2016-2017

 

 

 

 

 

THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA

 

 

 

 

 

SENATE

 

 

 

 

 

A NEW TAX SYSTEM (GOODS AND SERVICES TAX) AMENDMENT

(MAKE ELECTRICITY GST FREE) BILL 2017

 

 

 

 

 

 

 

EXPLANATORY MEMORANDUM

 

 

 

 

 

 

 

(Circulated by authority of Senator Leyonhjelm)

A NEW TAX SYSTEM (GOODS AND SERVICES TAX) AMENDMENT (MAKE ELECTRICITY GST FREE) BILL 2017

 

OUTLINE

 

The A New Tax System (Goods and Services Tax) Amendment (Make Electricity GST Free) Bill 2017 makes a supply of electricity GST-free.  This would commence from the first day of the quarter following Royal Assent. 

 

Water is GST-free because it is an essential service.  Electricity is also an essential service so should also be GST-free.

 

Prior to the recent surge, electricity prices in Australia have been rising by an average of 8 per cent each year over the last decade. Making electricity GST-free will provide immediate relief from the pain of rising electricity prices, which is felt particularly by low-income households.  A typical household could save around $200 each year as a result.

 

Making electricity GST-free is just part of what needs to be done to counter the long-term growth of electricity prices.  The construction of new low-cost electricity generation is required.  Policies that favour certain forms of electricity generation over others should be abolished and assurances should be given that such policies will not return.

 

Reflecting the fact that the GST is a Commonwealth tax, this Bill will make electricity GST-free irrespective of the views of State and Territory Governments.   The enactment of this Bill will override the commitment, previously legislated in the A New Tax System (Goods and Services Tax) Act 1999 and the A New Tax System (Managing the GST Rate and Base) Act 1999 , to only vary the base of the GST with the unanimous support of the State and Territory Governments. 

 

The legislated commitment that GST revenue will be granted to the State and Territory Governments is unaffected by this Bill. 

 

Analysis from the Parliamentary Budget Office is attached to this Explanatory Memorandum.  The Office estimates that, as a result of making electricity GST-free:

·          GST revenues granted to the State and Territory Governments would fall by around $2 billion each year (which would still leave State and Territory budgets in a healthier position than the Commonwealth’s);

·          electricity prices to households would fall 9.1 per cent (which reflects that GST is 10 per cent of pre-GST prices and 9.1 per cent of GST-inclusive prices);

·          the Consumer Price Index (CPI) would fall by 0.18 per cent; and

·          government spending on welfare payments indexed to the CPI would fall, as would revenue from alcohol and fuel excises, which are indexed to the CPI, leading to an overall boost to the Commonwealth budget of around $200 million each year.

This Bill is not a bill imposing taxation so may originate in the Senate.

 

NOTES ON CLAUSES

Clause 1: Short Title

1.           This clause provides for the Bill, when enacted, to be cited as the A New Tax System (Goods and Services Tax) Amendment (Make Electricity GST Free) Act 2017 .

Clause 2: Commencement

2.           This clause provides that the substance of the Bill, which makes electricity GST-free, commences on the first day of the quarter following Royal Assent.  The remainder of the Bill, which contains the mechanics of the Bill, commences on the day of Royal Assent.

Clause 3: Schedules

3.                   Each Act specified in a Schedule to this Bill is amended or repealed as is set out in the applicable items in the Schedule.  Any other item in a Schedule to this Bill has effect according to its terms.

Schedule 1 — Amendments to the A New Tax System (Goods and Services Tax) Act 1999

Item 1 - Subdivision 38-I — Water, sewerage and drainage

4.                   Item 1 adds ‘electricity’ to the heading for Subdivision 38-I in preparation for Item 2’s insertion into Subdivision 38-I of a provision to make electricity GST-free.

Item 2 - After section 38-285

5.                   Item 2 inserts Section 38-287 making a supply of electricity GST-free.

6.                   To avoid doubt, Section 38-287 makes clear that a supply of equipment for the generation of electricity, such as a diesel generator or solar panel, or the storage of electricity, such as a battery (whether charged or uncharged), is not GST-free.

Item 3 - Application

7.                   Item 3 is an application provision ensuring that electricity is GST-free in relation to supplies made on or after the first day of the quarter following Royal Assent.

