (or “exempting”) food for human consumption in a number of other cases.

5.2 Food provided to hospital patients except in the hospital cafeteria environment; to nursing home residents; to passengers on international airline flights and connecting domestic legs all represent examples of food the government proposes to zero-rate. Where a GST-registered business pays the costs of food consumption and that cost is currently income-tax deductible, but not an FBT –taxable fringe benefit, it would be zero-rated under the Government's proposed GST. Where a GST-registered charitable organisation is able to satisfy the Australian Taxation Office that it has supplied food at a non-commercial price (defined as less the 50 percent of the “market price”), that also would be zero rated under the government's proposal.

5.3 Food sold by suppliers with annual turnovers below the GST registration threshold and which opt not to register will be subject to GST input-taxation (or GST “exemption” in the jargon) under the Government's proposal. This same treatment would apply to home-grown vegetables, back yard chickens and eggs etc. Where a GST exempt business (such as a bank) pays the cost of food consumption and that cost is currently income-tax deductible but not an FBT-taxable fringe benefit, that food would be input-taxed (or “exempt”) under the Government's proposed GST.

5.4 Food for consumption by animals would be subject to 10 percent GST except where the feeding of the animals was an input into a GST-registered business activity (e.g. guard dogs, racing greyhounds, racehorses, circus animals, most farm animals). In those latter cases the rebating of the GST input tax would effectively render the animal food GST-free.

5.5 Except for the types of situations outlined in paragraphs 6.1 to 6.4, food would be subject to the standard rate (10 percent) GST under the Government's ANTS proposal.

5.6 When changes to the taxation of goods and services are being considered, one of the questions which always provokes intense discussion is the idea of a tax on food (sometimes linked also to other `necessities of life'). Current consideration of the proposed new tax system has proved to be no exception. A considerable body of evidence has been given to the Committee in support of both sides of the case.

5.7 The Treasury warned that the exclusion of food would destabilise the package as a whole:

In the absence of other changes, the exclusion of food, clothing and shelter from a GST would result in less taxation revenue and higher disposable income across the community than would be the case if these goods were taxed. However, this would mean that the package was unsustainable as a whole, with likely highly adverse economic effects on the fiscal balance, monetary policy settings, growth and employment.

To avoid these effects, the package would need to be substantially adjusted in other ways. [1]

Equity Concerns with the Taxation of Food

5.8 It was not disputed that in percentage terms, taxation of food is regressive because low income households allocate a higher proportion of their expenditure to food than high income households. This is illustrated most graphically in the following table generated by the Melbourne Institute:

SHARES OF EXPENDITURE BY QUINTILE

RANKED BY TOTAL EXPENDITURE (%) [2]

5.9 In its submission, the Australian Council of Social Service (ACOSS) commented:

ACOSS strongly believes that the interests of low income Australians would be better served by minimising the price increases … by removing food from the GST and thereby removing most of the $6 billion net increase in consumption taxes from the package. [3]

5.10 ACOSS took this position because, it was argued, the compensation proposed for low-income earners was insufficient and underestimated the price effects of the tax package for a major part of that sector. ACOSS referred to the Government's statements that low-income earners would be better off under the proposed arrangements. The problem, ACOSS said, lay in the methodology used by Treasury to calculate the price effects of the tax package.

5.11 In its calculations Treasury applied two particularly broad assumptions. It was assumed that all households have the same general expenditure pattern, regardless of income. It was also assumed that each household spent all of its income but no more, i.e. the level of savings was assumed to be zero.

5.12 Consequently, ACOSS claimed that the Treasury results had three key flaws:

• they did not take account of variations in expenditure patterns among different household types;
• they did not take account of variations in savings patterns for different households; and, consequently,
• underestimate the overall increase in prices faced by households. [4]

5.13 The St. Vincent de Paul Society also suggested that Treasury calculations considerably underestimated the price effect which would face those on low incomes. The Society made a number of recommendations, including:

• that the Government prepare, as a matter of urgency, HES and CPI data specifically for low income households ($30,000 and below) and undertake an assessment of the impact of the proposed tax package on low income earners;
• that the fundamentals underlying any tax changes be transparent and that certainty and justice be given to the interests of low and middle income earners;

a) that the Government re-consider the methods of compensation for the burden of the GST on the poor. [5]

5.14 The St. Vincent de Paul Society, disagreeing with Treasury's assumptions, carried out their own expenditure survey. The results, although from a very small sample size, showed that low income earners spend in excess of their income. Over 50 per cent of the households surveyed were in deficit. The Society concluded, from their experience, that even those who claim to have a surplus each week are only in surplus while everything is going smoothly.

5.15 High income groups purchase more expensive foodsbut still spend only about 10 per cent of their income on food. For low income families, the estimates range as high as 30 per cent. [6]

5.16 The Deputy-Director of the Centre for Labour Research at the University of Adelaide, representing the United Trades and Labour Council of South Australia, voiced concern that the Government's analysis assumed that a tax on consumption has the same effect on all households. He said that this greatly understates the negative impact on poorer individuals and added:

A more sophisticated analysis which takes account of these matters reveals that many low income households will be worse off. The distribution of benefits, already highly skewed towards the wealthy in the government's calculation, is even more so in more realistic modelling. Very high income households will be up to $4,500 better off, whereas some low income households will experience net losses of around a thousand dollars. The losses are especially marked for low income households with two children where both parents work and earn below $25,000. It is difficult to estimate how many households will be affected, but recent census data suggests that there are around 730,000 in Australia with incomes below $25,000. It is safe to assume that a significant proportion of these might be affected by the introduction of a GST. Much more research is necessary to measure the impact in this area.

