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Treasurer announces withdrawal of sales tax exemptions on cars in pre-COAG offer to the States.

JOHN HIGHFIELD: On the eve of the annual Premiers' Conference, the Federal Government has thrown down the fiscal gauntlet to State and Territory governments, also local governments, challenging them to accept the abolition of wholesale sales tax exemptions in return for guaranteed general purpose funding. And while the sales tax exemptions on most items are on the table for discussion at Thursday's Premiers' Conference, Treasurer Peter Costello has pre-empted the talks on one element, by withdrawing the exemption for motor vehicles, effective today. In Canberra, Catherine Job.

CATHERINE JOB: The money or the car - that's the choice facing State and Territory governments when they come to Canberra to get their annual hand-outs this week. But it's a Hobson's choice, because unlike the game shows, it's not a question of which prize they get to take away but which of the two they'd prefer to loose.

Peter Costello's fax to the Premiers this afternoon offered to maintain the real value of their per capita general purpose grants conditional on them accepting a scrapping of the Government exemption from wholesale sales tax. And just to show he is serious, Peter Costello withdrew the exemption for cars this afternoon.

PETER COSTELLO: The bottom line is this, that at a time when the Commonwealth is moving to balance its budget, at a time when that involves an $8 billion fiscal consolidation, how could you, with a clear conscience, go to the States and say, 'Not only will we not cut you, we'll give you $600 million more'.

Now, I think a lot of people out there would be saying to themselves, 'Well, where's the fairness in that? Where's the fairness in a government fiscal consolidation, which allows people in the know, who are employed by governments or government authorities, to avoid paying a tax that I am paying? Where's the fairness in a situation where people in the know can salary sacrifice and avoid income tax when the Government's reducing outlays?' And I think people are going to say, 'Well, this is a good policy answer to what otherwise would have just been a contraction in the offer to the States.'

CATHERINE JOB: The Treasurer says the exemption is a rort. But the Tax Office has told him tax practitioners are marketing schemes, to governments and their departments, to take maximum advantage of the exemption; schemes that have complex leasing arrangements providing cars not only to employees but also to their spouses.

PETER COSTELLO: Unquestionably, there are rorts and they are growing as they are being actively promoted. Many of those that are entering into them would say, of course, 'Well, we've been given this exemption and we are entitled to use it.' The fairest way to make it clear that this is going to be applied in an even-handed way is to put everybody on the same playing field so that when Joe Average goes to buy his car he pays the same amount of tax as his State government. At the moment he goes into a dealer paying a tax that his government is not liable for.

Now, let me make it clear, this is not just a State government, for example - and we've given you a list attached to my press release. For example, the Reserve Bank will loose its exemption as well. It's a strange situation, isn't it, when Joe Average from the outer suburbs pays a tax buying a motor vehicle that the Reserve Bank doesn't? And we're going to make sure that there's an equality in relation to this.

CATHERINE JOB: But the Treasurer says it's not just a matter of cracking down on the rorts. The decision, he says, is good policy because it will force governments to take more realistic decisions about their assets. The States are currently exempted from some $300 million worth of sales tax on their car fleets, but the Treasurer says they won't necessarily have to cough up the whole amount.

PETER COSTELLO: One of the advantages from the State point of view is they now have the option to change their behaviour. For example, if they were to decide this sales tax exemption, having gone, it made sense for them to contract the supply of cars rather than buy them themselves or, for example, to turnover cars on a three-year cycle rather than a two-year cycle, the effect on them would be less. But in relation to that, that assumes about $300 million with no behavioural change and I would expect that there would be some behavioural change.

CATHERINE JOB: So what effect will that have on sales of new cars?

PETER COSTELLO: Oh, look, I don't think it will have a major effect on car sales. Government purchases are a significant part of purchases from manufacturers, but governments will still continue to purchase vehicles.

Now, as I've said before, there will be some behavioural impact and to the degree that they, for example, change their vehicles over on a three-year cycle rather than a two-year cycle, there would be some effect and I acknowledge that.

I am told that the downside effect in relation to the new vehicle market will be off-set by the upside effect in the second-hand market, which at the moment is in fact distorted by one class of buyer coming on to the market with a tax exemption and effectively taking the advantage of that to increase sales prices, and so there will be trade offs either way.

But the important thing to bear in mind is it's good policy, it's fairness and it ensures that Mr and Mrs Average are treated on the same basis as wealthy and powerful government and government authorities.

