Australian GST and Income Tax

This essay examines the ongoing debate in Australia regarding the potential increase in the Goods and Services Tax (GST) rate to offset reductions in personal income tax rates. It presents a comprehensive overview of Australia's tax system, highlighting the significance of income tax as the primary revenue source for the federal government and the role of GST as a consumption tax. The essay delves into arguments supporting the GST increase, emphasizing its efficiency and potential positive impacts on individual assets and government revenue. Conversely, it addresses counterarguments concerning the regressive nature of GST, its potential negative effects on employment and affordability, and its potential to exacerbate income inequality. The conclusion acknowledges the complexities of the issue, recognizing the trade-offs between efficiency and fairness in tax policy reform. The essay cites various sources, including reports from CPA Australia and articles from news outlets and academic journals, to support its analysis.

“Some have argued that Australia should raise the rate of GST so as to
lower personal income tax rates”.
INTRODUCTION
Australia is one of the prominent taxing countries around the world. The Australian Taxation
system comprises of around 125 taxes and is considered as one of the most convoluted
globally. It has adopted a dynamic taxation system which is a combination of direct and
indirect taxes imposed by the Federal and State governments. The Australian Constitution
entitles The Commonwealth to enforce duty and to formulate laws related to the same. It has
the exclusive power to impose most important taxes like custom and excise tax, income tax
and sales tax. However, in Australia, income tax is the most important base of revenue for
Federal government. It is a direct tax which is imposed on individuals. As Australia’s
taxation system is continuously growing, progressive tax rates and subsidiary rates are the
basis on which income tax is paid by the individuals i.e. higher the income, higher the rate of
the tax. It is also levied on individuals having a part in any trust or partnership.
On the other hand, the federal government announced goods and service tax (GST) on July
2000. It brought considerable changes by plummeting individual income taxes and
benefitting pensioners and low income group with huge rise in government payments. The
said tax is analogous to value added tax. It is levied not only on the trade (sale) of the
majority of commodities and services in Australia but also on most of the products imported
in the country1. The Current rate of GST applied in Australia is 10 %. However, certain
supplies and services like food, education, health and monetary services are exempted from
the said tax. It is mandatory for companies with yearly revenue of a certain sum to enlist for
GST. Income generated from the main taxes by the Commonwealth significantly surpasses its
disbursements. Hence, it largely supports the states monetarily.
Since income tax levied on individuals and company is the major source of revenue for
Australia, it depends majorly on them than on consumption taxes. Although consumption
taxes like GST are more cost effective as compared to any other tax. It has been proven that
income taxes can alter country’s proficient viable activity which will in turn hamper its
1 Hall and Wilcox, A Guide to Taxation in Australia, 25 June 2015, <https://www.lexology.com/library/detail.aspx?g=5ebb4d78-d304-
4d32-9cdb-9b26ba544b7e/>

capacity to strive globally2. Australia’s budget deficit is forecasted to be worse in future. It is
estimated that by the year 2030, The Federal government and States together will face yearly
budget deficit of around $45 billion of which $35 billion will be because of expenditure on
health3. Globally, many countries like New Zealand are reforming their tax structure by
increasing consumption taxes to subsidize individual and organization taxes . In Australia,
New South Wales Premier Mike Baird also suggested a rise in GST from 10 to 15% along
with current exception on food, health, education and childcare and reimbursement to
households with collective income less than $100,000. The revenue generated from the same
will fulfill Australia’s prospective health requirements. Currently, states are distressed and
require funds badly as they are dominated by the federal government financially. So there is a
serious need of tax reform in the country.
There has been a continuous debate over the issue of altering the tax structure i.e. to increase
the rate of GST so as to lower personal income tax rates.
ARGUMENTS IN SUPPORT OF THE ISSUE
Goods and services tax (GST) is considered as one of the most efficient and minimal
detrimental tax of all taxes. It will be favorable to increase the rate of GST as it is imposed on
supplies and services and it is impossible for individuals to stop using them because of the
tax. GST is an indirect tax which is imposed circuitously through manufacturer and
merchandiser. Hence, mostly the customers are not aware of the said tax. Also a rise in the
rate of GST will be easier and cost effective than imposing on product and services which are
exempted from it like health, education, food and financial services. Hence, if efficiency is
the criteria, it will be constructive for the economy of Australia to increase the rate of GST
and lowering the personal income taxes.
Positive impact on individual personal assets is another outcome anticipated of the said
exchange of the taxes. Also, GST is more productive as it is the only flat rate of tax. Not only
will the rise in GST will reduce income tax but according to CPA Australia extra revenue
generated from GST can also offer reimbursement to less earnings households and can be
2 Mallesons King and Wood, Rethinking Australia’s Taxation System, 31 July 2015,
<http://www.kwm.com/en/au/knowledge/insights/rethinking-australias-taxation-system-20150330>
3 Charis Chang and AAP, Who are the winners and losers if GST is increased, 22 July 2015,
<http://www.news.com.au/finance/economy/australian-economy/who-are-the-winners-and-losers-if-gst-is-increased/news-story/
051f1f26fc4dad0a7a5b5c241a79f7c4>