Some of the policy implications of these outcomes might include: it is extremely difficult to design a compensation package which allows food to be taxed but still maintains equity; and it would be possible to exempt food and to make up for the loss of revenue with a modest scaling back of tax cuts and by applying other compensatory measures. Reason and international comparisons show that there is little credibility to the claim that exempting food would create insurmountable definitional and administrative problems. [7]

5.17 The Branch Secretary of the Community and Public Service Sector Union was asked whether improvement of the tax cuts/compensation in the lower income areas and removal of food from the GST, would make the package more acceptable to workers. She responded:

Yes, that is very accurate.

5.18 A consultant for the Union added:

The modelling that we have looked at suggests that compensation is not sufficient - particularly for poor people and couples with children. Our broad comment was that it is very difficult to start with a regressive tax like a consumption tax and then figure a compensation package. Our view is that it is much better to start with a progressive tax. I think the issues you have raised show how difficult it really is. [8]

5.19 The National Institute of Accountants, however, suggested in their submission that to achieve its equity goals the Government should use direct compensation and/or reimbursement of those most affected:

Excluding food and other necessities from the GST base will not be as effective as direct compensation/reimbursement in achieving equity. Excluding food and other items will:

• increase the compliance costs to business;
• create legislative instability because of interpretation difficulties, leading to greater opportunities for aggressive tax minimisation;
• will cost Government revenue an estimated $5 billion whereas direct compensation will cost the revenue an estimated $650 million;
• gives high income earners benefits whereas direct compensation or reimbursement does not; and distorts economic activity. [9]

5.20 Analysing the question of an exemption for food, Professor Quiggin of James Cook University, noted that, historically, the Australian public had been very resistant to the idea of a tax on food. He cited as examples the strong public reactions which followed the 1985 Tax Summit and the presentation of the first version of Fightback! in 1991. He suggested that proposals for tax reform would not succeed if they included a tax on food.

5.21 Professor Quiggin gave two main reasons for not taxing food. The first, which drew most of the comments in evidence, is that a tax on food is regressive. The second, is that little loss of efficiency would be caused by exempting or zero-rating food, because the demand for food is inelastic. [10]

5.22 Evidence about the regressive nature of a food tax was divided. The main point of dispute lay in the question of whether the effect is best measured by comparing the actual dollar amounts spent on food by different income groups, or by using a comparison of the percentage of disposable income used to buy food by each group.

5.23 Professor Quiggin described a tax on food as `highly regressive' and as effectively equivalent to a poll tax [11], which he called `the most regressive of all taxes'. [12] Support for this view was provided by work carried out by the Melbourne Institute in 1998:

… Food is … a higher share of total expenditure for households with low total expenditure. Households in the lowest quintile spend nearly 25 per cent of their total expenditure on food and non-alcoholic beverages compared to 13 per cent for those in the highest quintile. [13]

… a change … to a GST with minimal exemptions is likely to result in a loss of standard of living for the lowest expenditure quintile and a gain for all other quintiles with the gain increasing both absolutely and as a percentage of expenditure with total expenditure (i.e. the greatest gain to the highest expenditure quintile). However when food and health are zero rated most of the adverse distributional effects are mitigated and now households at all levels gain but the biggest gains remain with the highest quintiles. The distributional effects are not large and could also be offset by rather small adjustments to the social security and income tax systems. [14]

5.24 Other evidence was submitted which held that there are better ways of approaching the compensation issue. The National Institute of Accountants (NIA) commented:

Excluding food and other necessities from the GST base will not be as effective as direct compensation/reimbursement in achieving equity. Excluding food and other items will:

• increase the compliance costs to business;
• create legislative instability because of interpretation difficulties, leading to greater opportunities for aggressive tax minimisation;
• will cost Government revenue an estimated $5 billion whereas direct compensation will cost the revenue an estimated $650 million;
• gives high income earners benefits whereas direct compensation or reimbursement does not; and
• distorts economic activity.

Therefore, the NIA supports the contention that adequate direct compensation/reimbursement is the best, most cost-effective way of achieving equity. Other ways of trying to alleviate the impact of GST compromise the possibility of reducing complexity, increasing efficiency and achieving equity. [15]

5.25 Professor Neil Warren supported this approach in a paper published in 1996:

There is ample evidence that a GST which zero-rates food benefits, in absolute terms, the better-off households relative to the lower income households. The zero-rating of food is a poorly targetted means of compensating the lower income groups for the impact on them of taxing food. The superior approach is to do this directly through the social welfare system. [16]

5.26 In a later paper (December 1998), Professor Warren further noted:

Excluding various goods and services consumed by households from the GST would quickly erode the revenue potential of such a tax. Clearly, the broader the base of a GST, the stronger is the case for such a tax as a replacement of the current narrowly based WST. … Excessive exclusions from the base of a GST would quickly bring into question the argument that the introduction of a GST would significantly expand the base of Australia's current taxes on goods and services. [17]

