Chapter 15
Other
IssuesPricing and Profit Margins15.1 The Government asserts that
the tax reform package is expected to deliver substantial long-term improvements
in the operation of the economy, to the benefit of all Australians. In the short-term,
the package might be expected to have transitional effects upon both demand (particularly
its pattern) and prices. 15.2 The pattern of demand in the economy is likely
to change in the period immediately preceding and following the introduction of
the tax reform package. The Government argues that the overall effects on economic
activity during this period are likely to be small and dominated by the fiscal
stimulus inherent in the package. 15.3 The Government asserts that on average
across the economy as a whole the price level is expected to be broadly unchanged
with a one-off rise in the overall prices of investment and export goods and services.
The ANTS package argues that these relative price changes must be allowed to occur
to bring about the more efficient allocation of resources flowing from the indirect
tax system. On this basis the Government argues that the introduction of a GST
is unlikely to lead to an increase in inflationary expectations and on-going inflation.
[1] Prices and the Tax Package15.4 Shop,
Distributive & Allied Employees' Association (SDA) contends that a number
of assumptions were made in the government's ANTS document which are highly questionable.
These assumptions are : - The estimate “……assume(s)
that the abolition of the wholesale sales tax would be passed through fully to
consumers in the form of lower prices.
- “Similarly, it is assumed
that lower transport costs due to cheaper diesel for road and rail transport are
passed through in lower prices for consumers. [2]
15.5
SDA quoted Colin Hargreaves, the Director of the Economic Modelling Bureau of
Australia, writing in the Financial Review on 7 December 1998 as saying: …from
our discussions with companies, it is clear that many of the cost reductions will
not be passed on to the consumer but the GST will, by its nature. This leads to
a temporary increase in corporate saving and a concomitant reduction in final
demand. With 50 per cent “pass on”, the fiscal stimulus to demand
from the package becomes an equally large contraction in final demand. 15.6
The Committee heard evidence from representatives of the Australian Council of
Social Services (ACOSS) whose concerns were on the likely effects of the GST on
low income households that mainly rely on government benefits for their income.
Members of the Committee queried as to whether the Melbourne Institute estimates,
which ACOSS had relied upon in their submission, assumed that 100% of the tax
savings arising from abolition of existing taxes on consumption would be passed
on to consumers. 15.7 ACOSS in answer to this question on notice, noted
that the Melbourne Institute estimates assume that 100% of the reductions in tax
due to the abolition of existing consumption taxes are passed on to consumers.
Notwithstanding this, calculations made by ACOSS indicate that at least one million
households would be worse off during at least the first year of introduction of
the GST. In reality as the full 100% in tax savings is unlikely to be passed on
to consumers, ACOSS envisaged that low income household will face even higher
average price increases, especially in the first few years. 15.8 Arthur
Andersen, as an adviser to many businesses (including government owned businesses)
with varied and diverse interests, submit that the legislative framework for tax
reform must seek to achieve the highest level of integrity and its implementation
should be equitable and practical for business and the wider community. 15.9
Arthur Andersen expressed concern that the Government's expectations, enforced
through the new powers proposed for the Australian Competition and Consumer Commission
(“ACCC”), will put business in a position where it is artificially forced
to reduce prices (before the GST effect) without any commercial justification.
15.10 Arthur Andersen submitted : We support and encourage the Government's
attempts to ensure that realised cost reductions from tax reform are, in fact,
passed on as price reductions for goods and services, but we are concerned that
penalty measures may be applied in circumstances where those cost reductions are
not in fact forthcoming or where business simply cannot identify, and quantify
those reductions. In circumstances other than blatant price exploitation, we submit
it is not appropriate to penalise business by directly or indirectly enforcing
unsupported price reductions. This aspect of the transition process is, we feel,
underestimated. The impact of GST on regulated prices, the timing of realisation,
recognition and quantification of cost reductions along with the recognition of
the additional costs flowing from the implementation of the GST will put business
under severe strain in coming years. [3] 15.11
Australian Consumers' Association (ACA), an independent not-for-profit, non-party-political
organisation established to provide consumers with information and advice on goods,
services, health and personal finances, believes that the major goal for any tax
system is to redistribute wealth in a way that is equitable, sustainable and efficient.
