THE case for increasing the GST was strengthened this week by revelations from the Australian Tax Office.
Alas, increasing the GST is off the agenda because it is a political hot potato. It is so easily portrayed to the masses as a great big tax, the tax on everything you consume, irrespective of your income.
In many ways, though, it is the battlers’ friend, as figures revealed by Jim Killaly, the deputy commissioner in charge of large business and international matters, in a speech to the seventh annual corporate tax summit this week.
Killaly did not mention battlers and hardly mentioned the GST. He was mainly talking about big business tax compliance. His full speech is on the Tax Office’s website.
Killaly defined big business as those with a turnover of more than $250 million. There are 1300 of them if you include financial businesses. They put in 5000 tax returns between them because of subsidiaries and related entities.
Guess what? Forty per cent of these tax returns showed zero tax payable on average in the past four years.
“Over the 2005 to 2008 financial years more than 40 per cent of the company income tax returns lodged by large business taxpayers had a tax payable of zero and around half those were showing losses,” he said.
Bear in mind these years are mostly pre-financial crisis and some years were boom years for big business. A lot of the zero returns can be put down to tax concessions, avoidance and evasion. But big business has the clout to resist changes to tax concessions.
Forty per cent of big businesses are foreign-owned. That helps in moving profits off-shore. It helps in creating tax-deductible loans in Australia which are used for payments off-shore away from the ATO’s eyes.
Big business has got away with it because successive governments have not staffed the Tax Office properly and have not cut out the business welfare in the tax system for fear of well-funded backlashes.
But at least Killaly was making it clear to business that it better start cleaning up its own act or face fairly relentless scrutiny.
He made an interesting observation, which could be read as a veiled warning, in these days of self-assessment and self-regulation. He argued that corporations should be open to tax scrutiny, in the same way that the affairs of a corporation should be open to board scrutiny. A board of a corporation would not expect the affairs of the corporation to be hidden from it such that the board could not tell if the corporation was living up to its tax responsibilities.
The corollary, though not stated by Killaly, is that a board that fails to ensure that the affairs of a corporation are open to tax scrutiny is failing in its duty.
And as every director should know, personal liability can follow from failure of board duty. That should cause a few gasps at the big end of town.
Maybe I am reading too much into the speech, but coupled with the Ombudman’s approval this week of the Tax Office’s practice of arriving unannounced to inspect documents, it was a big message to big business to lift its tax self-assessment game.
Killaly also warned that once a big business gets an unsatisfactory audit the Tax Office will come back every year till the issue is sorted. And it would be no good arguing that returns had always been accepted in years before the audit years so why the change of policy.
That’s not how self-assessment works.
Also Killaly warned that if big business indulges in intricate transactions – especially overseas ones — that have no business efficacy, then watch it.
Sounds like a good use of ATO resources to me. Why slum around the 10 million or so personal returns which might net only a few dollars when the you can concentrate on just 5000 returns which might yield millions – particularly on the returns showing no income.
So how does all this show that the GST is the battlers’ friend? Well, Killaly revealed that in the past four tax years on average big business paid 36 per cent of total tax, but paid a whopping 53 per cent of GST revenues.
Get this picture? Big business can avoid company tax, and their highly paid executives can probably avoid a lot of personal tax, but it is pretty difficult to avoid the GST. Big business does a lot of contracting and the contractors, by and large, are in the GST system. If they want to claim their inputs they have to acknowledge their income and send 10 per cent of it to the tax office. They also do a lot of buying from smaller traders in the GST system.
If the GST were raised to 15 per cent, it would raise more than $15 billion extra a year, more than half of which would come from big business. You could probably end income tax for a lot of low- and middle-income earners. That’s a good trade-off. And it would be hugely efficient.
Also, the GST net should be widened to everything. Including rents. Alas, that would cause a Great Big Scare Campaign which would perpetrate a simple lie to defeat a complex truth.
If the GST were applied to rent tomorrow, the landlords would have the bear it. You could not increase rents by 10 or 15 per cent and get away with it. The market would not bear it. The result would be that thousands of negatively geared landlords would at least have to pay at least some tax instead of, as now, merely waiting for the refund cheque at the end of the year for the “losses” they have made on their property.
This would be far smarter than abolishing negative gearing.
Alas, the Henry review has been told not to touch the GST.
And by the way, when are we going to see the Henry report – which was handed to the Government nearly two months ago? So much for open government. Not good enough, Kevin. Why are you seeking unfair advantage for the Government at the cost of two months’ worth of constructive debate on the tax system?