5.27 Later in the same paper, regarding revenue estimates for the year 2001-2, he said that “if food was zero-rated, this would reduce revenue by over $5 billion.” [18] He contrasted this with the benefit which would flow to the poor as a result:

This might lead one to conclude as some have that food should therefore be zero-rated and the GST would be less regressive. The simple fact is that this approach to compensating for the effects of taxing food is quite inferior to directly targeting those groups which are adversely affected. This should be clear from the magnitude of the benefit to the lower income groups from zero-rating food. In effect, what zero-rating food has done is to reallocate about $2 b … which was initially on food to all other goods …Although low income groups do benefit, the benefit is marginal compared to the potential benefit from a compensation package which directly targets assistance. [19]

5.28 On the best way of assisting the poor, he said:

Even from an equity perspective, while zero-rating food does assist the poor, it is a very ineffective method of compensating those adversely affected by such a tax. [20]

5.29 Anglicare, like a number of other charitable organisations, was reluctant to support the idea of compensation for the poor rather than a GST exemption for food. Their submission identified three reasons for that reluctance:

1. compensation packages are unlikely to remain intact for long. They require highly visible government expenditure and in modern western economies there is always pressure on governments to reduce expenditure;
2. it is normal to make compensation packages as small as politically feasible and to restrict their coverage as much as possible; and
3. the lack of convincing arguments for a flat rate of GST, which would preclude separate treatment for food. [21]

5.30 The Master Builders Australia while supportive of the charities' aims noted that:

The analysis and research work undertaken by various tax experts in Australia show that exempting food could lead to the GST being set at 12.5 per cent or more if the integrity of the Government's Tax Reform Plan is to remain intact. Such an increase in the GST rate, we believe, can only have a negative impact on low income earners, thereby defeating the very objectives of achieving fairness and equity. It would seem to defy logic for lower income earners paying lower food prices but having to pay a higher rate of GST on all other goods and services. It would also seem perverse that high income earners would also be exempt from paying GST on food.

We believe that exempting food from the GST can only lead to negative downstream effects. … greater inequity and unfairness can only result in calls for more compensation, not only from low income earners but from other groups such as home owners and renters who will face higher costs due to a higher rate of GST.

MBA recognises that there is a proper role for Government in providing appropriate support to individuals and households in the Australian community, particularly those on low incomes. We do not believe, however, that making food GST-free in any will achieve such an outcome. MBA recommends that it would be far better for low-income earners to receive compensation through measures such as increased tax cuts and/or direct subsidies. Such an approach will achieve fairness and equity while minimising complexity and inefficiency. The granting of exemption for food under a GST can only lead to complexity and costs which will be borne by business and passed on to consumers, including those on low incomes.

Excluding food from the GST will have direct revenue implications that in turn will reduce the Government's capacity to introduce the extent of the proposed tax cuts and may lead to a higher rate of GST. Such an outcome would change the equation for many industry sectors and households. …

Such an approach would also have a direct import upon employment, … because of the inefficiencies that would be introduced by having one sector treated differently under the GST. [22]

5.31 The Business Coalition for Tax Reform agreed that the exclusion of food would pose significant problems:

… excluding food would add significant compliance costs, particularly for small business; tend towards creating a culture of non-compliance and activity that seeks tax avoidance; increase the administrative costs and the time spent by tax administrators and the courts in deciding what is and is not food for the purpose of tax; and reduce the general competitive advantages of a single rate, broad based indirect tax. We would lose an estimated 15 per cent of the GST revenue, which either would have to be found elsewhere or would mean that programs would have to be cut. We would reduce the amount of GST paid by the wealthiest 20 per cent of households by double the reduction for the poorest 20 per cent of households. In other words, for every dollar benefit received by the poorest 20 per cent of households, granting a GST-free status for food would deliver a benefit of $7.60 to the rest of the population.

5.32 We believe that equity concerns should be dealt with by using some of the additional revenue to compensate for any additional tax paid by low income earners. This approach is endorsed by a wide range of experts, including Professor Neil Warren. [23]The Australian Food and Grocery Council agreed with the necessity for maintaining the principles of a soundly-based tax system - equity, efficiency, simplicity and competitive neutrality. The Council's submission concluded that excluding the `necessities of life' from the GST would compromise those principles and would fail to deliver the expected social objectives. The Council also rejected the idea of differential taxes for food and non-alcoholic drink products.

