SCMP Conference Hong Kong 2005

1
SCMP Conference Hong Kong 2005

• John Foster
• Asia Pacific GST Counsel
• 3 March 2005

2
Overview

• Australian GST in brief
• Key selling points to Australian Public
• Australian scorecard
• Reviewing the pre GST predictions
• General observations about Australias
  implementation
• What about the future?
• Financial services?

3
Australian GST in brief

• Taxes the supply of most goods and services 10
  rate
• Multi-stage tax designed to flow through most
  businesses and tax end consumer
• Liability for GST rests with supplier but the
  supplier usually adjusts price to include GST
• An entity needs to hold a valid tax invoice to
  claim an offset for GST on its acquisitions
• Taxpayer pays net amount to ATO (output tax
  input credits)

4
Tax Reform in Australia

• Key selling point - Australians will be better
  off because
• GST will replace an existing antiquated wholesale
  sales tax which in itself was complex with
  multi-rates of tax making the economy more
  efficient and reducing prices on many goods.
• Many imports will be cheaper as GST rate is
  generally less than import duties which were
  applicable to many goods.
• Income tax rates were lowered this was a huge
  incentive to middle income earners.
• State governments in exchange for receiving all
  GST revenue agreed to phase out a number of state
  taxes (FID tax, BAD tax and stamp duty).
• There was much political maneuvering and several
  policy shifts to appease lobby groups (education,
  food, residential premises, financial services).

5
Australias scorecard 6/10

• Revenue generated 10/10 A35 bill (2004)
• Economy 10 spike in prices for services
• Complexity very complex in certain sectors
• Compliance high cost to business
• Administration many rulings but still a great
  deal of uncertainty
• Efficient tax user pays
• Acceptance very few headline articles in the
  press over 4 years

6
Net GST Collections by Industry
7
Reviewing the pre GST predictions

• Inflation? no long term effect (short term
  spike 2)
• Hardship/insolvency? minor effect
• Consumer spending ? there was a bring forward
  of expenditure on residential construction,
  services and delay in motor vehicle and retail
  spending but no prolonged effect
• Cash economy? GST has grown faster than GDP
• Business efficiency? large effect/compliance
  burden
• Economy? no long term effect (perhaps
  luck/timing)
• Employment? no effect (short term increase in
  consulting ranks) tech crash had more impact

8
Observation - 1

• Without doubt Australian Government did not learn
  the key lesson from other countries simplicity!
• Too many special rules food, education, health,
  financial services, taxis, residential premises,
  sale of freehold land rules, change of use rules,
  value shifting rules, telecommunication rules,
  imported services rules, reduced input tax credit
  rules, financial regulations etc etc
• The cost of implementation for businesses was
  underestimated. Businesses spent millions
  updating computer systems, analysing
  transactions, reviewing contracts, and
  documenting processes and procedures
• The ATO and Treasury issued hundreds of private
  rulings, views on treatment of certain supplies,
  public rulings, questions answer booklets, and
  implemented a massive full time help desk which
  required training.

9
A company needed approx. 18 months to implement

• Project initiation/stakeholder buy-in/project
  set-up
• Estimate cost of implementation, timelines and
  seek approval from CEO
• Understand legislation/lobby on specific issues
• Review all existing contracts for GST impact
• Organise valuations where necessary (real
  property)
• Analyse all business supplies for GST treatment
• Analyse all business expenses for GST treatment
• Develop apportionment methodology based on
  product/cost centres
• Initiate project to work out systems requirements
  and reprogram in-house operating, finance and
  procurement systems - implement apportionment
• Test systems outcomes
• Document processes and procedures
• Educate and train all staff
• Risk management and external sign off

10
Observation - 2

• The Australian Taxation Office (ATO) was careful
  to use a softly, softly approach towards
  implementation which greatly eased Australias
  transition
• Positives from this approach
• Defused public anxiety/backlash at time of
  implementation
• Helped open valuable dialogue between ATO and
  business
• Negatives from this approach
• Businesses have been lulled into false sense of
  security (GST is off the radar)
• Not all businesses are fully compliant and
  actually face significant ATO audit risk
• Many issues still not settled between ATO and
  businesses

