VENTURE CAPITAL LEADER: GST Reform Is The Key To Helping Australia Transition To A Digital Economy

AVCAL CEO Yasser El-Ansary wants Australia’s tax system to be refreshed. Image: Supplied.

For the best part of the last decade or more, our tax system has slipped progressively behind in its capacity to cope with our modern economy.

As businesses right around the world evolve, our old tax system with its fundamental structure and design that hasn’t changed much since the early part of the twentieth century, is starting to show its age.

We know that our over-reliance on revenues generated through income taxes, rather than consumption-based taxes such as the GST, is not going to be enough to meet projected government funding for services and infrastructure.

In last week’s budget the government clearly made a number of difficult – and deeply unpopular – decisions about cuts to spending that impact on households as well as businesses.

Amongst the contentious decisions was the proposal to abandon around $80 billion in new specific purpose grants for health and education agreed between the previous government and the states and territories. The $80 billion represented a significant new funding commitment, over and above the increases in grants already booked into the forward estimates.

What has effectively happened here is the government has pulled back on exponential increases in health and education funding because there is very little likelihood there would be sufficient tax revenues generated to pay for the promised increase in funding. That is a very binary solution to the problem – and the government should explain it as simply as that.

There are only two ways by which the additional funding could have been met by any government.

One option was to bank on there being a major pick-up in economic activity and business profitability, perhaps coupled with increases in taxes which, when combined, would lead to significantly more federal revenues.

The second option was for there to be a sizeable re-allocation of more money away from other federal spending priorities and into health and education.

There are no other options. You either make changes to the money coming in, or the money going out.

Which leads us to the inevitable discussion that we always had to have.

Ultimately, there is only so much paring back of government expenditure that you can do before damage is done to the nation’s economy.

The only remaining option is to look at your revenue base and identify how more tax can be extracted in the most economically efficient and fair manner possible.

Despite what some argue, Australia’s tax system is not plagued with loopholes. In actual fact, there has been a concerted effort over the last decade to shut the gate on any actual or potential tax leakage.

But the one thing that our tax system does suffer from is that it is outdated and no longer capable of adapting to the modern way in which many new economy businesses are operating. For many businesses, the economic world is borderless. And our century-old tax system doesn’t cope with that.

Because of that, we face two problems.

Changes must be made over time to modernise our tax system to ensure that an appropriate share of tax on profits made by companies operating in the digital world is captured. However, doing that isn’t going to be easy.

For well over 20 years now, attempts by some of the best economic and tax minds in the world to come up with a solution have fallen short. If you look at OECD reports as far back as the early 1990s, you will see a focus on trying to address the challenges of taxing digital commerce but no clear answer was identified. We have to persist, and we have to take politics out of the equation so we can work constructively with other countries to get there.

The other part of the solution here in Australia has to be to look at the role that an expanded GST can play within our future tax system.

The GST system represents one of the most economically efficient ways to go about boosting tax collections through a stable and growing source of revenue. Over the last few years, we’ve seen the evidence to support the fact that despite significant volatility in income tax revenues, revenues from GST have remained stable, and in fact continued to grow. Since its introduction in 2000, GST growth has averaged around six per cent every year.

A comprehensive GST base is the least economically distorting approach because it would have less impact on the day-to-day decisions made by individuals and businesses. The logic is that there is very little, if any, scope to avoid being exposed to the tax, so there’s no point changing your spending or investment decisions because of the tax.

Australia is a net importer of capital which means we have to strike the right balance between direct and indirect taxes to ensure we have a competitive tax system.

Right now we are far away from the right balance, which is consistent with the recommendations made by the Henry Tax Review.

Reforming our GST system to ensure that it does more of the tax ‘heavy lifting’ is clearly the right answer. Of course, when you look at the role of an expanded GST you have to also look at how you would adjust personal income tax rates in order to offset some of the regressive impacts of a higher GST on lower income earners.

We have to do a better job of aggressively competing for capital from around the world through a more competitive tax system. But we can’t do that with one arm tied behind our back.

Yasser El-Ansary is chief executive of the Australian Private Equity & Venture Capital Association Limited.

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