ACA noted that the greatest strength of the proposed tax package is its ability
to deliver improved simplicity within the system. However, ACA submits : By
removing the multi-levelled WST which currently varies from state to state and
replacing this with a flat rate of GST, structural and compliance efficiencies
are easily addressed. Unfortunately, failing to require the disclosure of GST
at the point of sale or per transaction means that the government has not addressed
the issue of transparency. [4] 15.12 ACA acknowledged
that it is difficult to predict the change in our inflation rate due solely to
the introduction of a GST. ACA also expressed serious concerns about the effects
on pricing of the new package. These concerns are based on a serious lack of competition
in some areas of the economy. The failure of the government model to consider
transaction costs further complicates the prediction of the effect on prices.
In order to determine the amount of GST to be paid, businesses will have additional
costs such as record keeping, staff training and the possible addition of new
software. These initial and ongoing costs will be passed onto consumers, increasing
the price impact of the GST. [5] The effect
of competition15.13 Minimising the impact of the GST on prices requires
highly competitive markets to ensure the costs involved are not inflated or unnecessarily
passed on to consumers. Under the government's assumptions all markets are perfectly
competitive, thus the price impact is minimal. Unfortunately not all markets are
perfectly competitive. Throughout its research, ACA is repeatedly encountering
markets where competition is lacking. In these markets, ACA noted that the price
impact will be higher because competition will not ensure that costs are absorbed.
15.14 On the other hand, the Road Transport Forum claims in its submission,
that the Australian road transport industry is highly competitive and believes
that there can be little doubt that cost savings attributable to the GST Package
will be passed on. The Road Transport Forum has every confidence that with the
reforms in the tax package, the same pattern will emerge as with the Iraqi oil
crisis when road transport costs first rose very quickly as international fuel
prices rose, and then fell equally quickly when international fuel prices settled
down again. 15.15 ACA submits that while higher prices may be influenced
in part by transportation costs, the extent to which the Government's proposal
to reduce fuel taxes could lead to savings on food by consumers in remote areas
is a matter of great debate. ACA also expressed concerns that savings will not
be passed onto consumers, especially in remote areas where there is little competition
between transport companies. 15.16 The results of a recent supermarket
survey commissioned by Life. Be In It were also quoted by ACA as an area of concern
especially with regard to higher food prices in areas with less competition. The
Centre for Media Research and Community Opinion found in August/September 1998
a 9% cost difference on grocery items between markets where a discount supermarket
was present and where it was not. Further, there was a 16% cost difference for
fresh produce on the same basis. The difference between stores within a supermarket
chain was found to be as high as 31%. [6] 15.17
In assessing these results, ACA is of the view that inequity in pricing is going
to be further compounded by a GST on food. It suggests that not only are there
areas with less competition where consumers are paying more for food items, but
they are also paying more tax. The `cascade effect'.15.18 The
government has argued that the current system for collecting indirect taxation
revenue is structurally inefficient. The wholesale nature of indirect taxation
tends to increase prices by more than the amount of tax collected. This is sometimes
described as a `cascade effect'. ACA fears that not only will a 'cascade effect'
of this type continue to occur under the new tax regime, because of the use of
a value added tax to implement a goods and services tax, but that price adjustments
will be made on the inflated retail price, rather than the wholesale cost. 15.19
ACA encourages the government to : - Adopt consumer education campaigns
and introduce easy access to complaints mechanisms as part of the ACCC's role
in formal retail price monitoring. The inflationary effect of the new tax system
is the subject of much debate, and there will be some areas that require additional
surveillance where competition is lacking. ACA's recommendations for particular
areas with unique competition concerns are :
a) monitoring of both
aggressive competition in some areas and monopolistic practices in other areas
of the retail food industry. b) a price monitoring role for the Commonwealth
Department of Health and Family Services in the health area, for example using
Medicare statistics already calculated. - The inclusion of the GST
at any point of price disclosure to ensure greater understanding of the individual
consumers' tax burden. Full disclosure of the GST also helps to counter cascading
prices that can occur as a result of a value added method of tax collection. ACA
has urged the government to improve the level of disclosure by legislating that
prices must be given with the GST `on top'. This will improve the transparency
of the tax and make price monitoring simpler.
