How Does Good and Service Tax Affect Australia Economic and Australia Property Market - Essay Example

Running Head: GST GST [Name Of Student] [Name Of Institution] Introduction The ‘goods and service tax’-GST is a value added tax which is intended to substitute the ongoing sales tax. This was first proposed by a French economist in 1954 named Maurice Laure (Presteny, 1999). It is an indirect type of tax which means that the cost of this tax is eventually imposed on the end consumer as it is collected at every step of the supply chain which gathers the tax and is responsible for giving it to the government (Hendern, 2004). GST is very critical as it aids in complete trade liberalization. It is achieved when the revenue losses are remunerated by decreasing tariff rates; that is the tax on imported items, and at the same time continuing expansions in the production as the producer costs are extended to overall world prices (Presteny, 1999). All this ensures that the Australian business market remains competitive in the global market and brings prosperity to the countries economy. In this paper, I shall explain GST in detail with reference to the Australian taxation system. Furthermore, I shall explore how GST affects the economy and property market in Australia. History Of GST There are primarily two broad categories of taxes: direct and indirect. Examples of the first type of tax are road and income tax, where the tax payers feel the burden and yet pay their due shares to the government (Dixon, 2000). On the other hand, indirect taxes are collected in such a way that the people don’t really feel any burden while paying them as it is already incorporated in the selling price of items. GST falls in the second category; an indirect value added tax which is applicable to all goods and services in the country (Donnelly, 2003). The taxation system in Australia went through a massive change in 2000 when the new tax system came into force. The good part is that proper measures were taken by the government to ensure that the general public understands the system well (Presteny, 1999). There were massive educational and awareness companies all across the country to inform the people about the reason behind the change and also what benefit it would bring to the Australian economy, and eventually to the people. It was enforced by the federal government on the basis of the new Tax System Act 1999 with the aim of expanding the tax base which was initially very biased in terms of provision of services. The new tax system imposed, instead of a wholesale tax, a 10% GST on majority of the items except the ones that are exempted from tax or the input taxed goods and services (Libbis, 2005). This system was designed to support individuals (as per an estimate, nearly 80% citizens of Australia pay a tax of about 30 cents per dollar), small business establishments (as this system collected taxes once in three months through a simple form), pensioners who got a 4% raise in their allowances, and the Australian economy (Donnelly, 2003). Before this system, a whole sales tax system was prevalent in the country which collected tax on the wholesale of items. This was in effect from the thirties when the Australian economy was heavily dominated by goods. However, during all the years of progress, the economy had expanded to include more services and hence the GST implementation promised to waive off the unfair tax benefit that service providers had over those who supplied goods (Dixon, 2000). Impact Of GST On Our Lives Just like any society, the taxes also constantly evolve. After consulting businesses and associated accounting agencies, governments keeps on making changes in the tax measures to strengthen the economy and to serve the people better. Since the common public constitutes a large body of tax revenue, it is consequently affected by any changes in the tax system. Over the past two decades, Australian economy has shifted from being solely good based to being service and skill based along side good based. Due taxes applied on this segment has definitely helped the country (Libbis, 2005). The taxation system in Australia has an inherent safety valve which is the reason why its people survived the global financial crisis better than their U.S counterparts. The ratio of entrepreneurship and small businesses is quite high and this is partially due because of the system of taxation in effect which motivates the formation of small ventures and businesses. The response of the Australian public on the new tax system is moderately better than what was expected. Though there are flaws in the system, yet it offers the people many goods too. There is a better incentive for jobs that pay in cash (Donnelly, 2003). There was an initial phase of apprehension and fear in the public and concerns from people whether they would be able to pay it right or not, but due to the proper awareness campaigns, the anxiety soon died down and the percentage of tax payers rose from 40 % to 61% from 2000 to 2002, showing the success of the system and the confidence that it enjoyed from the people. Many citizens also feel that they are being offered better support by the ATO after the GST (Hendern, 2004). Impact Of GST On The Australian Economy There are a variety of ways through which businesses tend to hide their true incomes which is a constant threat to any cash economy that is dependent on its revenue system. Also people used to prefer cash dealings in order to avoid the taxes. With the implementation of GST, it has become difficult for businesses to deal in cash, mainly because businesses cannot claim credit on their purchases in the absence of a tax invoice (Libbis, 2005). Also the law ensures that any business that tends to pay to any other business/person that is not registered with the government should hold back a 46.5% of the maximum tax rate (McCouats, 2000). This limitation combined with the fact that businesses like to claim input tax credits, ensures that they enter deals with only those service providers or people who are registered with the government. Making certain that businesses are registered drastically declines the threat that revenue will be hidden from the government. Also there is a separate section in the ATO for dealing the cash economy. This segment addresses the industries that are recognized as being at a soaring risk for cash economy dealings, like construction industry. A step ahead in the ATO is that data is shared also with other countries to uncover any hidden transactions (McCouats, 2000). Check and balance system