GOVERNMENT SENATORS' REPORT
Commonwealth-State Financial Relations, Wine Equalisation Tax and
Luxury Car Tax1. INTRODUCTIONThis is to be the final report of
the Senate Select Committee's Inquiry into A New Tax System. The terms
of reference for this report were to cover the evidence relating to Commonwealth-State
financial relations, wine equalisation tax, and luxury cars. The section
of the Committee report on Commonwealth-State financial relations is misleading
because it refers to evidence from the Tasmanian and Queensland Labor Governments
which contained the normal hyperbole that occurs in the lead-up to Premiers' Conferences.
The important outcome with respect to Commonwealth-State financial relations was
the Intergovernmental Agreement (IGA) unanimously signed at the 9 April Premiers'
Conference. 2. COMMONWEALTH-STATE FINANCIAL RELATIONSAt the 1999
Premiers' Conference, six State Premiers (3 of whom are Labor Premiers) and two
Chief Ministers signed a landmark Intergovernmental Agreement (IGA) with the Prime
Minister that will transform Commonwealth-State financial arrangements. Under
the IGA, all States will benefit from tax reform by gaining a stable and robust
source of revenue in the form of the GST and the capacity to remove a range of
inefficient taxes. An indication of the support for the agreement reached
can be gauged from the comments of the Premiers after the Conference. For example,
NSW Labor Premier, Bob Carr said the following: I have got to say
that I have never been at a more successful Premiers' Conference in the four years
I have been in this job. [1] It does represent
a transformation. It is the national government handing over a growth tax that
is going to be the basis for State revenues from now on in. [2]
It gives us a growth tax in the place …[of]… smaller, messy business
taxes that we have had to count on, as we have tried to meet people's needs for
schools and hospitals and so on. [3] Queensland
Labor Premier, Peter Beattie, whose Government's ambit claim in the lead-up
to the Premiers' Conference is extensively quoted in the Labor and Democrat report,
stated after the Conference that: ... Queensland, if the GST goes through,
it's a matter for the Senate, will be better off. [4]
Tasmanian Labor Premier, Jim Bacon, was quoted in the AGE
as saying: I am the first Tasmanian leader to go to Canberra “and
come away not worse off.” [5] Victorian
Premier, Jeff Kennett, said: I think its (the Premier's conference)
a seminal day in Australia's history. It is now up to the Senate to recognise
its responsibilities and to discharge them in the same way. [6]
As foreshadowed in the Government's Tax Reform: not a new tax, a new
tax system, the Commonwealth will provide financial assistance to the States
to cover any temporary shortfall in their budgets that may result from the implementation
of tax reform. This transitional funding guarantee is an integral feature of the
IGA and will ensure that the budgetary position of each State will be no worse
off in the initial years following the introduction of the GST. The guarantee
in ANTS recognised that the benefits flowing to States under tax reform (from
the receipt of all the GST revenue, termination of State off-road diesel rebates,
lower prices on their purchases due to indirect tax changes and higher tax revenues
resulting from the economic benefits of tax reform) would for a short time be
outweighed by other aspects of the reforms. These include the abolition of financial
assistance grants and business franchise fee replacement payments, the removal
of nine State taxes, a reduction in State gambling tax revenues, the assumption
by the States of responsibility for local government financial assistance grants
and a first home owners' scheme, and payments to the Commonwealth for the administration
of the GST. However, as GST revenue increases at a faster rate compared with the
existing grants and narrowly based, distorting State indirect taxes, all States
will receive large financial gains. At the Premiers' Conference, the Commonwealth
agreed to provide further assistance to the States and Territories to recognise
the abolition of wholesale sales tax equivalent payments by their Government business
enterprises; to ensure that local government benefits fully from the removal of
wholesale sales tax and excises on their purchases; and to provide funding to
meet increased public housing costs, subject to the resolution of the new Commonwealth-State
Housing Agreement. The Commonwealth also agreed to more generous transitional
arrangements in the third year of reform. These changes benefited Queensland by
an estimated $147 million, with this amount to be contributed by the Commonwealth.