CATHERINE JOB: So much for cars. But lurking in the wings is the wholesale sales tax exemption on everything else which the Treasurer also wants to scrap and that amounts to about $1.7 billion. No wonder Mr Costello wouldn't be drawn on just how much the States could soak the Commonwealth for if they decide to impose their taxes on the currently exempt Federal Government.

JOHN HIGHFIELD: Catherine Job in Canberra.

Well, two questions: Who stands to loose the most from ending the sales tax exemptions for State, Federal and local government authorities, and does the Commonwealth Government have the power to do it?

PM's economics correspondent, Peter Martin.

PETER MARTIN: The Commonwealth Government has no power to impose any tax on property of any kind belonging to a State. The Constitution says so. In fact those are nearly the exact words. They are there in section 114. And that's why for nearly 100 years now States and State authorities have been exempted from Federal Government taxes, and the Federal Government and Federal authorities have been exempted from State taxes.

But just recently a reinterpretation of the Constitution by the High Court allowed the Feds to look at things again. In a 1992 ruling, involving the New South Wales Government Insurance Office, the Court observed that sales tax wasn't really a tax on the State authority buying the good being taxed; it was a tax on the good itself.

Sales tax on goods being sold to State governments or State authorities could be legal. All the Feds would need to do would be to pass a law removing the exemption. And as State governments and businesses have become more and more intertwined, the exemption has been looking sillier and sillier.

A few weeks ago, it was noted on commercial radio, that the Sydney and Melbourne casinos both enjoyed an exemption from sales tax on the lights and airconditioning installed in their buildings. That's because those buildings are owned by the State governments yet operated by private businesses.

Peter Costello is right to use the word 'rort' in many cases. And when an organisation buys a car without paying sales tax, then sells that car on the market two years' later for what could be a profit, clearly there's something wrong.

The last government lacked either the knowledge, the time or the courage to act and even for this government it won't be easy. I am told the High Court's new interpretation of the Constitution isn't clear-cut. There's the potential for an appeal by a State government minded to do so and that's why Peter Costello is seeking the agreement of the States to the change at the Premiers' Conference. He is threatening to withhold their money until he gets it. He has also resorted to legislation by press release to stop a rush of car sales tonight by government authorities and departments around the country. His press release says 'the tax will be imposed from 3.15 this afternoon'. The truth is, that's up to the Senate.

JOHN HIGHFIELD: Peter Martin.

Well, local councils around Australia are tonight calculating the extra taxes they will now have to pay as a result of the decision by Canberra.

According to Brisbane Lord Mayor, Jim Soorley, his council will have to find an extra $3 million to pay the sales tax on cars and will be up for an extra $60 million if the exemption is lifted from other goods. Mr Soorley joins us on PM; speaking to him, Sharon O'Neill.

SHARON O'NEILL: Mr Soorley, you're saying this decision by the Federal Government will ruin local government across Australia - why?

JIM SOORLEY: Oh, Sharon, many local authorities will simply not be able to afford this. Look, let's be clear about this. This is a tax on the tools of trade of local government -plumbing inspectors, buildings inspectors, people who go and fix the pothole. Mr Costello has actually put a tax on all those vehicles.

So to talk about a rort is very clever and slick but totally dishonest and, I guess, it's what we expect from Mr Costello. Next time he smiles down the television with his rather slick smile, just remember he's got his hand in the pocket of every ratepayer across the nation.

SHARON O'NEILL: Well, Mr Costello is saying that it's only fair that State and local governments should pay the tax that the broader community has to pay, that if Joe Average has to pay a tax on his car why shouldn't local government and State governments pay it?

JIM SOORLEY: I find it interesting that Peter Costello would be concerned about Joe Average; he's probably never met him. But let's take the point of Joe Average. Joe Average pays rates to every local authority; the Federal Government doesn't. So if Mr Costello is going to be consistent and be really concerned about Joe Average, he would therefore say that Joe Average has to pay rates, therefore, the Federal Government, on its property, should pay rates.

SHARON O'NEILL: Is that something that you're proposing?

JIM SOORLEY: Well, no, I am saying he should be consistent. Outside my window I see a Federal Government building in the heart of the city of Brisbane - they pay no rates.

SHARON O'NEILL: What would the rates be worth on that building?

JIM SOORLEY: Oh, a lot of money. We could take the Enoggera Army barracks in Brisbane which is a huge property. So a local authority like Brisbane could offset it by having some consistency and some principles from Mr Costello; but the rural councils can't. But if he then goes the next step further to say all local authorities will pay all sales tax - we've just done some quick calculations here and they are rough - it's somewhere between $30 million and $60 million for Brisbane. Now, if he is saying he is going to offset that with a $600 million more for the country, this is nothing more than a rip off.