11
Observation - 3

• Compliance burden was not properly thought
  through
• Original GST return was too detailed and
  disclosure was onerous
• Original GST return did not allow for differing
  accounting systems and differing businesses
• This became a hot political issue and GST returns
  were quickly modified to have minimal disclosure
  requirements
• As a result, a lot of key data which the ATO
  Government thought they would collect was lost
  (reducing ability to model)
• Electronic lodgment of GST return was not
  efficient for large business group (e.g
  investment funds, property companies)

12
Observation - 4

• The Government set up the Australian Competition
  and Consumer Commission (ACCC) watchdog to
  monitor prices and where necessary issue very
  hefty penalties for incorrect pricing or
  profiteering from the introduction of GST.
• ACCC guidelines included strict guidelines for
  disclosure of GST
• GST could not be separately disclosed in shop
  prices
• Benefits of this approach
• Australian consumers dont see GST every time
  they purchase goods
• Any consumer who wanted to complain could do so
  to ACCC who would actively follow up the
  complaints

13
Observation - 5

• Impact of GST has been softened by the robust
  economic climate experienced by Australia since
  July 2000.
• If businesses in Australia were not experiencing
  some of the best economic times they have ever
  had there may have been more noise.
• The Labour State Governments are getting all the
  GST revenue so they are quietly very happy with
  the introduction of GST and do not really oppose
  it.

14
Observation - 6

• Australia had a number of transitional rules that
  seemed to work quite well including
• Long term contracts (grandfathered)
• Margin Scheme for property (only pay GST on
  margin generated after 30 June 2000 but purchaser
  can not claim input tax credit).
• Trading stock on hand at 30 June 2000 (credit for
  sales tax paid)
• Rights reasonably expected to be exercised after
  30 June 2000
• Construction contracts (pre post GST
  components)
• No input tax credits allowed for vehicles
  acquired before 23 May 2001 (to smooth vehicles
  sales)

15
What about the Future?

• Australian GST revenue will not continue to grow
  at a rate in excess of GDP
• As Australias population ages there will be a
  skew towards health care which does not earn GST
  revenue and GST revenue will dip below GDP
• Explosion in Audits, rulings and case law
• Beyond the everyday worldlies the world of VAT,
  a kind of fiscal theme park in which factual and
  legal realities are suspended or inverted Royal
  Sun Alliance Insurance Group Plc v Customs and
  Excise Commissioners 2001 STC 1476 at 54 per
  Sedley LJ.
• Corporate Governance - back taxes, penalties and
  interest
• ATO will go back 4 years and impose penalties and
  interest. Areas that were uncertain at
  implementation are now subject to a more ruthless
  approach by the ATO in Australia with huge
  potential for effecting corporate profits.

16
What about the Future?

• Australian GST model does not easily address the
  global economy
• Australian GST model is predicated on an
  assumption that end users will buy goods and
  services domestically
• Australian GST system does not handle virtual
  services to domestic consumers
• GST is not flexible enough to deal will a lot of
  innovative transactions (barter transactions,
  mixed supplies, hybrids etc)
• Many services are starting to be provided from
  regional service centers Australian GST does
  not handle this efficiently
• Australian taxpayers have yet to fully consider
  sophisticated GST planning structures

17
Financial Services?

• GST in respect of financial services in Australia
  is scored 2/10
• Legal uncertainty due to exemption of financial
  supplies (ATO still issuing apportionment rulings
  in 2005)
• RITC system has compounded the uncertainty
• Cost of compliance is high - maintaining computer
  systems/continuous education/constant transaction
  analysis/high use of external advisers
• Corporate governance risks are high due to audit
  risk/uncertainty/systemic risk
• Incentive for domestic end users to source
  financial services from offshore
• Because GST becomes imbedded in cost of
  Australian financial services it makes Australian
  business less competitive with the rest of Asia
  because unrecovered GST effectively cascades
  through the supply chain
• Financial service providers will have cut costs
  in other areas to compensate for impact of GST on
  bottom line (including employment)