5.33 The Council said the exclusion of food would have the effect of reducing revenue collections by 15 to 18 per cent and would compromise the internal integrity of the Government's overall tax package. It noted, however, that

There is little argument that excluding food from the GST will assist the poor, but there is no defensible argument that it is an efficient and appropriate mechanism of compensation. [24]

5.34 The Committee was surprised that the Baking Industry Association (NSW Employers) in their submission and evidence to the Committee were supportive of the proposed GST, despite the fact that their products are at present untaxed. When queried about this, the Association representative (Mr Firek) responded that “… we believe that the compensation package is sufficient to cover any possible price increases.” [25]

5.35 Earlier in his evidence Mr Firek had commented:

The way we see it, this is a package that we have been waiting for a long time. We support food being taxed at the 10 per cent rate and we do not support any special exemption for food whatsoever. The reason we do that is that we believe the tax system must have some integrity to it. We cannot see how you could pull $5 billion of food revenue out without a plethora of other industries clamouring for similar treatment. Before you know it, we could have a situation where the whole proposal is compromised. We have waited a long time for a system that is simple, transparent and easy to administer, and that is why we are supporting the current proposal by the government. [26]

5.36 We would like to see an end to, under the current sales tax system, the expensive litigation that we see regarding, for instance, whether something is self-raising flour or flour, which, of course, affects the rate of tax it is taxed at, and the constant questions of classification as to whether something is taxed at one rate or another. We think that a simple, transparent system where we simply subtract the tax paid on the inputs from the tax charged on the outputs and remit the difference to the government is the simple solution. Such actions, we feel, would see cost savings cascading throughout the system. [27]The Association's submission concluded by summarising their position:

• We believe the only way to maintain the integrity and attraction of the GST regime is to have no exemptions at all. The tax should be levied on all items or none.
• We are yet to see any definition of food or exemption from the GST which we consider would not be heavily detrimental to the industry.
• We believe the cost of compliance would be very substantial, but falling particularly harshly on small business.
• We firmly call on the Senate inquiry to recommend subjecting all products to the one simple flat rate of tax. [28]

Compliance Issues:

The issue of the compliance costs of zero-rating food has been the subject of considerable evidence to the Inquiry. A large number of submissions have pointed to the technical problems of defining food in Canada and the United Kingdom as evidence that compliance costs would be an intolerable burden, particularly for small business. [29] On this basis, accountancy and retailing bodies recommended that food be taxed but the regressive effect of such a tax on low income earners be addressed through the social security system.

5.37 The Australian Society of Certified Practising Accountants (ASCPA) setting out their key position on the question of the GST, included the following comments:

the GST should be broadly based and apply at a single rate to make it administratively simple - particularly for small business - as well as efficient and equitable;

it is essential that the position of low-income earners be protected from the impact of tax reforms. This should be addressed by close consideration of the compensation package - not through GST concessions. [30]

5.38 ASCPA also commented that overseas experience indicates that despite the underlying motives, GST concessions quickly become opportunities for evasion and avoidance in addition to assisting the needy. [31]

5.39 Indeed, the Australian Society of Certified Practising Accountants went somewhat further and called for the zero-rating of health and education also not be introduced due to the compliance costs for business. [32]

5.40 The Tax Commissioner, Michael Carmody, while strident in his concern about the compliance costs for food outlets, was not unduly concerned about the compliance costs for the 80,000 health, education and childcare outlets affected by the zero rating, bring into serious question his consistency on the issue of compliance costs. [33]

5.41 Beyond the assertions about definitional difficulties in Canada and the United Kingdom, very little evidence was received about the exact extent of the compliance burden on small business. The Tax Commissioner said up to 370,000 businesses would be “…in the business of distinguishing between GST and non-GST purchases and sales”, including services stations, newsagents and clubs selling snack foods. [34] This figure, however, appears to include 56,000 businesses affected by the zero rating of health, 20,000 by the zero-rating of education and 4,000 by the zero-rating of child care [35], suggesting around 290,000 will be affected by a broad definition of food. The ASCPA has produced a similar estimate of 300,000 businesses affected by the zero-rating of food. [36]

5.42 The Tax Office has not provided the Committee with a breakdown of the 290,000 figures. However, a cursory glance of published statistics raises questions about its accuracy. According to the 1996-7 Taxation Statistics published by the ATO, there were 1842 large businesses [37] and 211,286 small businesses in retail and 678 large businesses and 41,865 small businesses in accommodation, cafes and restaurants, a total of 255,671 businesses. If restaurants and cafes were excluded from the food definition, then the zero-rating applies only to the retail sector. The question then becomes how many retail outlets are engaged in food retailing.

5.43 The last ABS survey of the retail sector was conducted in 1992. The breakdown of the sector is summarised in the attached table:

SUMMARY OF RETAIL OPERATIONS 1991-92 [38]

5.44 This table shows that, excluding liquor and takeaway food retailing, food retailers make up just 15,652 out of the 83,596 retail outlets in 1992, or 19%. Applying that ratio to the Taxation statistics suggests that about 40,000 retail businesses would be affected by a zero-rating of food.

5.45 Unpublished data from the ABS obtained by the National Association of Retail Grocers and attached as Appendix 15 to their submission to the Retail Dominance Inquiry broadly confirms this figure. The data shows that in September 1998, there were 7835 supermarkets and grocery stores and 37,246 specialised food retailing stores. It should be noted that the later ABS data includes liquor stores and probably takeaway food outlets in “specialised food retailing” (which comprised half of all specialised food outlets in 1992). It also counts business locations rather than businesses. With the big retail chains dominating around 74 per cent of retail trade, [39] the number of actual grocery outlets is likely to be considerably lower than the number of business locations. It should also be noted that as food speciality retailers (eg. butchers, greengrocers) sell only food products, all of their produce would be zerorated, resulting in a much lower compliance cost than a grocer selling a mixture of goods.