- Replace the value added
system with a retail only consumption tax.
15.20 In Canada prices
are given as the amount `plus GST' with the total transaction broken into these
components, given on the receipt. This allows consumers to understand the effects
of the GST on the price they pay, and to calculate the tax burden they are incurring.
The UK system is more arbitrary, with some large chains giving a price breakdown
receipt to travellers. 15.21 The Committee heard evidence from ACCC in
relation to its role in price surveillance for the GST to ensure that the anticipated
net reduction in price is passed on to consumers. It would appear that pending
the passage of the legislation that is currently in the House, ACCC is positioning
itself to preparing guidelines for industry, with industry, and to educate industry
as to its compliance obligations under the new regime. 15.22 The Committee
also heard evidence about the limited legislated powers and resources which ACCC
currently has to contend with in conducting its operations. ACCC advised that
it relies on policy instruments such as : - the Trade Practices Act
which prohibits a number of forms of behaviour such as collusion;
- the
Prices Surveillance Act which has limited application in most industries; and
- various guidelines which have status in court
in monitoring
prices set in the marketplace. ACCC has argued that the very presence of the powers
of the ACCC and the fact that ACCC exists and that people are aware of ACCC's
powers, is inducement enough for people to do the right thing in relation to pricing.
15.23 The point was made clear to the Committee that further work is imperative
to ensure that the ACCC is empowered according to the proposed legislation, to
monitor the behaviour and behaviour patterns of industries with the introduction
of the GST. The Committee expressed some reservation with relying on the notion
of market forces ensuring that perfect competition will result to ensure a 100%
pass on of price reductions to all consumers. Cost of ATO Administration15.24
The Commissioner of Taxation, Mr Michael Carmody, appeared before the Committee
on 26 March 1999. When he was questioned regarding the likely administration costs
for the GST, the following exchange took place: Senator Gibson - In
the Age on 11 February your Mr Rick Matthews is quoted with regard to compliance
costs. He said that the tax office expects it will cost 0.88 per cent of revenue,
about $300 million, to collect the GST. This compares with 1.47 per cent in New
Zealand and 2.55 per cent in Canada. Would you care to expand on why you believe
our costs will be lower than in New Zealand and Canada, and are those estimates
correct? Mr Carmody - You need to be careful with revenue, because
rates vary and change the amount of revenue. I point out that, in preparing for
our administration, we have obviously had the benefit of implementations around
the world. We are doing it at a time when electronic service delivery is much
more viable. We are aiming to be the best at administering that. Inevitably, for
example, in the UK, which has a very complex set of exemptions - not only zero
rating but variations - their costs are significantly higher because of that.
Whether that is a universal rule, it comes down to that question of what level
of compliance and intrusiveness do you accept. [7] Computer
Leasing15.25 Hitachi Data Systems Australia Pty Ltd (HDSA) is extremely
concerned that certain provisions of the Transition Bill as it currently stands,
will have a highly detrimental impact on HDSA and other companies in the computer
leasing industry. HDSA's submission calls on the Senate Select Committee to address
the lack of adequate transitional provisions in the GST Bills. 15.26 Computers
and other goods that are currently subject to WST at the rate of 22% will be significantly
cheaper, particularly for businesses, once GST is implemented. This is due to
the fact that WST will be eliminated, and those businesses will be able to effectively
purchase the goods GST free by claiming an input credit in relation to the GST
embedded in the price of the goods. 15.27 HDSA is concerned that demand
for IT equipment such as computers will fall sharply prior to 1 July 2000, due
to the significant incentive of savings on tax. These savings, suggests HDSA,
will compel buyers to defer purchases until after the GST comes into effect. This
would clearly disrupt trade in the lead up to the introduction of the GST. 15.28
HDSA propose two alternative methods of providing transitional relief to encourage
businesses not to delay purchases of capital equipment till after 1/7/2000:
- Reduce the sales tax payable on capital goods from 22% to 12% from 1 July
1999. This simple idea has been implemented for the brown goods industry (i.e.
television, stereo and video industry), whereby the Government has announced a
reduction in the rate of sales tax from 32% to 22% effective from the date when
the GST Bill receives Royal Assent.
