The Turnbull government’s proposal to eliminate the $1000 threshold before the GST is levied on imported goods is not a tax integrity measure. It is a tariff, and one that will have serious repercussions that the government does not seem to have considered seriously.
The end of the low-value threshold was first flagged by the government in December 2014. It formed part of last year’s budget. Now there is actual separate legislation before parliament, and a Senate committee inquiry that will give its verdict on the legislation the same day Scott Morrison releases his 2017 budget.
By July, if everything goes to the government’s plan, the commonwealth will be receiving a stream of GST revenue from every global internet retailer that supplies Australian customers with a total of more than $75,000 worth of goods.
That’s the plan, anyway. This proposal is no more convincing now than it was two years ago when it was first announced.
In 2011 the Productivity Commission concluded that inspecting low-value imports at the border to assess their GST liability would cost more money than it would raise. So rather than getting Customs to collect the GST, the government wants to convince foreign online retailers to do it for them.
Let’s imagine this ploy works. Some of the consequences are easily predictable. First, many Australians will substitute away from well-known online sellers – such as eBay and Amazon – that have built excellent reputations for facilitating and protecting trade, to those less well-known sellers that are likely not to charge the GST.
Doing so will expose more Australians to online fraud and lead to them purchasing less reliable products from unreliable suppliers that may not meet our high quality and safety standards. It also will expose more Australians to the more unsavoury sellers on the internet, possibly leading to an increase in unlawful imports into the country.
At the very least, a 10 per cent increase in the cost of digital goods will make intellectual property piracy just that little bit more attractive. This is a real cost of the policy that must be fully accounted for.
Second, the way the government proposes to implement this measure constitutes an exercise in extraterritorial power. The commonwealth Treasury does not have jurisdiction over eBay (headquartered in San Jose, California) or Amazon (headquartered in Seattle). Attempting to rope them into our tax system will place the Australian government in conflict with our major trading partners. At the very least this should generate trade disputes at the World Trade Organisation.
Doubly so if our trading partners read the Treasurer’s second reading speech introducing the legislation, which makes it clear that this is a protectionist measure to benefit the Australian small businesses that have been “unfairly disadvantaged” by the fact they pay taxes that firms in other countries do not.
This is the nub of the issue. Transactions that occur in foreign countries should not be liable to the Australian GST.
The GST is usually described as being a “consumption tax” but in fact, for practical reasons, it is a tax on sales.
When Australian consumers purchase goods online from, say, a company based in Britain, the sale does not occur in Australia – it occurs in Britain.
The money is exchanged in Britain, the order is produced in Britain, the sale is processed in the Britain and the dispatch order is made from Britain.
The fact the goods are subsequently imported into Australia does not mean those goods should be liable to an Australian sales tax. A tax levied on imports is a tariff. This legislation is an embarrassing reversal of Australia’s longstanding free trade agenda.
Morrison pointed out in his second reading speech that his legislation is a “significant world first”. That is not something of which he should be proud.
In the realm of tax administration, at least, Australia is showing itself to be a bad international player.
Rather than introducing a new tariff to protect Australian business from international competition, the government should focus its efforts on those features of the Australian business environment that impose such high prices on local consumers.
Working to lower company tax, high wage structures and reducing red tape would benefit Australians far more than protectionist measures for their small-business constituency.