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Wednesday, 2 December 1998
Page: 1087


Mr COSTELLO (Treasurer) (9:32 AM) —I move:

That the bill be now read a second time.

The bills I introduce today establish a new tax system for Australia. This is the most comprehensive reform of taxation in the history of the Federation.

This is a new tax system for a new century. Today's legislation sweeps away an outdated, inefficient tax system that does not serve the needs of the modern nation. The new tax system rewrites Commonwealth-state financial relations. The new tax system will lighten the burden of income tax for families and average wage earners.

At the last election the government put this plan to the people. And the people of Australia endorsed it. The government asked for a mandate. And the people of Australia gave it.

This is a plan not for a new tax but for a new tax system. It encapsulates those changes necessary to make our great country more productive and more competitive. It will help our exporters, deliver more jobs and increase standards of living.

The bills being introduced today are the first part of a package. The government proposes to enact the whole package by the end of this financial year to meet the timetable outlined to the Australian people at the last election. When the package is enacted, Australia will have a new tax system from 1 July 2000.

A modern, broad based, low rate, goods and services tax

The bills before the House will enact a broad based goods and services tax that will be levied at 10 per cent and will start in July 2000.

The GST will apply to most goods and services consumed in Australia.

When a business purchases goods and services it will be entitled to full input tax credits. This means that the tax burden on business inputs will be significantly reduced. With the introduction of the GST, the wholesale sales tax is to be abolished.

In consultation with the states, the following nine types of taxes are also to be progressively abolished:

. financial institutions duty;

. debits tax;

. stamp duty on marketable securities;

. conveyancing duties on business property;

. stamp duties on credit arrangements, instalment purchase arrangements and rental hiring agreements;

. stamp duties on leases;

. stamp duties on mortgages, bonds, debentures and other loan securities; stamp duties on cheques, bills of exchange and promissory notes; and `bed taxes'.

The abolition of the wholesale sales tax and other taxes is vital to reduce the cost of doing business. At the moment over half the money raised from the wholesale sales tax comes from taxing goods purchased by business. It imposes a hidden tax on exports and import competing industries.

The introduction of the goods and services tax will change this. As businesses are entitled to full input tax credits the hidden burden will be removed. In fact business costs will fall by more than $10 billion as a result of the GST and abolition of current inefficient and unfair taxes.

The GST will also lead to a $4.5 billion fall in the cost of exporting. Lifting this burden will increase the competitiveness of Australia's export industries.

The bill provides for some activities to be GST free which include:

. exports of goods and services;

. international air and sea travel, and domestic air travel, purchased overseas by non residents;

. taxes and charges at all levels of government (including local government rates and water and sewerage rates and charges).

The price of GST-free services will fall because tax will be removed from the purchases of those supplying them.

The GST will be broadly based, providing simplicity for business and consumers.

The government has not neglected important community services.

In its tax plan, the government proposed that virtually all health, education and child-care services, charitable activities and religious services would be GST free.

On 27 October a Tax Consultative Committee was established and charged with the task of making recommendations on the appropriate scope of four key GST-free areas—health, education, religious services and the non-commercial activities of charities—and transitional arrangements for motor vehicles.

The committee received over 300 submissions from interested parties and made recommendations to the government based on these submissions and its own expertise.

We consider the recommendations provide sensible boundary lines which are clear and based on sound policy principles.

The recommendations extend the GST-free areas further than those proposed in the government's tax policy.

They recommend GST-free treatment for a wide range of medical and allied health services.

They provide for comprehensive GST-free treatment for residential and community care for the aged and the disabled, provided the care is at a sufficiently high standard.

They provide for GST-free treatment for a wide range of aids and appliances specifically designed for people with illness or disabilities.

They provide for GST-free treatment for all secondary and tertiary courses, including vocational courses, provided students are eligible for income support.

And they provide for generous rules for charities.

Accordingly, the government has no difficulty in accepting the vast majority of the recommendations. In some areas the government has gone further, with more generous treatment of religious services and professional education.

The bottom line is that the committee tried to promote clarity and simplicity and in doing this has recommended good policy, which we will adopt.

We will apply international best practice to the treatment of financial services, which means that banks pay tax on their purchases, but home mortgage payments and the supply of most financial services is not taxed.

No GST will be charged on residential rent and rents will be input taxed only. Houses will be taxed only when first built and sold.

A First Home Owners Scheme will be introduced to offset the net impact of the GST on the price of new homes, entitling those eligible to a lump sum payment of $7,000 from 1 July 2000.