- Allow business input credits for
the sales tax paid on equipment purchased prior to the introduction of GST. The
credit could be calculated on the basis of the proportion of the useful life of
the item that falls within the GST period. [8]
Joint
Ventures15.29 Ernst & Young provided evidence to the Committee on
the impact of the proposed GST on issues regarding the nature of joint ventures.
The proposed GST makes allowance for the joint registration of companies involved
in a joint venture in limited circumstances. The restrictive circumstances under
which joint registration will be allowed under the proposed GST, will result in
many companies being precluded from benefiting from joint registration and therefore
face significant compliance costs associated with the GST. Ernst and Young submit
that all joint venture purposes be included within the GST joint registration
provisions from the commencement of the proposed GST. 15.30 Ernst &
Young (EY), on behalf of their clients in joint ventures, noted that the Australian
economy benefits greatly when the expertise and resources of companies can be
pooled together in a joint venture. Division 51 of the GST Bill provides for joint
registration as a GST Joint Venture for some companies that are participating
in joint ventures for the exploration or exploitation of mineral deposits. Companies
within a joint venture but do not satisfy the registration requirement for a GST
joint venture, must apportion taxable supplies and creditable acquisitions
and account for them individually. EY submit that this is an unnecessary and unreasonable
burden upon joint ventures. 15.31 A joint venture is not a separate legal
person. However, EY recommends that it makes more sense and reduces greatly the
cost of compliance to the companies involved in the joint venture, if for the
purposes of GST Joint Venture registration, and for GST compliance that the joint
venture be treated under the new tax system as a separate and individual taxpayer.
15.32 EY recommends that by treating a joint venture as a single taxpayer
under the proposed GST legislation, the total amount of GST payable to the Commissioner
for Taxation is not reduced, that the legislation as a package is not complicated
or compromised in any way and that the compliance costs, for the joint venturers
individually and for the joint venture as a whole, is greatly reduced. 15.33
EY indicated too that there should not be any discrimination of purpose when granting
registration as a GST Joint Venture to companies participating in joint ventures.
The same considerations that apply to joint ventures formed for the purpose of
exploration or exploitation of mineral deposits should be applied equally to all
joint ventures. 15.34 The Committee heard evidence that foreign companies
are precluded from being members of joint ventures in Australia under the GST
provisions, nor do the provisions allow a joint venture participant to be a member
of another GST group. EY asked the Senate, through the Committee, to amend the
registration requirements of the GST legislation to allow more joint venture participants
to be able to register as a group, to remove the restriction on foreign entities.