5.46 What will their compliance cost actually be? The Tax Commissioner and the ASCPA both have referred to a United States General Accounting Office survey showing that zero-rating items increases compliance costs for the businesses affected by 30 to 50 per cent [40], with the ASCPA arguing that this would affect 300,000 businesses and add $100 million to compliance costs (including the restaurants and takeaway food sector). This is the only estimate produced of the compliance costs so far.

5.47 Given that the actual number of retailers likely to be affected by the zero rating is probably closer to 40,000, an eighth of the number cited by the ASCPA, then the compliance cost is likely to be only around $12 million using the ASCPA figures.

5.48 A different approach suggests that the compliance cost for small business arising from the zero-rating of food would be in the range of between $24–40 million in 2001-02. This is calculated by taking the gross compliance cost for 2001-02 from the Regulation Impact statement of $1.9 billion, multiplying it by 16% (the food component of the GST in 2001-02), multiplying that by 26% (being the current market share of small retailers) and multiplying that by 30-50% being the additional compliance cost burden estimated by Carmody based on the US study.

5.49 Even using the higher $100 million estimate calculated by the ASCPA, total gross compliance costs for the GST would rise by just 5.3%, suggesting that, in the overall scheme of increased compliance from moving from a WST to a GST, the impact of zero-rating food is quit small.

5.50 This minimal impact on gross compliance costs was evident in evidence to the committee from an expert of tax compliance costs, Mr Michael Walpole of the University of New South Wales. While Mr Walpole argued that zero-rating food would add to compliance costs of individual retailers, he conceded that there was no international evidence that it added greatly to overall compliance costs [41].

5.51 A major study of VAT/GST compliance costs by the United Kingdom National Audit Office cited by Mr Walpole found that the Canadian and United Kingdom VAT systems, which exempted food had lower compliance costs than the New Zealand system which fully taxed food. [42] While parts of this difference can be explained in various ways (e.g. lower business registration thresholds in the UK and a higher VAT rate), the general impression is clear that there is no huge gross compliance cost burden in countries that zero-rate food as compared with countries that do. Indeed, Professor Neil Warren, in his analysis of the compliance costs of the UK in his assessment of taxes on food concluded that:

It would therefore appear from the United Kingdom evidence that the burden on compliance of a GST, in aggregate, is not unduly serious. [43]

5.52 Computerisation of accounts has the potential to reduce the cost of compliance considerably. [44] This also applies to compliance costs associated with zero-rating. Indeed, the President of the New Zealand Employers Federation, in his advice to his Australian counterparts submitted to the Committee as part of the Australian Chamber of Commerce and Industry submission, confirms that computerisation reduces the cost even of zero-rated goods:

In any event, computers are programmed to calculate the GST at the appropriate rate on data entry, and if there is minor variation in the cents, no-one pays this any attention as there are swings and roundabouts situation brought about purely by the methodology of computers in the handling of percentages go.

As far as our export invoicing is concerned, these are all zero-rated and done automatically by computer, and as we are able to claim any input tax there is no added cost associated with our (zero-rated) exports. [45]

5.53 In summary, the Committee concludes that the compliance costs of zero-rating food as an issue is grossly overstated, particularly in the context of the huge increasing compliance costs associated with the introduction of a GST.

Macro-economic Effects of Zero-rating Food

5.54 The economic modelling carried out for the Committee by Professor Peter Dixon of the Centre of Policy Studies, Monash University, and by Chris Murphy of Econtech, included two simulations which used the exclusion of food from the GST as one of their parameters. It should be noted that the definition of food used in Monash simulation was a very limited one - meat, dairy products, fruit and vegetables, oils and fats, flour and bakery products. A summary of the key findings of the two reports is as follows:

EFFICIENCY EFFECTS OF GST-FREE FOOD

Peter Dixon Chris Murphy

Monash University Econtech

(** For his modelling, Peter Dixon used the Treasury generated CPI estimates. Treasury found that CPI would fall from 1.9% to 0.5% with food exempted).

5.55 The central simulation carried out by Monash sought to examine the effects of tax changes as set out in the ANTS document (i.e. with food subject to the GST). In the two simulations considered here, this scenario is varied by excluding food and by a balancing reduction in the level of tax cuts. The results are then assessed by comparing the results of two contrasting labour force reactions to the tax package.

5.56 In the central simulation, and the first of the other simulations, it is assumed that the labour force accepts the proposed tax cuts as compensation for the price increases caused by the introduction of the GST - this means that the labour force is concerned with the level of real after-tax wages. In the second simulation it is assumed that the labour force does not accept the tax cuts as full compensation and bids wage rates up - i.e. real pre-tax wages are the measuring point.

5.57 Comparing the results of these two simulations with the central simulation shows that:

• with after-tax wage bargaining, the exclusion of food produces a slightly improved short-run employment effect (employment rises by 38,000 instead of 30,000). In the longer term, the result is slightly lower levels of capital formation and GDP and therefore a slightly smaller economy;
• with before-tax wage bargaining, the exclusion of food has a greater effect in the short-term than the previous case. It shows a substantial reduction in the level of job losses produced by the central simulation (100,000 down to 68,000). In the longer term, however, it makes little difference to the outcomes produced by the central simulation of the tax package. [46]

5.58 In his evidence before the Committee, Professor Dixon confirmed these findings:

… I think the exclusion of food would have a short-run positive impact on employment and it had that on both wage assumptions.