The government has at every turn considered the impact on business.

Very small businesses with a turnover less than $50,000 per year and non-profit organisations with a turnover of less than $100,000 a year will not have to register, but may choose to do so.

A special Small Business Consultative Committee will be involved in consultations to ensure that financial incentives, worth up to $500 million for small and medium businesses and other bodies registered for GST will be delivered in the most effective way.

Gains for rural and regional Australia

The reform package also acknowledges the high cost of transport particularly for rural and regional Australia.

Mr Melham interjecting

Mr Crean interjecting


Mr SPEAKER —The member for Banks and the member for Hotham!


Mr COSTELLO —A new diesel fuel credit scheme will effectively reduce diesel excise for all off-road, including marine, users from around 37c per litre to zero, and for larger transport users, including rail, from around 37c per litre to 18c per litre.

This is on top of savings of 7c per litre for business users of petrol and diesel through their access to a refund of the GST paid on fuel.

Alternative fuels will remain excise free on the introduction of goods and services tax.

Transformation of Commonwealth-state financial relations

From 1 July 2000, the Commonwealth will provide states with a secure and growing source of revenue by giving them the revenue from the goods and services tax. This is conditional on the states abolishing inefficient taxes—such as financial institutions duty, the debits tax and stamp and conveyancing duties—and not reintroducing them. Financial assistance grants will be abolished.

Mr Melham interjecting


Mr SPEAKER —The member for Banks!


Mr COSTELLO —The states will be required to take responsibility for the payment of general purpose assistance to local government, which is currently made by the Commonwealth. The Commonwealth will make the payment of GST revenue conditional on the states making these payments in accordance with existing conditions. This will ensure that local government is not worse off in that respect.

In fact, overall, local government will gain from the removal and reduction of Commonwealth and state taxes that currently increase their running costs. Local governments will also benefit from rates, water and sewerage charges being GST free.

The Special Premiers Conference on 13 November this year reached a historic agreement on principles that will transform Commonwealth-state financial relations as promised in the government's tax plan. The Commonwealth and all state and territory governments agree that the current financial relationship between levels government must be reformed to facilitate a stronger and more productive federal system for the new century.

Locking in the GST rate

Mr Melham interjecting


Mr SPEAKER —I warn the member for Banks.


Mr COSTELLO —Part of the Commonwealth-state agreement is a process to lock in the rate of the GST. Any request for a change to the GST rate would need to be made to the Commonwealth unanimously by all state governments, it would need to be endorsed by the Commonwealth government of the day and relevant legislation would need to be passed by both houses of parliament.

Price oversight

The community has a right to expect that reduced business costs are passed on to consumers in the transition to the new tax system.

We will amend the Trade Practices Act to give the Australian Competition and Consumer Commission special transitional powers to monitor prices for 12 months before goods and services tax starts and for two years thereafter. There will be penalties of up to $10 million per offence.

The Commonwealth will consult with the states and territories to ensure these measures apply across the economy. The amending legislation for this measure is expected to be introduced next week.

Transitional arrangements

The abolition of wholesale sales tax and the introduction of goods and services tax could result in difficulties for business if appropriate transitional rules are not put in place.

Without such rules, there might be double taxation or large falls in the value of stock held for resale. Consumers and businesses may delay purchases to take advantage of price falls when the higher wholesale sales tax rates cease to apply. Business may delay high-value purchases to obtain input tax credits.

Without special measures, the benefits of tax reform would be delayed. The government has designed transitional arrangements to ensure that this kind of disruption does not occur so that the benefits of tax reform can flow immediately to businesses and the wider community.

When the goods and services tax commences, businesses holding stock for sale on which sales tax has been paid will be able to claim the sales tax against their GST. This will ensure that GST does not apply to stock that has already paid wholesale sales tax.

The government recognises that large price changes can disrupt markets. Accordingly, the 32 per cent luxury wholesale sales tax rate will be phased down to reduce market disruption. Except for furs and jewellery, goods currently taxed at 32 per cent will be subjected to the standard 22 per cent rate from the date the GST is passed by the parliament—that is, goods such as cameras, televisions, video recorders and watches would all become cheaper prior to the introduction of the goods and services tax.

The introduction of the GST could result in major disruption to the motor vehicle market if businesses were able to claim input tax credits straight away. The government will reduce the incentive to delay vehicle purchases until after GST starts by denying input tax credits for purchases made in the first year of goods and services tax and by reducing the input tax credit by 50 per cent in the second year.