The IGA specifically stated: Reform Measures 5. The
Parties will undertake all necessary steps to have appropriate legislation enacted
to give effect to the following reform measures. (i) The Commonwealth will
legislate to provide all of the revenue from the GST to the States and Territories
and will legislate to maintain the rate and base of the GST in accordance with
this Agreement. (ii) The Commonwealth will cease to apply the Wholesale
Sales Tax from 1 July 2000 and will not reintroduce it or a similar tax in the
future. (iii) The temporary arrangements for the taxation of petrol, liquor
and tobacco under the safety net arrangements announced by the Commonwealth on
6 August 1997 will cease on 1 July 2000. (iv) The payment of Financial
Assistance Grants will cease on 1 July 2000. (v) The Commonwealth will
continue to provide Specific Purpose Payments (SPPs) to the State and Territories
and has no intention of cutting aggregate SPPs as part of the reform process set
out in this Agreement, consistent with the objective of the State and Territory
Governments being financially better off under the new arrangements. (vi)
The States and Territories will cease to apply the taxes referred to in Appendix
A from the dates outlined below and will not reintroduce them or similar taxes
in the future. · Bed taxes, from 1 July 2000; · Financial
Institutions Duty, from January 2001; · Debits tax, from 1 January
2001; · Stamp duties on marketable securities; business conveyances
(other than real property); leases; mortgages, debentures, bonds and other loan
securities; credit arrangements; installment purchase arrangements and rental
arrangements; and on cheques, bills of exchange and promissory notes, from 1 July
2001. (vii) Stamp duty on non-residential conveyances of real property
will cease to apply by a date to be determined by the Ministerial Council on the
basis that no State or Territory will be worse off in any year. (viii)
The States and Territories will adjust their gambling tax arrangements to take
account of the impact of the GST on gambling operators. (ix) Nothing in
this clause will prevent any Party from introducing anti-avoidance measures that
are reasonably necessary to protect its remaining tax base or liabilities accrued
prior to the date the tax ceases to apply. [7] The
IGA also established a Ministerial Council, to be chaired by the Commonwealth
Treasurer, to oversee the operation of the Agreement. It will meet at least once
a year. It is also envisaged that the Council of Australian Governments will meet
at least once a year for Heads of Government discussions. Queensland's
Concerns in Relation to Transitional ArrangementsIn the lead up to the
1999 Premiers' Conference, the Queensland Government opposed the proposed transitional
arrangements for the distribution of GST revenues and guarantee payments. ·
The Special Premiers' Conference on 13 November 1998 agreed that in the first
three years following the introduction of the GST, the Commonwealth would provide
a funding guarantee that would ensure that the States would be no worse off financially
in aggregate than they would be under the current arrangements. ·
In addition, it was agreed that payments of GST revenues and Commonwealth grants
would be made so that the budgetary position of each State would be no worse off
in each year. - This meant that during the first three transitional years,
GST revenue would not be distributed wholly in accordance with horizontal fiscal
equalisation (HFE). Revenue was to be distributed to meet the Commonwealth's guarantee
relating to the budgetary position of each State. Queensland argued that
the proposed arrangements were inequitable for Queensland taxpayers. This was
on the basis that, because Queensland does not impose FID and applies a lower
than average rate of tax for some of the other taxes to be abolished, a lower
rate of GST would be required to replace the abolished taxes. If Queensland did
not receive its full share of GST revenues on a pure HFE basis, Queensland argued
that its taxpayers would be penalised by an increase in their tax burden with
the additional tax paid flowing to the other States. The Commonwealth's
guarantee was that the budgetary position of the States would not be worse off.