 

Statement of Compatibility with Human Rights

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

 

A NEW TAX SYSTEM (GOODS AND SERVICES TAX) AMENDMENT

(MAKE ELECTRICITY GST FREE) BILL 2017

 

This Bill is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 .

 

Overview of the Bill

The Bill makes electricity GST-free. 

Human rights implications

This Bill does not engage any of the applicable rights or freedoms, as the relevant international instruments do not refer to a right to property, nor a right to avoid the erosion of one’s property through taxation.

The closest the international instruments come to recognising a right to property and the avoidance of its erosion through taxation is in Article 1 of the International Covenant on Economic, Social and Cultural Rights.  This Article states that all peoples have the right of self-determination, to freely pursue their economic development, and to freely dispose of their natural wealth and resources, and that in no case may a people be deprived of its own means of subsistence.

 

Conclusion

The Bill is compatible with human rights and does not engage the rights listed in the relevant international instruments.

 

Senator Leyonhjelm

 

 

 

Policy costing—outside the caretaker period

 

 

Name of proposal:	GST-Free Electricity
Summary of proposal:	The proposal would make electricity supplied Goods and Services Tax (GST) free unless it is supplied in a battery. Equipment for self-generation of electricity, like generators and solar panels, would remain subject to GST. States and territories would not be compensated for the reduction in GST revenue collections. The start date of this proposal is 1 January 2018.
Person/party requesting the costing:	Senator David Leyonhjelm, Liberal Democratic Party
Did the applicant request the costing be confidential:	☒ Yes	□ No
Date costing request received:	17 July 2017
Date costing completed:	3 August 2017
Expiry date of the costing:	Release of the next economic and fiscal outlook report.

 

Costing overview

This proposal wouldbe expected to increase the fiscal balanceby an immaterial amount and increase the underlying cash balance by $600 million over the 2017-18 Budget forward estimates period. The fiscal balance impact reflects a decrease in net GST revenue (ie GST revenue less GST expenses paid to the states and territories) of $600 million and a net increase in the budget balance from a reduction in Consumer Price index (CPI) indexation of government transfers and excise of $600 millionover this period.

The proposal would be expected to decrease GST revenue and receipts, however this would not be expected to have a net financial impact on the Commonwealth Government on an underlying cash balance basis, as it would result in a corresponding decrease in the GST paid directly to the states and territories (net of administrative costs) under the Intergovernmental Agreement on Federal Financial Relations (the Intergovernmental Agreement).

On a fiscal balance basis, there would be expected to be a small decrease in net GST revenue to the Commonwealth Government because of a delay between when GST revenue is recognised by the Commonwealth and when the associated receipts are received, and when the GST expense to the states and territories is accrued.

Making electricity GST free would be expected to reduce the price of electricity to households by 9.1 per cent, which would contribute a one off change in the level of the CPI of -0.18 per cent. The proposal would have no impact on the cost of electricity for most business users, because GST taxable businesses are able to claim input tax credits for the GST included in the price of electricity they consume.

The net financial impact of this proposal on the Commonwealth primarily reflects the impact of the one-off decrease in the level of the CPI on a number of government transfers to households and excise revenues that are indexed to the CPI.

This proposal would be expectedto have an ongoing impactthat extends beyondthe 2017-18 Budget forward estimates period.

The financial impact of the proposal would generally continue to grow over time in line with growth in the underlying parameters. However, there is a large decrease in the financial impact on government transfers to households from 2022-23.

•             This is because, for some government payments to households, the financial impact of the one-off decrease in the CPI would be temporary, as some base rates are indexed to the higher of the CPI and the Pensioner and Beneficiary Cost of Living Index (PBLCI) as wellas being benchmarked against a percentage of Male Total Average Weekly Earnings (MTAWE). In 2022-23 the MTAWE benchmark exceeds the rate given by indexation by the CPI or PBLCI, removing the effect of the reduction to the CPI on some government payments.

A detailed breakdown of all the components of the costing over the period to 2027-28 is included at Attachment A .

The proposal is not expected to have a material impact on departmental expenses as entities involved in supplying electricity would continue to lodge BusinessActivity Statements in order to claim input tax credits.