Do we have to do a freedom-of-information request for a report produced by public servants about how the public is to be taxed and based upon submissions given by the public? We own the report, not you.
CRISPIN HULL
This article first appeared in The Canberra Times on 20 February 2010
1. To suggest that forty percent of big businesses pay no tax is incorrect:
– All the money that has been distributed to employees would have had the correct PAYG tax remitted to the ATO and of this any individual earnings in excess of $80,000 would have been taxed at higher than the company tax rate.
– Any payments to contractors would have similar employee taxation effects and profitable small businesses would most likely have paid company tax.
To this we can add the positive social benefits of employment and having money circulate. Also business are encouraged to use all money available to them and to borrow money to engage in more business and therefore zero profit is not necessarily a bad thing.
I agree that all business must be encouraged and monitored to ensure that they do comply with Taxation Law and do not engage in business transactions purely to minimise or evade tax.
2. No matter what Mr Killaly says, all GST is paid by the end user, i.e. the general public. All businesses pass on the GST cost. There are only four groups that any business can deal with:
i. the end user,
ii. another corporation which will then pass its GST cost on to the end user (eg. PWC charging GMH GST on accounting services which then Holden pass on in its Commodore sale price and so on, no matter how many times the GST is passed on),
iii. government, where the GST is paid by our taxes,
iv. export customers, where GST has never been applicable.
3. Raising the GST beyond 10% will have other consequences:
i. social welfare recipients and low income earners will be disadvantaged because they already pay minimal, or no, tax and therefore any increase is direct. Looking back at the introduction of the GST, this group had minimal benefit from the reduction in wholesale tax of such things as cars and electrical goods because they never had the money (or the need) to buy these items.
ii. the rate of 10% allows mathematic simplicity: multiply by 1.1, divide by 11, move the decimal point one to the left etc.
iii. a higher rate will further encourage the cash economy and other ideas to ‘minimise’ GST.
iv. lead to further maldistribution of taxation revenue between the states, unless this ‘hot potato’ is changed.
4. Applying the GST to rents will increase the cost of rents:
i. as the GST would apply to all rents the tenants have nowhere else to go, and therefore I would predict it to be passed on immediately in all areas with low vacancy rates.
ii. in areas of higher vacancy rates there may be a year, or two, of relief but as the returns from rental are poor the landlords would have to pass them on or sell the property.
You write “losses” in inverted commas as if to imply that these losses are false or otherwise not real. This is fundamentally incorrect. Any person who is negatively gearing a property is losing money for all those financial years where ‘negative gearing’ applies. They will only receive a refund if they already paid tax in that year, i.e. they belong to the PAYG group. The refund is directly proportional to how much money they have lost on conducting their ‘rental business’ for that year, but the ATO will only ever contribute a maximum of 46.5% to this loss (and most likely only 39.5% as most landlords earn between $80,000 and $180,000). Therefore, most landlords contribute 60.5% of their own money to their losses to have someone live in their negatively geared property. So that if they receive, say, an $5200 refund for their property, they have themselves contributed $7964 (60.5/39.5 x 5200) to house the renter.
Put another way, the government has contributed $100 per week to house the renter and the landlord has contributed $153 per week of their own, after-tax, money to do the same. The landlord has done this in the expectation, but ultimately in hope, of an increase in the capital value of the property after a number of years upon which they will pay approximately 19.75% CGT.
Sounds almost charitable. If this mechanism did not exist, who would provide the rental accommodation?
If I add the frustrations of having tenants, paying land tax, dealing with banks and real estate agents, I know why I am not a negative gearer of property. (To my detriment as house prices continue to rise beyond expectations, although I feel we may finally have reached the end of wide spread spectacular gains, as the wage earner cannot afford any further increase in the proportion of their income that has to be devoted to buying a house without wage increases i.e. inflation)
Also, remember that if negative gearing was removed the landlord can still carry over any, and all, expense(s) to be deducted from the sale price of a property when CGT is calculated, i.e. they still get a tax deduction for their costs, albeit smaller and much later.
Regards, Arne.
G’dy Crispin,
I do not agree with your commment about raising the GST to 15% to ensure that big business pays its share of tax. My understanding is that GST is paid at each sales transaction stage. The GST collected at each transaction is remitted to the ATO and the vendor is credited the GST it collected at the previous transaction stage. At the final transaction the purchaser who is not a GST registered business is unable to claim a GST credit . Another way of looking at GST is that business does not pay GST. It is the comsumer. As with tax laws there are exceptions, but in the matter of GST they would be insignificant.
Regards
Jack Kelleher