In one scenario - I think it was sensitivity 4 - employment increased by 30,000 with food GST. As you moved and took the GST off food, the employment gain was 38,000. Under the other wage scenario - the sort of disaster scenario - the figures were 100,000 jobs lost in the central simulation. Take the GST off food and it is 68,000 jobs lost.

I think, in the short run, failing to GST food would have favourable employment effects. It does not mean that that is what you should do. You have got to think about the longer term, the compliance costs and the difficulties of making major exemptions. But I think the interpretation that the short run would be easier if GST were not applied to food is right. [47]

5.59 In his review of the Monash conclusions, Mr Chris Murphy of Econtech reached similar conclusions. In giving evidence regarding his findings Mr Murphy said:

… as for making food GST free, I have simulated that as well, as has Monash. The conclusion I have reached is that the efficiency of that is neutral to slightly negative. The effect on simplicity is negative. The effect on equity is positive, but it is better to leave food in because the equity objective would be more efficiently met through income tax and social security measures.

5.60 In a discussion with Committee members, Professor Dixon and Mr Murphy summarised their conclusions on the merits of excluding food from the GST:

Professor Dixon:

The result in our report was that there was little impact on economic welfare in the long run - I think that is right - but that in the short run there might possibly be some advantage in leaving food out. It made the labour market transition easier for reasons that I explained last time.

Leaving food out meant that there was less pressure on wages to go up. There is quite a detailed explanation of that argument. It does not mean that you want to do it, but there was some short-run advantage in leaving food out and little measurable long-run disadvantage.

… we found little long-run disadvantage and some short-run advantage.

… you have to think about all the various things that are left out of our sort of model, which are to do with compliance costs and so on. That actually is covered very well, I think, in Chris Murphy's report.

Mr Murphy:

On that issue I get much the same result - taking food out shaves the welfare gain, but not by a lot.

Prof. Dixon:

Or you could choose to describe it as negligible but negative.

Mr Murphy:

Yes, I would agree with that. The main issue is the simplicity issue, and that is a point which Peter discusses in his paper as well - that taking food out would substantially increase the compliance costs especially, and that is not taken into account in the modelling. So that is something that needs to be considered.

The other issue is the equity issue, of course. The view of most economists … would be that the right instruments for dealing with equity are the income tax and social security systems, not by having special exemptions from particular indirect taxes. It is just a much sharper, more efficient way of dealing with concerns about equity. So my view would be that, because of the simplicity issue - which I have not modelled and on which I am just offering my opinion - food should be left in, and concerns about equity should be addressed through the income tax and social security systems.

Impact on Rural Industries

5.61 The Committee has received mixed evidence on the impact of the GST on food on agricultural industries.

5.62 The National Farmers' Federation (NFF) stated that it is solidly opposed to the idea of any exemptions from a consumption tax regime. At its Council meeting in November 1998 it was resolved:

That the NFF continue to press for a broad-based GST and strongly oppose any further narrowing of the base to which the GST applies. [48]

5.63 In a submission to this Committee the NFF set out its objective as:

… a simpler, more transparent indirect tax system that removes the distortions and impediments to economic growth inherent in the current system, without disadvantaging people on low or fluctuating incomes. [49]

5.64 The NFF indicated that, in support of this goal, it would be unlikely to support a reform package which included a narrowly based GST - i.e. which did not include things such as food, clothing, books, shelter and `essential services' in the tax base. Its submission described the narrowing of a GST tax base to solve the problem of regression in indirect taxation as an “exceptionally blunt instrument”. It argued that “most farm families would be better off under the Government's package” [50]

5.65 However, other evidence to the Committee has suggested that zero-rating of food would have a negative effect on the agricultural sector. The Australian Fresh Stone Fruit Growers Association told the Inquiry that their organisation was not a member of the National Farmers Federation, which tended not to represent horticulture:

Agriculture cannot be lumped together in one hit. The grains industry would have the reverse effect from us. They would benefit greatly from a GST because a significant part of their costs are in such areas as freight and transport where it is not so in our industry. [51]

5.66 ANTS indicates that the GST will result in much higher price increases for fresh food products (6-7 per cent) - three times that of the economy as a whole (2.2 per cent) and four times that of confectionary and snack foods (1.7%) [52] In the long term, the Murphy and Monash models forecast a modest 1% rise in agricultural output as export growth outweighs falls in domestic demand, although Murphy forecast a long term loss of 500 jobs in agriculture [53]. . In the short-term, additional modelling for the Employment Committee shows there will be a loss of 10,600 jobs across agricultural and food industries according to the Monash modelling for the Employment Committee. In percentage terms, only the Entertainment Industry will be worse hit than food and agriculture [54]:

SHORT TERM EMPLOYMENT LOSSES IN FOOD AND AGRICULTURE

5.67 By contrast, the Monash modelling showed a gain to the economy of 8-12,000 jobs from the zero-rating of food, with food and agriculture industries major winners. The Murphy model showed that zero-rating of food would double the positive effect of tax reform for agriculture.