 

Table 1: Financial implications (a)(b)

 

Impact on ($m)	2017-18	2018-19	2019-20	2020-21	Total to 2020-21
Fiscal balance	-200.0	-50.0	120.0	130.0	..
Underlying cash balance	..	160.0	220.0	230.0	600.0

(a)    A positive number represents an increase in the relevant budget balance; a negative number represents a decrease.

(b)    Figures may not sum to totals due to rounding.

..    Not zero but rounded to zero.

Key assumptions

 

GST revenue assumptions

 

•            It is assumedthat there are no changesto the Intergovernmental Agreement and all reductions in GST receipts (net of administrative expenses) result in a corresponding reduction to GST paymentsto the states and territories.

•            All price impactsfrom the GST exemption of electricity are fully passedon to final consumers.

•            The impact of households delaying consumption in order to purchase electricity after it becomes GST free is assumed to be immaterial.

•            There are assumedto be no material fiscal implications flowingfrom consumers altering their behaviour in responseto changes to the price of electricity they face.

 

GST timing

 

•            On a fiscalbalance basis, all GST revenueis recognised in the year the tax is leviedon the consumer. The payment of GST to the states and territories is recognised as an expense when GST is received by the Commonwealth.

•            On an underlying cash basis, GST receipts are recognised when they are collected by the Australian Taxation Office (ATO). It is assumed that a percentage of GST revenue is received in the year after it is recognised on a fiscal balance basis. This reflects the fact that GST payments are made to the ATO in arrears, and accounts for the fact that businesses can either remit their GST annually, quarterly, or monthly.

•            There is assumedto be no delay between the receipt of GST by the Commonwealth and associated payments to statesand territories.

 

Impacts on associated government transfers and fuel and alcohol revenues

 

•            The proposal would impact the CPI release for the quarter immediately after the GST change takes effect. Government transfers and revenues would be affected from their next indexation date following this CPI release.It is assumed that transferrecipients do not alter their behaviour in response to changes in the payment rates or income thresholds for government transfers.

•            Consumers do not change their consumption of fuel or alcohol in response to incrementally lower than otherwise excise rates, or changes in the GST rate.

•            There is no change in the production or importation of fuel and alcohol products in response to lower than otherwise excise rates.

Methodology

 

Data from the Australian Bureau of Statistics (ABS) was used to estimate the GST revenue implications of the proposal. Estimates were grown over the medium term based on growth in household consumption expenditure of similar goods and services. The impact on the CPI was estimated as a percentage change based on the 16th Series Weighting Pattern of the CPI. In order to estimate the impact on revenue and payments, the estimated CPI change was used to estimate government transfers, excise and customs duties under the proposal and then compared to current estimates of revenue and transfers.

GST revenue and expenditure estimates and government transfers to households have been rounded to the nearest $100 million.

Fuel excise, Fuel Tax Credit expenses and alcohol excise have been rounded to the nearest

$10 million.

 

 

Data sources

Australian Bureau of Statistics, 2011. 6471.0 - Consumer Price Index, 16th Series Weighting Pattern , 2011, Canberra: Australian Bureau of Statistics.

Australian Bureau of Statistics, 2017. 5206.0 - Australian NationalAccounts: National Income, Expenditure and Product, March 2017 , Canberra: Australian Bureau of Statistics.

Australian Bureau of Statistics, 2017. 5209.0.55.001 Australian National Accounts: Input- Output Tables - 2014-15 , Canberra: Australian Bureau of Statistics.

Commonwealth of Australia, 2017. 2017-18 Budget , Canberra: Commonwealth of Australia. The Australian Taxation Office provided unit record data for alcohol and fuel excise.

The Department of Immigration and Border Protection provided unit recorddata for alcohol and fuel excise equivalent customs duty.

The Department of Social Services provided the 2017-18 Budget model for government transfers to households.