At the Premiers' Conference the Commonwealth was prepared to meet Queensland's
request for revised transitional arrangements in the IGA. Consequently, GST revenue
will be distributed on a HFE basis after the second year of the GST, rather than
after the third year. The Commonwealth continues to guarantee that each State's
budget will be no worse off during the first three years, and will provide further
assistance to any State that may require it beyond this period. This outcome
was acceptable to all States including Queensland. The States will be able to
retain any 'surplus' GST revenues in the third year and beyond. It was estimated
that this will benefit Queensland by around $147 million in the third year,
without detriment to the position of the other States. Local GovernmentThe
IGA requires the States to assume responsibility for the payment of financial
assistance grants to local government. These payments (comprising general purpose
assistance and identified road grants) are worth an estimated $1.2 billion
to local government in 1998-99. The IGA requires that the States provide local
government with funding on the same basis as it has been provided by the Commonwealth,
including the maintenance of funding levels in real per capita terms. The
Ministerial Council established under the IGA will monitor the States' compliance
with the conditions governing the provision of local government financial assistance
set out in the IGA. The outcome of the Premiers' Conference confirmed that
local government can also expect to enjoy significant benefits from the reforms
to indirect taxation. It is estimated that local government will gain around $70 million
per annum as a result of paying lower prices on its purchases (the net impact
of the introduction of the GST, the removal of wholesale sales tax, changes to
Commonwealth excises and the abolition of nine State taxes). The IGA allows
the States to make revenue neutral funding adjustments, in consultation with local
government, to reflect reciprocal taxation or charging initiatives or changes
in the roles and responsibilities of the States and local government. This provides
the Commonwealth, the States and local government with sufficient flexibility
to introduce sensible policy changes in the future without financially disadvantaging
local government bodies. Local government will continue to enjoy funding certainty
since policy decisions will need to be effected on a revenue neutral basis and
in consultation with local government. The IGA provides that, where the
imposition of the GST on a State or local government transaction may be unconstitutional,
the State or local government concerned will voluntarily make GST-equivalent payments.
It is desirable that all Governments participate in the GST arrangements to ensure
that there is an efficient and seamless framework that allows disputes and anomalies
related to the application of the tax to be avoided. Accordingly, the IGA allows
the States to adjust a local governing body's financial assistance grants by the
amount of its outstanding GST liability if the local government body declines
to make voluntary GST payments. ConclusionThe Federal Labor Opposition
are totally isolated and at odds with their State Premiers over the landmark Agreement
to transform Commonwealth-State financial relations, as promised in the Commonwealth
Government's Tax Reform: not a new tax, a new tax system, which all State
and Territory leaders signed. The three Labor Premiers not only
signed on to the agreement, but have all publicly stated that their individual
States will be better off. The Commonwealth has introduced legislation
to provide all of the revenue from the GST to the States and Territories and to
protect the rate and base of the GST in accordance with the IGA. The new
arrangements will provide the States and Territories with a stable and growing
source of revenue to fund important community services into the future. The
States have committed to abolish nine inefficient taxes, removing their reliance
on these distortionary and growth-reducing taxes and charges. In each of
the transitional years following the GST's introduction, the Commonwealth will
compensate any State whose budgetary position is temporarily worse off. As
GST revenue increases, all States will receive large financial gains, even after
abolishing stamp duty on non-residential conveyances. The Government Senators
recommend that the Commonwealth-State Financial Relations bills be passed
without delay. 3. WINE EQUALISATION TAXFrom 1 July 2000, the WST
will be abolished and be replaced with a GST at the rate of 10 per cent. Currently
wine products are subject to wholesale sales tax at the rate of 41 per cent. The
wine equalisation tax means that after the abolition of WST and its replacement
with a GST prices are equalised and there will not be dramatic and dislocating
price falls. The ANTS (WET) Bill will apply to wine products including:
- grape wine;
- other fruit wines and vegetable wines;
- wine
products, such as wine cocktails and creams;
- cider and perry; and
- mead
and sake.
- Since the release of the ANTS package in August 1998 the Government
consulted industry and had taken advice from industry representations. The Bill
applies to a broader range of products than outlined in A New Tax System.
In particular, cider is included and will remain excise free.
- From 1
July 2000 the wine equalisation tax will be levied at a rate of 29 per cent.
- The
impact on consumers will be minimal.
- The price of a four-litre cask of
wine is expected to increase by about 1.9 per cent - the estimated general price
increase associated with indirect tax reform. The 29 per cent rate will achieve
the relative price impacts on cask and bottled wine outlined in our tax reform
policy endorsed at the last election.