is quite strong, for example, the sales turnover figures of stores given by shopping malls is compared with the ones given to ATO to identify any discrepancy. Another feature which adds to the strength of the Australian economy is ATO’s focus on cash economy especially for B2C dealings (Hendern, 2004). There are constant efforts to educate the people of the broader outcomes of supporting activities of cash economy. A strong economy means the prosperity of the people in terms of better services, opportunities to foster and grow etc. the strength of the economy lies in its tax collection system. In Australia, all measures are being adopted to generate revenue from taxes in an efficient manner. Some examples include identification of road side sellers, comparing appointment records to invoices to track customer dealings, using local council data to track owner- constructor dealings and also comparing data from businesses and trade suppliers (Hendern, 2004). Source: (Libbis , 2005) Effects Of GST On The Real Estate Market It is important to review the previous taxes on real estate in order to determine the impact that GST has had on the property market. Initially, real estate taxes were very simple, including a purchase stamp duty, a tax that was imposed on re-sale (if at a profit), and a tax deduction on rent when the property was off-set. Before the eighties, all properties that were inherited or presented came under a separate provision of death and gift duties (Hill, 1999). GST is applicable to all sorts of property dealings. The property sale is subjected to GST and varies depending upon the nature of the property; farmland, private, residential or commercial all are treated respectively. In some cases, GST also takes into account the buyer and seller are registered with the government or not. In the year 1983, the act of building depreciation was introduced which allowed writing off building costs for new ones after a period of 40 years (Hill, 1999). In the year 1985, the capital gains tax was enacted which was applicable to all properties attained after that or to those which had significant asset expenses upon them after that date. This substituted the resale at profit tax (Hill, 1999). As a general rule, GST is payable (a) by seller on selling of a real estate, (b) by landowners when leasing another piece of land but not to financiers when sponsoring any real estate. It is applicable to vendors and landowners as they offer a supply of real estate services which comes under tax law (Hill, 1999). The two main methods for the calculation of GST are (i) normal method and (ii) the marginal scheme. Separate pieces of property can be sold under both schemes but the selection of the method should be made prior to exhibiting the property for sale. The first method achieves the required amount of GST by dividing the value of the deal by 10 when selling and for buying or acquiring the deal value is divided by 11. Under both methods the seller is obliged to forward the GST to the ATO (McCouats, 2000). It is important to mention that GST does not apply to the purchase of residential property except when one wants to acquire a new residential property. This means that there is no GST provision on the sale of a second hand house, irrespective of the ownership of the property which may be owners or an investment property, given that it is used for residential purposes and is not new (McCouats, 2000). Certain limitations apply to the above stipulation which entail that on the first sale a new residential property is subjected to GST. The term ‘new’ here means any property that has not been used for residential purposes prior to that. Also, in cases when the second hand property is renovated to new, such as complete demolition and reconstruction of a house then GST applies (Hill, 1999). It is nonetheless not applicable for minor renovations such as extending or adding another storey to the house. Conclusion The most promising aspect of the Australian approach to tax administration including that of GST is its dedication to discussion, mutual association and co-design. It is founded on the notion that motivation leads to voluntary observance and conformity which is best attained by formulating the right settings and environment and by making ensuring simplicity of the process of paying taxes. The GST system had to face an initial apprehensive phase but it has passed that phase and is continually progressing on the path of learning and adjustments for ATO and also for businesses (Presteny, 1999). It learns from the models of other nations and strives to incorporate better implementation of GST both by businesses and individuals. The Australian tax system is a source of support for all tax payers and makes use of latest technology to make the entire procedure easier and simpler for people to comply with by making use of latest technology. It also entertains the concerns of the general tax paying public, responds to the issues that surface and most of all functions in association with the key stakeholders. The effectiveness of the system can be determined from the fact that in the year 2005-06 the total GST collections were more than thirty seven billion dollars which was then utilized in states and regions to fund their developmental plans for providing public goods and services (Deutsch et al, 2000). References Deutsch, RL; Fischer, D & Orow, B Income tax and GST strategies manual, 2nd ed, Sydney, Australian Tax Practice, 2000 Dixon, D Super strategies for the 21st century: post GST, Melbourne, Information Australia, 2000. Fisher Research 331.2520994 66 Donnelly, A GST: the winners and the losers, Elsternwick, Vic, Wrightbooks, 2003. Fisher Research 336.2710994 5 GST in practice, North Ryde, NSW, CCH Australia Ltd., 1999-.2714099 6 Hendren, LP Survive the GST: a guide for small & medium businesses, Montville, Qld, Oracle Press, 2004. Fisher Research 336.27140994 25 Hill, P & Stacey, P GST business essentials, Sydney, Australian Tax Practice, 1999. Law Research 336.2714099 14 Hill, P. Doing business with GST. Rozelle, NSW, Australian Tax Practice, 1999. Law Loose-leaf 336.2714099 11 Libbis, S & Hirsh, D Conveyancing plus GST, Melbourne, Law Crest, 2005. Law Research 343.94055 23 McCouat, P Australian master GST guide, North Ryde, NSW, CCH Australia Limited, 2000- . Law Journals Level 10 under Australian McCouat, P GST survival guide: how GST works, 2nd ed, North Ryde, NSW, CCH, 2000. Law Research 343.94055 9 A Prestney, S. The ABC of GST, Melbourne, Information Australia, 1999. Fisher Research 336.2714 14 Read More