 

 

Attachment A - GST-Free Electricity—financial implications

 

Table A1: GST-Free Electricity—Fiscal balance (a)(b)

 

($m)	2017-18	2018-19	2019-20	2020-21	Total to 2020-21	2021-22	2022-23	2023-24	2024-25	2025-26	2026-27	2027-28	Total to 2027-28
GST impacts
GST revenue	-1,000.0	-2,100.0	-2,300.0	-2,500.0	-7,900.0	-2,700.0	-2,900.0	-3,100.0	-3,400.0	-3,700.0	-4,000.0	-4,300.0	-32,000.0
GST expenses to the states and territories	800.0	1,900.0	2,200.0	2,400.0	7,300.0	2,600.0	2,900.0	3,100.0	3,400.0	3,600.0	4,000.0	4,300.0	31,200.0
Net impact on GST	-200.0	-200.0	-100.0	-100.0	-600.0	-100.0	..	..	..	-100.0	..	..	-800.0
Flow on effects from a change in CPI
Government transfers to households	..	180.0	250.0	260.0	690.0	230.0	110.0	110.0	120.0	130.0	130.0	150.0	1,670.0
Alcohol excise and customs duty revenue	-	-10.0	-10.0	-10.0	-30.0	-10.0	-10.0	-10.0	-10.0	-10.0	-10.0	-10.0	-100.0
Fuel excise and customs duty revenue	-	-40.0	-40.0	-40.0	-120.0	-40.0	-40.0	-50.0	-50.0	-50.0	-50.0	-50.0	-450.0
Fuel tax credit expenses	-	20.0	20.0	20.0	60.0	20.0	30.0	30.0	30.0	30.0	30.0	30.0	260.0
Net impact from the change to CPI	..	150.0	220.0	230.0	600.0	200.0	90.0	80.0	90.0	100.0	100.0	120.0	1,380.0
Total	-200.0	-50.0	120.0	130.0	..	100.0	90.0	80.0	90.0	..	100.0	120.0	580.0

(a)   A positive number for the fiscal balance indicates an increase in revenue or a decrease in expenses or net capital investment in accrual terms. A negative number for the fiscal balance indicates a decrease in revenue or an increase in expenses or net capital investment in accrualterms.

(b)   Figures may not sum to totals due to rounding.

..    Not zero but rounded to zero.

-        Indicates nil.

 

Table A2: GST-Free Electricity—Underlying cash balance (a)(b)

 

($m)	2017-18	2018-19	2019-20	2020-21	Total to 2020-21	2021-22	2022-23	2023-24	2024-25	2025-26	2026-27	2027-28	Total to 2027-28
GST impacts
GST receipts	-800.0	-1,900.0	-2,200.0	-2,400.0	-7,300.0	-2,600.0	-2,900.0	-3,100.0	-3,400.0	-3,600.0	-4,000.0	-4,300.0	-31,200.0
GST payments to the states and territories	800.0	1,900.0	2,200.0	2,400.0	7,300.0	2,600.0	2,900.0	3,100.0	3,400.0	3,600.0	4,000.0	4,300.0	31,200.0
Net impact on GST	-	-	-	-	-	-	-	-	-	-	-	-	-
Flow on effects from a change in CPI
Government transfers to households	..	180.0	250.0	260.0	690.0	230.0	110.0	110.0	120.0	130.0	130.0	150.0	1,670.0
Alcohol excise and customs duty receipts	-	-10.0	-10.0	-10.0	-30.0	-10.0	-10.0	-10.0	-10.0	-10.0	-10.0	-10.0	-100.0
Fuel excise and customs duty receipts	-	-30.0	-40.0	-40.0	-120.0	-40.0	-40.0	-50.0	-50.0	-50.0	-50.0	-50.0	-450.0
Fuel tax credit receipts	-	20.0	20.0	20.0	60.0	20.0	30.0	30.0	30.0	30.0	30.0	30.0	260.0
Net impact from the change to CPI	..	160.0	220.0	230.0	600.0	200.0	90.0	80.0	90.0	100.0	100.0	120.0	1,380.0
Total	..	160.0	220.0	230.0	600.0	200.0	90.0	80.0	90.0	100.0	100.0	120.0	1,380.0

(a)   A positive number for the underlying cash balance indicates an increase in receipts or a decrease in outlays or net capital investment in cash terms. A negative number for the underlying cash balance indicates a decrease in receipts or an increase in outlays or net capital investment in cash terms.

(b)   Figures may not sum to totals due to rounding.

..    Not zero but rounded to zero.

-        Indicates nil.