Importantly, this measure does not apply to organisations such as schools and farmers that can buy cars and 4WDs wholesale sales tax free. They will get a full input tax credit for motor vehicle purchases from day one of the goods and services tax.

Of course, consumers will get the benefit of substantially lower car prices as soon as the goods and services tax comes into effect.

Goods and services sold or performed after 1 July 2000 will be subject to goods and services tax.

Where a contract has been entered into before today, goods and services sold or performed pursuant to it will not be subject to goods and services tax even if sale or performance is to be on or after 1 July 2000.

However, if such a contract has provision for a review then goods and services tax applies after the first opportunity for review arises. Otherwise goods and services tax will apply to the sale or performance under the pre-existing contract only on or after 1 July 2005.

Goods and services tax will apply to goods and services supplied to consumers after 1 July 2000 under any contract entered into from today.

If a construction contract spans the start date of 1 July 2000, the part completed before that date will not have goods and services tax applied to it.

Many businesses will need to consider the GST implications of contracts that they enter into after today. The government recognises legitimate concerns that businesses will need some time to consider the precise impact on their operations. Businesses that enter into contracts with other businesses (which will be entitled to input tax credits) for the supply of goods and services, will provide those goods and services GST free until the first opportunity for review, provided the contract is made before the date the GST legislation gets the royal assent.

Personal tax cuts and increased family assistance

From the outset, one of the government's guiding principles for tax reform was that there must be no increase in the overall tax burden. We will do better than that. The tax reforms will actually reduce the overall tax burden on Australians by $4 billion.

The tax cuts will more than compensate taxpayers for the introduction of the goods and services tax and will also make it possible for ordinary Australians to save and invest.

The personal income tax bill gives effect to the cuts in rates of income tax and provides extra assistance to families by increasing the family tax assistance tax-free thresholds.

The tax-free threshold increases to $6,000 and the lowest tax rate decreases from 20 per cent to 17 per cent. This helps all taxpayers but is of relatively greater benefit to low income earners.

Under the old tax system, incomes between $20,700 and $50,000 are subject to rates of 34 per cent and 43 per cent income tax. The new system applies one lower rate of 30 per cent on all income between $20,000 and $50,000. This will mean that around 81 per cent of taxpayers will have a top tax rate of 30 per cent or less compared to 30 per cent of taxpayers who have that under the current system.

Low and middle income earners will keep more of their wages. This incentive encourages Australians to seek promotion, extra training and overtime. More effort will now mean more reward for individuals as well as a more productive Australian economy.

The top rate remains unchanged at 47 per cent for those with annual incomes of more than $75,000.

The $75,000 threshold will be equal to around 1.7 times average earnings. This will ensure that average earners do not drift into paying the top marginal tax rate, which would otherwise have occurred early in the next century.

Increased fairness

Some high earners are avoiding obligations and taking advantage of government assistance given to low income earners by converting income into fringe benefits. This way they get their monetary income down to qualify for income support even though their actual remuneration, including benefits, is much higher.

From the 1999-2000 income year, group certificates will show the full value of fringe benefits received when the taxable value exceeds $1,000. These benefits will be taken into account when liability for surcharges and eligibility for assistance is being determined.

Conclusion

The government has received strong endorsement for its management of the Australian economy. The Reserve Bank of Australia has announced this morning another cut in official interest rates by 25 basis points. The reduction in interest rates have been important in shielding the Australian economy from external events. This government is committed to pushing ahead with economic reforms to build on our achievements and to continue to strengthen the economy to withstand external crises like those affecting our region and other areas of the globe at present.

This package of legislation represents fundamental economic reform. The need for tax reform has been recognised by governments of both persuasions over the last 30 years. But this is the government that has acted on it. This is the government that intends to fix the problem and reform the system, notwithstanding opportunistic opposition which is contrary to the best interests of the nation. These reforms relieve the tax burden for business and exporters, allow scope for substantial personal income tax cuts and will contribute to a more stable and prosperous Australian economy.

These are the reforms which will strengthen our economy, our prospects, our living standards, our financial arrangements and will secure better opportunities for the future through a new tax system.

Full details of the measures in the bill are contained in the explanatory memorandum circulated to honourable members.

I commend the bill to the House and present the explanatory memorandum to the bill. I also present the regulation impact statement.


Mr Crean —I move that debate on the bill to introduce a new 10 per cent tax on almost everything be adjourned.

Debate adjourned.