Mr Costello promised, at the last election, there would be no new taxes. This is a new tax but it is through the back door with his hand in every ratepayer across the country.

SHARON O'NEILL: How will your council pay for those extra taxes?

JIM SOORLEY: Well, the $3 million .. our budget in fact is before the council now being debated. So the $3 million .. this year we would either have to amend our budget on Friday and put up rates - $11 a property in Brisbane or cut out some capital works. We have a billion dollar budget so we can absorb that, but the other local authorities simply cannot do that.

SHARON O'NEILL: The Treasurer is saying that this gives governments - local governments, State governments - an opportunity to look at the way they do things, to perhaps modify their behaviour, perhaps make better decisions. I mean, isn't that fair enough, that there could be room for you to look at the way you've been doing things and do things differently which will bring about savings?

JIM SOORLEY: We don't need that from the Treasurer; we are already doing that. We've corporatised Brisbane Transport; we've corporatised Brisbane Water. The real issue is: under the Hilmer reforms the tax equivalent agenda was being looked at. So what one government pays to another was going to be all evened out under Hilmer's reforms. What he's done - he's cut right across two years' of discussion and negotiation of Hilmer and said, 'Thank you, we're taking the lot'. It is simply a greedy, selfish and deceitful move by the Treasurer to put his hand in the pocket of every ratepayer across this city and the country, to take local government monies to try to solve his own budget problems.

SHARON O'NEILL: And at the end of the day, do you think there'll be an increase in rates?

JIM SOORLEY: There will have to be an increase in rates. Local government simply will not be able to cope with this and if he goes to the next step of what he is proposing at the Premiers' Conference, to impose this on every local authority, then some local government around Australia will simply go broke.

Look, let's deal with this honestly. When a road is laid it will be a tax to the Federal Government. This is not the fat cat cars; this is the car that fixes the road; it's the car that fixes the park; it's the car that goes .. these are tools of trade of local government, and there will be a tax on them every time they do a bit of work.

SHARON O'NEILL: Okay, Mr Soorley, thanks very much for joining us.

On the line now is Queensland Treasurer, Joan Sheldon. Mrs Sheldon, you've been listening to what the Lord Mayor has to say. Do you share his dismay over this decision?

JOAN SHELDON: Well, I am looking at it from a State government point of view and we've worked out that this tax slug will cost Queenslanders about $50 million just on cars.

I've got a few concerns with what was said. I don't believe the States are rorting anybody and, in fact, we are just going on in the business of government under the rules we currently have. But to say that the States should be paying sales tax .. I've got two points I'd like to raise on that. First of all, is the Federal Government does not pay stamp duty, payroll tax or land tax in Queensland, so that they are being exempt. And if the Federal Treasurer is concerned about Joe Average then Joe Average pays stamp duty and land tax and his employer usually would pay payroll taxes.

SHARON O'NEILL: So that would be something you'd be wanting to raise with the Commonwealth Government?

JOAN SHELDON: Well, you know, if we have all got to be fair and equal, this is a concern to us.

SHARON O'NEILL: Would that he a conditional thing on extending .. the lifting of the exemption to other areas?

JOAN SHELDON: Oh, look, we will look at our whole rights in this situation, our constitutional rights. I could also say that - the comparison again to Joe Average - if in fact we as a State, and it looks like we, under decree, are having to pay $50 million - and it may go on it many hundreds of millions if sales tax is applied to everything - then, indeed, that is less dollars for the State to be able to spend on providing the services to the people of our State.

I am very disappointed with today's decision. It seems that on the eve of us going to Canberra to discuss what we thought was issues in an atmosphere of cooperative federalism, we've had decree by media release from the Federal Treasurer. You know, they have given to the States with one hand and they are taking with another. We've received an increase in general purpose grants of approximately $148 million, which was what we were in line to receive due to our increase in population, and at the same time they are taking $50 million away.

If this is what we are going to expect in our dealings with the Federal Government then we've got a real problem in this State to be able to provide the basic services to our people which, I think, they have a right to deserve.

SHARON O'NEILL: Well, the Treasurer has put this forward as an offer to the States. It doesn't sound like you're very willing to accept it at this point?

JOAN SHELDON: Well, where's the offer? As I see it it's a subtraction.

SHARON O'NEILL: Well, they say that they'll maintain their general purpose grants if you agree to this.

JOAN SHELDON: Well, the figure given to us, as I understand it - we've only had this by media release - of $148 million for our general purpose grants, is what we were expecting anyhow, so they haven't given us extra money. They have given us $148 million increase, which we see was our due, and then they have taken $50 million off the top of it.

