Democrats Leader Senator Meg Lees and Federal Treasurer Peter Costello say that the new arrangements for charities under the GST will be world’s best practice. That does not say much for the rest of the world.
The exemptions and special treatment extracted from the Government since it first proposed its GST legislation will be a curse on the new tax system. Food, medical and educational services, residential rents and now many charitable transactions will be exempt. It would have been better to include the lot and for compensation to be paid through the welfare and grants process. It would have been better for everyone to realise that there is a 10 per cent tax on the purchase of all goods and services. Once you go down the path of exemptions you add complexity and provide the potential for loopholes and artifice.
Efficiency was one of the main reasons for the new tax system. Provided the dividend that results from greater efficiency is used in ways that benefit the whole community it is worth pursuing. If charities are granted an exemption, it means businesses that the charities buy goods and services from will have verify the charitable status of their customers and provide accounting mechanisms to calculate the exemptions. The aim of the GST was to have a simple system: compute the value of inputs and outputs and pay 10 per cent of the difference in tax. The more exemptions there are the more messy this becomes.
The deal done of charities is now full of complexity. Some transactions will be exempt and others not depending precisely on the nature of the transaction — raffles, pens, lamingtons and chocolate attract tax, but red noses, daffodils and poppies do not. The former have commercial value; the latter do not. Further, charities can sub-divide their endeavours to bring them under the $100,000 tax-free threshold.
Another complexity is that newsletters and journals will be tax free. That will mean the GST paid on the business inputs for those journals (printing and delivery costs) will not be rebateable, but the GST on inputs will be rebateable for other charity work like major raffles and Genes for Jeans Day auctions.
The Government should have spent more effort and offered more of giving charities higher grants and more help in transition costs and avoided exemptions. It succeeded only partially. It increased compliance help to $65 million and increased the one-off indexation of grants to charity to 10 per cent. But it has left charities and the businesses that supply them with an unnecessarily complex system. Indeed, it might be more complex than the wholesale sale tax that it replaces. Removal of the WST with its several rates and manifold classification of goods upon which the rates applied was one of the pluses of the GST, according to the Government.
The debate over GST exemptions has been marked by a terrible combination of poor understanding of how indirect taxes work; low levels of trust by voters and stakeholders in the Government and rampant political opportunism and populism.
It is too easy to cry: don’t tax charity, or don’t tax food, education and so on. It is more difficult to explain that a uniform tax regime with appropriate compensations has huge dividends that can help society in general. But that is where the lack of trust in politicians becomes so destructive. In the presence of widespread (understandable) ignorance about the mechanics of the GST, there is a need for widespread trust if reform is to go ahead. There is also a need for each side of politics not to opt for easy populism in the face of widespread ignorance. Alas those things are not present in Australia.
The result will be an unnecessarily complex tax regime which is in no-one’s interest.