Legal Services15.35 The Law Council of Australia raised some of
the more important aspects of the goods and services tax that impact on the provision
of legal services. The Council submit that consideration should be given to the
GST being recognised explicitly as an addition to fees – rather than treated
as a deduction from fees rendered. The major costs involved in the provision of
legal services are labour costs. Although the GST does not have direct implications
for PAYE salaries and wages, these costs will be affected in the legal profession
if the full cost of GST collected on legal fees cannot be passed on to purchases
of legal services. [9] 15.36 The GST is more
easily viewed as applicable in the manufacturing sector where value is added as
goods pass through progressive stages of manufacture. In the professional services
sector (which includes lawyers, accountants and consultants), value is created
almost entirely by owners and employees using their knowledge, skills and experience
in the “production process”. Given the low level of non-labour input,
the amount of GST that most law firms will be able to offset from input tax credits
will be very limited. 15.37 In the Council's view it is therefore necessary
for legal firms to try to pass on most, if not all, of the cost of the GST in
the form of increased fees. However, there are a number of factors that will limit
the capacity of law firms to pass on the impact of the GST to purchasers of legal
services. These relate to fixed fee structure and fixed price contracts. Legal
practitioners undertake work for legal aid commissions, courts and other clients
where fees are fixed by regulation, determination and agreement. Unless governments,
courts and tribunals can be persuaded to accept charging of GST on top of fixed
fee formulas, legal practitioners will be disadvantaged by having to effectively
bear the cost of the tax from their own incomes. Where fees are regulated
by governments, courts and tribunals, specific action will be necessary to increase
fees to ensure that legal practitioners do not carry the burden of the GST and
that the incidence of the tax is passed on to the user. [10]
15.38 The Council also noted that unless the GST collected on legal services
can be fully passed through in increased fees, the tax will effectively reduce
the incomes of owners and staff of law firms. In this respect, the GST will amount
to an additional income tax. 15.39 Some law firms rely for a significant
amount of work on fixed price contracts with certain “threshold” limits.
For example, government contracts in NSW have a threshold of $50,000 before public
advertisement is required. Unless purchasers are prepared to increase base contract
prices, law firms will be disadvantaged as a result of : - Reduced
returns – having to pay the GST which was not previously payable
- Additional
work to win tenders in a more competitive environment if thresholds are not increased.
15.40 The Council recommends that government departments and agencies
will need to examine and increase contract thresholds to reflect the impact of
the GST on the cost of professional services, or specify the threshold exclusive
of GST. 15.41 The Council is also concerned that the ACCC and other price
surveillance authorities may not be comfortable with the price of goods and services
increasing by a full 10 per cent on top of current prices – due to their
lack of understanding of the cost structure of legal (and other) professional
service practices. It recommends that consideration should be given to explicitly
recognising the GST as an addition to the price of services rather than
a deduction from it. 15.42 Freehill Hollingdale & Page noted
an instance whereby an offer was made by a third party purchaser, but is only
able to be accepted by the vendor during the period 1 January 2002 to 30 September
2002. The terms of the offer for sale of the property were agreed at the time
of the offer and no variation is possible without the express consent of the offeror.
In particular, the offer price is fixed and does not include any taxes which may
be payable. In the event that Freehill's client does not accept the offer during
the agreed period, the client is bound to enter into a long-term lease of the
property with the offeror, the terms of which have already been agreed and which
are particularly unfavourable to the client. That is, there is a deliberate commercial
bias towards Freehill's client accepting the offer to sell. 15.43 Freehill
submits that the Transition Bill will not apply in these circumstances as there
is only an offer, rather than a written contract, in existence prior to 1 July
2000. Therefore, in accordance with the Main Bill, if the offer is accepted and
the sale of the property takes place, the vendor ( client) will be required to
remit GST of one eleventh of the consideration received, ie in the order of $9
million. 15.44 Freehill notes that this is a result that was not intended
by the parties at the time they entered the arrangement. GST was not publicly
contemplated by the Government at that time. As the Draft GST legislation currently
stands, the client would not be able to pass the GST liability on to the purchaser,
thereby resulting in a reduced sales proceeds to the client of almost $9 million.
15.45 Freehill submits that greater flexibility is needed in the transitional
provisions for GST to remove unintended consequences such as those outlined above,
and request the Committee to revisit the transitional provisions for GST and give
serious consideration to recommending amendments to these provisions. Senator
Peter Cook Chairman
Footnotes[1]
Tax Reform not a new tax, a new tax system p156-157 [2]
Submission No.553, p13 [3] Arthur Andersen, Submission
No.927, Executive Summary p2. [4] Australian Consumers'
Association, Submission No.928, p5 [5] Australian
Consumers' Association, Submission No.928, p13 [6]
Submission No. 928. [7] Evidence: Committee Hansard,
26 March 1999, p.2237. [8] Hitachi Data Systems
Australia Pty Ltd, Submission No 965 [9] Law Council
of Australia, Submission No.944, p3 [10] Law
Council of Australia, Submission No944, p8
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