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What is the effect of GST-free food?



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BACKGROUNDER

Senator Meg Lees

Australian Democrats

Parliamentary Leader

 

May 30, 1999

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WHAT IS THE EFFECT OF GST-FREE FOOD?

 

The Democrats’ definition of food is far broader than just basic items and includes most food groceries, meaning that aroun d 80% of a low income household’s food purchases - will be GST free.

 

The amendment makes it clear that unless the type of food is included in one of the three "exception categories", then the food will be GST free.

 

The exceptions cover three classes:

 

The current categories of the Wholesale Sales Tax system developed by the Labor Government over 13 years (savoury snacks, confectionary, soft drinks, icecream and biscuits, although orange juice will become GST-free);

 

B Restaurant and takeaway meals, and fully prepared ready to eat meals sold in supermarkets that directly compete against restaurants and takeaways (this definition was developed by the fast food service industry based on the Canadian experience);

 

C Bakery products other than bread (based on the Irish VAT definition) as it is too difficult to differentiate whether bakery products such as pies are or are not, takeaway food.

 

All other food will be GST-free. If there is any doubt, it is GST-free.

 

This approach is not radical - the VAT/GST systems in 17 OECD countries confine the concessional treatment of food to "basic groceries". This is because low income earners spend much more of their households budget on basic groceries than high income households. Indeed, taking out basic food primarily eliminates the regressive effect of a GST:

 

TAKING FOOD OUT MAKES FOR A FAIR GST 

CPI EFFECT OF A GST ON HOUSEHOLD SPENDING (by quintile)

 

Income Levels

Poorest 20%

2 nd 20%

3 rd 20%

4 th 20%

Wealthiest20%

Average

ANTS with GST on food

2.67%

2.31%

2.06%

1.9%

1.7%

1.9%

GST with food GST-free

0.88%

0.77%

0.76%

0.8%

.92%

.9%

Less effect of deferred state taxes

-0.45%

-0.45%

-0.45%

-0.45%

-0.45%

-0.45%

NEW CPI EFFECT

1.33%

1.22%

1.21%

1.25%

1.37%

1.35%

(Democrat calculations based on Treasury and HES data using Melbourne Institute relativities)

 

TABLE: FOOD WHICH IS GST FREE AND NOT GST FREE:

 

FOOD WHICH IS GST FREE

FOOD ON WHICH GST IS PAYABLE

All meat products (uncooked)

Restaurant meals

Processed meats and deli products (e.g. ham, salami, sausages, whole cooked chickens)

Takeaway meals (including sandwiches)

Fresh fish (fresh or frozen) that is not takeaway, including frozen fish products (e.g. fish fingers)

Fully prepared, ready to eat meals (e.g. frozen TV dinners, Gourmet Chef meals) but does not include products which require mixing to make them fit for eating (e.g. tinned soups)

Chicken (other than cooked pieces)

Confectionary* (including popcorn, chocolate, muesli bars and glazed fruit)

Eggs

Savoury snacks* (including caviar, crisps, salted n uts etc.)

Milk (incl. flavoured milk*), cream and cheese

Biscuits*

Fresh fruit & vegetables

Cakes, pastries, pizzas, donuts and meat pies

Fruit juices* (other than cordials)

Soft drinks*

Bread and rolls

Cordials* with less than 25% fruit juice

Raw pas ta and rice

Ice-cream*

Breakfast cereals

Pet food

Sugar, tea & coffee

 

Canned food (soups & baby food)

 

Jams, spreads and sauces

 

Soy & rice milk

 

All food products that do not fall into the categories of catering, confectionary, savoury snacks, bak ery products, icecream, biscuits or softdrinks.

 

* denotes food which is taxed now under Labor’s Wholesale Sales Tax

 

 

TAX MIX SWITCH

 

The Democrats would have preferred that the changes to the GST be funded by reductions in income tax cuts. However, th e Government was insistent on retaining tax cuts for people on less than $50,000 (which is just 1.3 times average weekly earnings now anyway).

 

The paring back of tax cuts above $50,000 will save up to $1.3 billion, which is one third of the cost of making food GST-free. The remainder is funded by the deferral of the abolition of indirect taxes. The result is a significant reduction in the tax mix switch on what the Government proposed, once the new system settles down.

 

ESTIMATED TAX MIX SWITCH in 2002

 

Re duction in income tax (taking into account bracket creep of $9.5b since 1993 and base broadening measures in ANTS)

$0.5b

Increase in GST over replaced indirect taxes in ANTS with food taxed (less Housing and diesel rebates in ANTS)

$5.2b

TAX MIX FROM DIR ECT TO INDIRECT IN ANTS

$5.7b

Making food GST-free

-$4.04b

Reducing income tax cuts

-$1.33b

Less deferral of State taxes (BAD is half of this)

+$2.42b

NEW TAX MIX SWITCH

$2.75b

% of GDP

0.37%

% of GDP tax mix switch in Labor’s 1993 Budget

 

- Reduct ion in income tax - $3.1 billion

-0.6%

- Increase in indirect taxes - $3.0 billion

+0.6%

TAX MIX SWITCH IN LABOR 1993’s BUDGET

1.2%

 

The tax mix switch will be largely eliminated by 2005 as bracket creep pushes average weekly earnings towards $50,000 and the BAD tax is abolished.

 

The above analysis ignores the impact of the reduced diesel rebates as these are used to fund environmental measures.

 

The Democrats have persuaded the Government to consider further income tax base broadening measures as part of the Ralph Business review including the concessional FBT treatment of company cars (worth $700m a year), the introduction of a 20% alternative minimum company tax (worth $600m a year) and the use of company structures to avoid PAYE taxes (worth $500-1000m a year).

 

For further information: John Cherry 0411 430 367

 

 

 

rw  1999-06-08  11:10