used to remove lot of unproductive state taxes like stamp duties. A net profit of 50 cents per
dollar of tax income is expected if the stamp duties are substituted by higher GST4. Also from
government point of view, the said change would be beneficial as it would result in more
revenue for the government as the customers are bound to pay such tax unlike income tax
which is taxed on individual, business and investment income. Hence, by lowering the
income tax, consumers will save his income and the government can raise its revenue by
increasing the tax to be applied on the commodities and services. The said change will also
have a positive impact on the standard of living. Although the impact will be lesser but will
be considerable. It will also decrease the duty load on asset earnings as the capital income
will be taxed at a lower rate. With the above changes in the tax structure the states can reduce
their dependability on The Commonwealth by growing their own self-source income. Lastly,
with the said change there will be a rise in motility of funds globally5. However, one more
argument has arisen that GST should be imposed on all items without any exclusion.
According to CPA Australia, it has been estimated that by the year 2029/30, Australian
wealth will be $27.5 billion larger if 15% GST is imposed without any exemption6.
ARGUMENTS AGAINST THE ISSUE
Currently, there are a lot of arguments against the issue. Firstly, it is argued that although
GST is cost effective and easier to manage but increase in GST rates will have a negative
impact if we take into consideration fairness criteria. All the customers are required to pay
GST irrespective of their purchasing power and equal sum has to be paid for a specified
commodity or service. Hence, GST is regarded as a regressive tax7. It is also predicted that
since GST is applied on fresh houses, it could increase the complexity in home affordability.
Decrease in employment is another major issue against the said change. Clearly, increase in
GST largely affects fewer income group more than high income group. Hence, they will not
be motivated to work which will result in decreased employment especially amongst females
4 John Freebairn, How increasing the GST could boost our standard of living, 31 March 2015, <https://theconversation.com/how-
increasing-the-gst-could-boost-our-standard-of-living-39495>
5 Jessica Irvine, Australian GST reform debate heats up, 01 December 2016, < https://www.acuitymag.com/finance/australian-gst-tax-
reform-debate-heats-up>
6 Michael Janda, GST increase to 15 per cent would leave nation$27.5 billion better off: CPA, 18 February 2015, <
http://www.abc.net.au/news/2015-02-18/gst-increase-would-leave-nation-better-off-cpa/6130664>
7 Raffaele Piccolo, The GST: Is an efficient tax a fair tax? , 22 April 2014, < https://independentaustralia.net/politics/politics-display/the-
gst-is-an-efficient-tax-a-fair-tax,6407>

who are already facing significant restraints related to work. Although compensation will be
granted but presently government does not have required monetary ability to do so.
Also with an increase in GST and no subsequent reduction in income tax would make low
income group more vulnerable as they will be spending more and earning less. Moreover, if
compensation is granted for such an increase, it will not meet the purpose for which the said
change was proposed which was to meet the future health and public safety needs. With
regards to equality, raise in GST will be discriminatory for low income group as huge
percentage of their proceeds are spent on basic needs. Moreover, income tax is levied on both
income and investments which normally high income group possess. Hence, cutting income
tax would be more approving for them than for the lower income class. Thus, increasing
inequalities and will prove to be iniquitous for people in the economy which in turn will
result in low labor output and productivity and will adversely affect country’s economic
growth.
CONCLUSION
At the end, we conclude that there are many arguments in favor and against the issue.
Clearly, Australia requires alteration in the tax structure to improve its economic growth and
to meet its prospective needs. However, increasing the GST and reducing personal income
tax will prove beneficial in terms of efficiency. This said change will also help the
government in increasing its revenue. But at the same time it will create inequality and
unfairness amongst diverse income group in society if there is rise in GST and no reduction
in personal income tax.

REFERENCES
Hall and Wilcox, A Guide to Taxation in Australia, 25 June 2015,
<https://www.lexology.com/library/detail.aspx?g=5ebb4d78-d304-4d32-9cdb-
9b26ba544b7e/>
Mallesons King and Wood, Rethinking Australia’s Taxation System, 31 July 2015,
<http://www.kwm.com/en/au/knowledge/insights/rethinking-australias-taxation-system-
20150330>
Chang Charis and AAP, Who are the winners and losers if GST is increased, 22 July 2015,
<http://www.news.com.au/finance/economy/australian-economy/who-are-the-winners-and-
losers-if-gst-is-increased/news-story/051f1f26fc4dad0a7a5b5c241a79f7c4>
Freebairn John, How increasing the GST could boost our standard of living, 31 March 2015,
<https://theconversation.com/how-increasing-the-gst-could-boost-our-standard-of-living-
39495>
Irvine Jessica, Australian GST reform debate heats up, 01 December 2016, <
https://www.acuitymag.com/finance/australian-gst-tax-reform-debate-heats-up>
Janda Michael, GST increase to 15 per cent would leave nation$27.5 billion better off: CPA,
18 February 2015, < http://www.abc.net.au/news/2015-02-18/gst-increase-would-leave-
nation-better-off-cpa/6130664>
Piccolo Raffaele, The GST: Is an efficient tax a fair tax? , 22 April 2014, <
https://independentaustralia.net/politics/politics-display/the-gst-is-an-efficient-tax-a-fair-
tax,6407>