- Bottled wine is expected to increase
in price by around 2 to 3 per cent.
- Price relativities with full strength
beer will be maintained, while low strength beer will not change in price.
The
impact on taxpayers will also be minimal. Changes have been made to simplify the
administration of the WET and make it consistent with the GST. That is, the wine
equalisation tax payable will be incorporated into the net amount calculated under
the GST so that taxpayers do not have additional payment and administrative obligations.
Exports of wine will not be subject to the Wine Equalisation Tax or the
GST. The tax will apply to assessable dealings and importations and a quotation
system will ensure that the incidence of the tax is delayed until the final sale
at the wholesale level or an equivalent transaction. The Australian Taxation
Office (ATO) will administer and collect the WET for the Australian domestic market.
The Australian Customs Service (ACS) will administer and collect the WET on imports.
The WET has been designed to incorporate concepts of the WST with which
the industry is already familiar. This should simplify the introduction of the
WET. The opportunity has been taken to incorporate a quotation system for the
WET within the GST framework. Businesses will only incur minimal, if any,
additional implementation costs for the WET alone, as current WST systems and
accounting will handle the WET. Cellar door salesA good background
to the history of taxation treatment of cellar door sales is found in Bills
Digest No.164 Traditionally State governments levied a tax of approximately
15 per cent on alcoholic beverages through State business franchise fees. However,
cellar-door sales were not subject to these fees. In 1997, following a High Court
decision, the State business franchise fees were considered unconstitutional and
the Commonwealth government introduced measures to collect the revenue on behalf
of the States. (Hence the WST rate on wine increased from 26 per cent to 41 per
cent). The Winemakers' Federation of Australia raised concerns about cellar
door prices should the existing rebates offered by the States be discontinued
with the abolition of wholesale sales tax. On information available to
Government Senators, it would appear that if the current average cellar door margins
are maintained and the 15% State rebates continue to apply, then the cellar door
price rise is contained to about 3 per cent, which is similar to off-premise
sales price rises. As the States get the GST revenue, they could decide
to increase the rebate to include the GST as well. Government Senators
consider that the payment of cellar door rebates should continue to be a matter
for the States. Rebates are currently provided by the States and funded from revenue
provided to the States by the Commonwealth as a result of the High Court case
which found State business franchise fees (BFF) unconstitutional. As GST revenue
will replace the existing BFF replacement revenue provided to the States by the
Commonwealth, cellar door rebates remain an appropriate State responsibility.
In addition, because the rebates provide direct benefits to a jurisdiction
(tourism and industry assistance), they are best left to the States. Government
Senators note that small wine producers outside of the WST would be unaffected
as WST is not collected and rebates do not have to be paid, although they may
have an incentive under the GST to register. ConclusionsGovernment
Senators believe that the measures outlined in A New Tax System (Wine Equalisation
Tax) Bill 1999, and related customs and excise bills, are fair and remain
consistent with the Government's policy position which was taken to the 1998 election.
In consultation with the wine industry, the Government delivered on the
objective of the peak body and the majority of winemakers to ensure that tax reform
embrace an ad-valorem rather than volumetric tax. The Government introduced
legislation to provide an ad-valorem WET at 29 per cent of the wholesale price.
This rate of tax ensures that after the abolition of WST and its replacement with
GST, prices are equalised back to avoid dramatic and dislocating price falls.
It ensures that the price of a four-litre cask of wine will only increase by about
1.9 per cent - the estimated general price increase associated with indirect tax
reform, and that bottled wine will increase by around 2 to 3 per cent. Price
relativities with full strength beer will be maintained, while low strength beer
will not change in price. Government Senators note that certain members
of the wine industry want a lower rate of WET. This would result in a fall in
the price of cask wine and lower priced bottled wine. This outcome is inconsistent
with the Government's policy objectives and is not supported by Government Senators.