5.68 This Inquiry has received a number of submissions concerned about the impact of the GST on agriculture. The Australian Beef Association opposed the GST outright, arguing it would lead to a major 9-10 per cent reduction in domestic beef sales (sub. 459), The Dairy Farmers organisation predicted a major reduction in the supply of milk, and called for milk to be zero-rated as one of the staples or necessities of life (sub. 1039). The Australian Fresh Stone Fruit Growers Association warned that:

There is a very real risk of the Federal Government inadvertently steering general community consumption away from fresh fruit and vegetables towards manufactured snack foods because of the proposed change in tax, and associated price initiatives. [55]

5.69 Mr Trautwein, Deputy Chairman of the Association, in his evidence to the Committee, expressed serious concern about the impact of such price competition on sales of output from his industry:

There should also be consideration given to the diet of Australians and appropriate exemptions dealt out to those foods which are essential for a person's diet and which lead to a good and healthy life. [56]

5.70 The Mackay Fruit and Vegetable Grower Association also called for staple food to be excluded from the GST, arguing that:

The Government should be doing everything in its power to educate people to the benefits of consuming fresh food and making these foods as attractive as possible in the market place. In fact, we view a GST on staple foods as a real kick in the guts after years of devoting ourselves to quality management and safe food ideals such as HACCP. [57]

5.71 Dr Graeme Cole, a former university lecturer and New South Wales fruit grower, also argued for a fresh food exemption, arguing that a failure to do so would mean that:

Producers will suffer severe economic losses due to reduced returns. The Government which imposed such a tax would be seen to be uncaring of its effect on the poorer section of the community despite protestations that compensation is being considered. The Government would also be seen to be uncaring of the effect on the bulk of the primary producers of Australia. [58]

5.72 The Banana Sectional Group Committee (BSGC) of Queensland Fruit and Vegetable Growers is the representative body of 800 Queensland banana producers, producing about 75 per cent of Australia's total production. 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.

5.73 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.

5.74 Ms Milgate said her organisation did not have a firm view on removing the GST on food as “we have not modelled it.” [59] However, she said her industry was “greatly concerned” that a failure to pass on transport fuel price reductions to growers, or supermarket chains insisting that growers absorb the cost of the GST into prices would see medium producers' net disposable income reduced by 55.7 per cent [60]

5.75 The study incorporated the basic assumptions set out in the tax reform 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 hectares, 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 tax treatment of trusts. [61]

5.76 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. [62]

5.77 However if the transport savings are not passed on, the GST benefits for a medium producer in North Queensland would be reduced from $10,010 to $1,664, and for a large producer in North Queensland from $49,650 to $14,154. For smaller banana enterprises (which are to the near north of Brisbane where transport is a smaller component of costs) transport savings are a less significant issue. [63]

5.78 BSGC 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. 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.

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

That full price transparency, that is actual plus full 10percent GST, be displayed to consumers at the retail point of sale. [64]

5.80 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.

5.81 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.

5.82 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. [65]

5.83 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.

5.84 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 the imposition 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.

5.85 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.

5.86 Like the BSGC, the ABA expressed concern with regard to the incredible purchasing power of supermarkets. Three supermarket chains now sell over 40% of all retail beef in Australia and effectively set the 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 result in a reduction in the wholesale price paid to producers.

5.87 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. [66]

5.88 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.

The Effect of the GST on Food Pricing

5.89 When conducting the July 1998 CHOICE supermarket survey, ACA found competition in some areas was very fierce, but at the same time consumers in other areas of Australia were paying higher prices for basic food items. There are a number of data sources that show differences in food prices, with higher prices paid the further consumers are away from the east coast supply chain:

The survey found that consumers in Hobart were paying 21% more for their basket of goods than consumers in Newcastle. Darwin residents were paying 13% more. [67]

5.90 In 1997, Territory Health Services' nutritionists surveyed twenty Aboriginal community stores in the NT, revealing that breads and cereals, fruit and vegetables were, on average 35%, 28% and 26% more expensive respectively in Aboriginal community stores than the supermarket in the nearest regional centre. The highest price paid for fruit was 72% more than the supermarket price. [68]

5.91 Similarly in North Queensland, a representative basket of `healthy' foods surveyed in the first quarter of 1997 was found to cost 126-175% of Brisbane price in 26 of the 62 community stores surveyed. In 7 of the stores the basket cost more than 175% of Brisbane prices. The highest price and the poorest quality were found in the remote communities of the Cape and Gulf. [69]

5.92 The Committee also received extensive evidence that higher food costs, combined with lower incomes in regional areas would mean that food consumption could be particularly adversely affected in rural areas. [70] Spending on food consumes 15.5% of the household expenditure of rural households, as compared with 13.2% of spending for metropolitan households. [71] The National Rural Health Alliance called for a full exemption of food including “over the counter medicines” arguing:

Such an exemption would remove the bias in the package against the less formal forms of health care more widely used in rural and regional Australia. … Because food is a higher proportion of rural and remote expenditure, and because of the role of rural and remote areas in food production, such an exemption would also improve the equity of the package from an urban/rural perspective. [72]

5.93 Other submissions called for a major increase in zone allowances and payments to offset the increased GST payments due to the higher cost of living in regional areas. [73]