You know, I can assure you I'll be going to Canberra to fight for Queensland - I think we must. And I just have a concern that if the Federal Government are now going to make the States pay all this sales tax - and frankly I think the only think people don't pay sales tax on are basic foods and a lot of building materials - so there's going to be a heck of a lot of the operations of a State government that we are going to have to end up paying sales tax on if they increase the net, then indeed we are going to be sorely left not having much money at all to provide our basic services to the State. And I just feel that the Federal Government needs to face the fact that they don't pay stamp duty, payroll tax or land tax.

SHARON O'NEILL: So this at this stage are you going to Canberra with a mind to reject what the Treasurer has put to you today?

JOAN SHELDON: Oh, look, we will discuss this with the other Treasurers and, of course, I will discuss this with the Premier and it will be discussed with other Premiers. I am not unilaterally stating any position at this point in time, I am just raising our concerns in Queensland.

First of all our concerns that there was absolutely no discussions about this and yet we are heading off to Canberra tomorrow; and secondly, that it raises grave concerns about the sort of funding we are going to get from the Federal Government and the way we are going to be able to provide our basic services.

And I have also got a grave concern of what's going to happen to our special purpose payments because these amounted to $3.2 billion for Queensland last year and they are not based on population growth. So are we going to face real cuts in the special purpose grants and is this one way of the Federal Government sort of showing its hand on the eve of our discussion?

SHARON O'NEILL: Mrs Sheldon, thanks very much for joining us.

JOAN SHELDON: Thank you Sharon.

JOHN HIGHFIELD: And the Queensland Treasurer with Sharon O'Neill.

One group that appears to be happy - motor vehicle retailers. Their industry body, the Australian Automobile Dealers Association, says the sales tax exemption on cars was a loophole which was provided for the government sector at great expense to the wider community.

The Association's Executive Director, Michael Delaney, joins PM in our Canberra studio. Speaking to him, Catherine Job.

CATHERINE JOB: Mr Delaney, first of all, is this going to mean that fewer new cars are sold?

MICHAEL DELANEY: I wouldn't think so. Over time there might be some slight adjustment but for the longer term, not at all.

CATHERINE JOB: But why not? If the State government or a local authority goes from buying a new car every three years rather than every two, doesn't that mean they are buying fewer new cars?

MICHAEL DELANEY: Well, we wouldn't think so. You see, what's happened in Australia is increasingly the purchases have been done through fleets. They account for near enough to 52 per cent of the market now. Essentially what's happened is a lot of private buyers have withdrawn from the market in the face of the supply of vehicles under this rort that was going on. What we are saying is, if you restore the balance, as between all buyers of cars as this measure clearly does, and for which it is good policy and highly equitable, we would see the market coming back to something like its normal arrangements. I don't think that in the long run of vehicle markets you can sort of say that this will depress it or increase it one way or another because car purchase numbers move around very consistently with the state of the economy over the longer run.

CATHERINE JOB: So they don't alter much no matter what taxes you put on them. If you need a car you buy a car.

MICHAEL DELANEY: They certainly do alter. But the fact of the matter is the tax is now at 22 per cent and that of itself has been an incentive to a lot of these agencies to engage in salary sacrificing and, through that, employing the sales tax exemption to pass on to their employees benefits. All we are saying is that that has distorted the burden. It's increased the burden of collection from motor vehicles of sales tax over time to the disadvantage of all other buyers. I can as equally well argue that if the reliance that's had to be had on cars, to this extent, is to be reduced by this measure because half a billion dollars, near enough towards the black hole of $8 billion, will be collected in a full year, it may well be the burden for ordinary buyers can be reduced and, therefore, the sales numbers would go up. That's essentially what it's about.

CATHERINE JOB: Were you surprised by today's announcement? You actually called for this very thing to be done as recently as last December.

MICHAEL DELANEY: Catherine, we called for it first in 1990 when we first saw evidence of this racket or rort arising. We've been calling for it throughout for many years since. Most recently our press release was 8 December of '95.

CATHERINE JOB: Very briefly, you also called for this to be extended to charities, for them to lose their exemption. Should that happen?

MICHAEL DELANEY: Well, that can be argued in other policy terms. We were saying, however, that the extension to charities was part of the problem. What remains to be done about that we await from the Government.

CATHERINE JOB: Thank you very much for your time, Mr Delaney.

MICHAEL DELANEY: Thank you.

JOHN HIGHFIELD: Michael Delaney of the Australian Automobile Dealers Association with Catherine Job in Canberra.