The continuation of State-based rebates for cellar door sales will keep
cellar door price effects from the WET and GST at around the same level as off-premise
bottle sales. As the States will continue to receive revenue to fund such rebates
and the benefits of the rebate are regional, Government Senators call on the States
to maintain cellar door rebates. The Government Senators recommend
that the WET bills be passed without delay. 4. LUXURY CAR TAXThe
A New Tax System (Luxury Car Tax) Bill 1999 introduces a luxury car tax
from 1 July 2001 on taxable supplies and importations of luxury cars. The luxury
car tax rate will be 25% of the value above the luxury car tax threshold (which
is a GST-inclusive value equal to the car depreciation limit - $55 134 in the
1998-99 financial year). The new luxury car tax replaces the existing 45%
wholesale sales tax that applies to luxury cars and will ensure that, following
the introduction of the GST, the value of luxury cars will fall in price by about
the same amount as a car just below the luxury car tax threshold. The luxury
car tax is in addition to any GST that is payable on a luxury car, however, it
is not on top of the GST. Luxury car tax is incorporated into the net amount under
the GST system or, in the case of importations, is paid with customs duty. The
additional compliance impact of this measure is expected to be marginal because
it will utilise the same administrative framework as the GST. Government
Senators note that the Select Committee received only one submission on the issue
of the luxury car tax. Given that the price of new luxury cars, even with the
luxury car tax, is expected to fall by the same relative amount as other new cars
after the introduction of the GST, Government Senators believe that this indicates
broad support for the equity objective of this measure. Since the release
of the A New Tax System (Luxury Car Tax) Bill 1999 and associated bills
consultation has occurred with interested parties on the scope of Division 69
of the A New Tax System (Goods and Services Tax) Bill 1999. As a result
of these discussions, the Government will be moving an amendment to ensure that
a full input tax credit is available when a car that will be subject to the luxury
car tax is purchased as stock for resale. Government Senators note that
this amendment satisfies the concerns of Deloitte Touche Tohmatsu on Division
69 raised in its submission to the Select Committee. Deloittes also raised
a concern about input tax credits for secondhand vehicles. On this matter Government
Senators consider that the legislation, as drafted, reflects a balance between
minimising complexity and the need to prevent avoidance. On balance, and taking
into account overseas experience with notional input credit schemes, Government
Senators support the legislation as drafted. The transitional provisions
allowing deferred input tax credits for motor vehicles were also commented on
by Deloitte Touche Tohmatsu. A number of transitional proposals for the motor
vehicle industry were canvassed in the report of the Tax Consultative (Vos) Committee,
and Government Senators note that the transitional arrangements adopted by the
Government were considered by Vos to be "not an unreasonable response to
the difficult issues faced by the motor vehicle industry in the transition period".
[8] Government Senators also note that the Deloittes'
suggestion of phasing down sales tax in the lead up to the introduction of the
GST would have a significant revenue impact. Government Senators therefore do
not support the Deloitte proposals. With respect to the provision of a
special GST credit for the sales tax previously paid on goods held on 1 July 2000
for the purpose of sale or exchange, Deloitte Touche Tohmatsu raise the issue
of whether such credits will be available for motor vehicle spare parts held for
sale, use or warranty replacement. Government Senators consider that such
spare parts would be eligible for the tax credits and there is therefore no issue.
However, Government Senators do not believe that the tax credits should apply
to demonstrator and distributor fleet vehicles because they are not true trading
stock and including them could lead to avoidance possibilities. The other
issues raised by Deloittes appear to seek more favourable treatment for business
purchases of luxury cars. As the intent of the legislation is to remove any favourable
treatment for luxury cars, Government Senators are not inclined to support the
proposals. Conclusions Government Senators recommend that
the Senate pass the Luxury Car Tax bills without delay.
Footnotes[1]
Bob Carr, interview with Mike Carlton, Radio 2UE, 9 April 1999 [2]
ibid [3] ibid [4]
Peter Beattie, interview, Radio 4QR, 19 April 1999 [5]
The Age, 10 April 1999 [6] The Age,
10 April 1999 [7] Intergovernmental Agreement
on the Reform of Commonwealth-State Financial Relations, 9 April 1999, p2-3. [8]
Tax Consultative Committee Report, p. 104
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