5.94 The Community Affairs References Committee has reported that the imposition of the proposed GST on food items at present exempt from the wholesale sales tax would be likely to have deleterious consequences for the health of many Australians, particularly low income earners. [74] The Dietitians Association, for example, argued that:

Dietitians and many other professionals in the public heath and health care sectors, believe that a GST on basic foods will make it harder to protect the nutritional heath of Australians and could impact on the already overburdened health are system. The strategy runs contrary to the efforts, including those by Government, to promote the Dietary Guidelines for Australians, to promote the strategies for Acting on Australia's weight and Active Australia; and to encourage greater consumption of fruit and vegetables. Healthier eating is one of the most accepted and cost effective action we can take to reduce the human and dollar cost to the community of many preventable heath problems. For example, the increasing incidence of overweight and obesity amongst adults and children in Australia has been well documented (National Health and Medical Research Council report Acting on Australia's weight: a strategic plan for the prevention of overweight and obesity). This in turn is leading to an increase in type 2 diabetes resulting in an additional burden on the community, health care costs and systems. [75]

Footnotes

[1] Submission No.121.

[2] Melbourne Institute, Tax Reform: Equity and Efficiency, Report No 2, March 1998, p.9.

[3] Submission No.68.

[4] Submission No.68.

[5] Submission No.300.

[6] Submission No.300.

[7] Evidence, pp. 1043-4.

[8] Evidence, pp. 1047 and 1049.

[9] Submission No.1263.

[10] Submission No.78.

[11] Poll Tax: a tax under which everyone pays the same absolute amount.

[12] Submission No.78.

[13] Tax Reform Equity and Efficiency, Report No.2, Indirect Taxes: Evaluation of Options for Reform, Melbourne Institute of Applied Economic and Social Research, March 1998, pp. 9-10.

[14] Tax Reform Equity and Efficiency, Report No.2, Indirect Taxes: Evaluation of Options for Reform, Melbourne Institute of Applied Economic and Social Research, March 1998, pp. 29.

[15] Submission No.1263.

[16] GST. The long, winding road, Neil Warren for the Institute of Chartered Accountants in Australia, December 1996, pp. 34-5.

[17] Food, Staple of Life or Staple of the GST?, Neil Warren, ATAX, University of NSW, 16 December 1998, p.5.

[18] Food, Staple of Life or Staple of the GST?, Neil Warren, ATAX, University of NSW, 16 December 1998, p.7.

[19] Food, Staple of Life or Staple of the GST?, Neil Warren, ATAX, University of NSW, 16 December 1998, p.9.

[20] Food, Staple of Life or Staple of the GST?, Neil Warren, ATAX, University of NSW, 16 December 1998, p.5.

[21] Submission No.624.

[22] Submission No.338.

[23] Evidence, p. 608.

[24] Supplementary Submission No.340A.

[25] Evidence, p. 2073.

[26] Evidence, p. 2063.

[27] Evidence, p. 2063.

[28] Submission No.923.

[29] Submission No. 205, Submission No. 207, Submission No. 1033, Submission No. 340.

[30] Submissions No.205.

[31] Submissions No.205.

[32] Evidence p.569.

[33] Evidence, pp.2247-8.

[34] Michael Carmody, speech to the Taxation Institute National Convention Hobart 24/3/99 p. 13

[35] Evidence p.2247

[36] ASCPA media release 10/2/99

[37] Taxation Statistics 1996-97 table 6.2

[38] ABS Retail Industry 1991-92 ABS cat. No 8625p.11

[39] Submission No 207.

[40] Evidence p.2236, media release10/2/99.

[41] Evidence, p.1781.

[42] Submission No.1392.

[43] Food, Staple of Life or Staple of the GST?, Neil Warren, ATAX, University of NSW, 16 December 1998, p.16

[44] Econtech report p.3; Walpole evidence p.1782; also Carmody's speech pp.9-11, ASCPA “Tax Reform Issues for Small Business” April 1999 discussion paper pp. 28-28

[45] Submission No. 864

[46] Senate Select Committee On A New Tax System, First Report, February 1999, pp. 174-177 and 197-199.

[47] Evidence, pp.545-6.

[48] Supplementary Submission No.98A.

[49] Supplementary Submission No.98A.

[50] Supplementary Submission No.98A.

[51] Evidence p. 1072

[52] ANTS p.170.

[53] Econtech Report p. 26-8

[54] Monash report to the Employment Committee p.13

[55] Submission No.85.

[56] Evidence, p.1078

[57] Submission No. 951.

[58] Submission No.1217.

[59] Evidence, p.1411.

[60] Evidence p. 1403-4.

[61] Evidence, p.1400.

[62] Evidence, p.1400.

[63] Submission No.713.

[64] Evidence, p.1400.

[65] Submission No.459.

[66] Submission No.459A.

[67] CHOICE, July 1998, p8.

[68] Submission No.928.

[69] Submission No.928.

[70] Submission No. 928, Submission No. 801, Submission No.732.

[71] Submission No.732.

[72] Submission No.732

[73] Submission No.1042

[74] Submissions No.895, Submission No. 796, Submission No. 801, Submission No.732.

[75] Submission No.796.