A5.1 There were major changes to the Australian tax system from 1 July 2000 with the introduction of The New Tax System (TNTS). A major feature of the new arrangements was the introduction of a goods and services tax (GST), which affected the prices of a broad range of goods and services in the economy. The GST replaced wholesale sales taxes (WST) and a number of other taxes on production and imports, although not all of these taxes were abolished from 1 July 2000. The introduction of the GST was accompanied by reductions in personal income tax rates and increases in social security payments. There were also changes to company tax arrangements. TNTS has important implications for the national accounts, most of which affect the accounts from the September quarter 2000. For example, current price estimates of GDP increased, but there were no direct effects of TNTS on the chain volume measure of GDP. This appendix explains how the GST is treated in the national accounts and discusses the direct impacts that the changes in the tax system had on the major national accounts aggregates.
A5.2 The GST is a tax of 10 per cent on the price of most goods and services in Australia, including those that are imported. It does not apply to sales of goods or services that are either exempt (GST-free) or input-taxed. Businesses charge GST on goods and services sold to other businesses and to consumers. In most cases, businesses are able to offset the GST they pay on acquisitions, such as purchases of intermediate inputs and capital expenditure, against the GST they collect on their sales. This offset is referred to as an input-tax credit. Businesses remit the net amount of GST collected to the Australian Taxation Office. If the input-tax credit of a business exceeds the amount of GST that it has collected on its sales then it receives a refund for the difference. As such, the GST is ultimately paid by the final consumer. Under most circumstances, sales between businesses are effectively GST-free.
A5.3 Goods and services that are GST-free include:
- most exports of goods and services (the exception is goods and services consumed by visitors to Australia other than those for which visitors can claim a refund on the GST paid);
- health, education and eligible child-care services; and
Businesses producing GST-free goods and services are able to claim an input-tax credit on GST paid on their purchases.
A5.4 Services that are input-taxed include:
Businesses producing input-taxed services are unable to claim an input-tax credit on GST paid on the inputs to the production of these services. For example, as the purchase of dwellings is considered an input into the supply of residential rents, there is no input-tax credit allowed on such purchases.
A5.5 As a transitional arrangement, input-tax credits on most business purchases of new motor vehicles are as follows: no input-tax credit is allowed in 2000-01, a 50 per cent credit is allowed in 2001-02, and full credits are allowed from 1 July 2002. One exception is that a full input-tax credit is allowed from 1 July 2000 on purchases of motor vehicles that were not previously subject to WST.
A5.6 In another transitional arrangement, a special credit was allowed for WST paid on trading stock held by businesses at 1 July 2000. This ensured that, with the introduction of the GST, there was no double taxation on trading stock.
Treatment of GST in the national accounts
- supplies of international transport and some related domestic transport and other expenses.
A5.7 SNA93 describes the appropriate conceptual treatment of value added taxes (VAT), of which the GST is a type. Two basic approaches are described: the gross and net methods of recording. To quote the SNA:
"Under the gross system: all transactions are recorded including the amounts of any invoiced VAT. Thus, the purchaser and seller record the same price, irrespective of whether or not the purchaser is able to deduct the VAT subsequently.’’ (SNA93, paragraph 6.210);
A5.8 SNA93 explains that, within the system of national accounts, the gross method suffers from significant practical and conceptual drawbacks. Because of this, it states that:
‘‘In the net system: (a) outputs of goods and services are valued excluding invoiced VAT; imports are similarly valued excluding invoiced VAT; (b) purchases of goods and services are recorded including non-deductible VAT.
Under the net system, VAT is recorded as being payable by purchasers, not sellers, and then only by those purchasers who are not able to deduct it. Almost all VAT is therefore recorded in the System as being paid on final uses - mainly on household consumption. Small amounts of VAT may, however, be paid by the businesses in respect of certain kinds of purchases on which VAT may not be deductible.’’ (SNA93, paragraph 6.212).
A5.9 The ABS uses the net system to record the GST in the national accounts, in line with SNA93 recommendations. The ABS also considers that this is the most appropriate treatment from both a practical and conceptual perspective.
A5.10 According to SNA93, VAT are taxes on products, which are part of the aggregate taxes less subsidies on production and imports. The ABS treats the GST in the same fashion.
Impact of the new tax system on national accounts aggregates - current prices
‘‘The System therefore requires that the net system of recording VAT should be followed.’’ (SNA93, paragraph 6.212).
A5.11 Because the GST collects more revenue than the taxes (e.g. WST) on production that it replaced, the current price value of GDP is at a higher level after its introduction.
A5.12 This is most evident from the income measure of GDP, of which taxes less subsidies on production and imports is a component. Clearly, therefore, the increase in taxes on production and imports led to an increase in GDP. The other income components of GDP (compensation of employees, gross operating surplus, gross mixed income) are not directly affected by TNTS.
A5.13 The direct effects of TNTS on the expenditure measure of GDP are as follows:
- Household final consumption expenditure - the GST paid by households is included in the estimates for this aggregate, although the increase in expenditure attributable to the GST was offset by the removal of WST and other taxes embedded in the prices paid by households, as well as the removal of taxes paid directly by households (e.g. the NSW bed tax). Overall, the impact of tax reform was to increase prices for many goods and services and this is reflected in higher household final consumption expenditure.
- General government final consumption expenditure - this aggregate was largely unaffected by the introduction of the GST. General government bodies are able to claim a refund on GST paid, so general government expenditure is recorded exclusive of the GST. As the general government sector was generally exempt from WST, the removal of these taxes had little impact on general government final consumption expenditure.
- Private gross fixed capital formation - dwellings - as the GST paid on new dwellings is not able to be claimed as an input-tax credit, expenditure on this aggregate increased as a result of the GST's introduction, although the increase was partly offset by the removal of WST and other taxes on inputs used in the construction of dwellings.
- Private gross fixed capital formation - other components - the agriculture, mining and manufacturing industries were mostly exempt from WST, and businesses in these industries are generally able to claim an input-tax credit on the GST paid on their purchases. An exception is expenditure on passenger motor vehicles, for which these industries were subject to the WST. The replacement of the WST by the GST and the phasing in of the input-tax credit produces a stepped reduction in the net tax payable on the purchase of passenger motor vehicles during the transition period. For the finance industry, there was a downward effect on expenditure due to the removal of WST, but an upward effect due to the input-taxed nature of financial services. For other industries, there was a downward impact on the cost of assets due to the removal of WST. However, this impact is moderated by the phasing in of the input-tax credit on motor vehicles.
- Public gross fixed capital formation - general government - this expenditure is recorded exclusive of the GST. As such, TNTS had little affect on this aggregate as most government bodies were previously exempt from WST.
- Public gross fixed capital formation - public corporations - for the most part, this expenditure is recorded exclusive of the GST, although in those instances where an input-tax credit cannot be claimed there is an increase in expenditure due to increased prices. There was, however, a downward effect from the removal of WST for those public corporations that were not previously exempt.
- Changes in inventories - for the most part, these are recorded exclusive of the GST as most GST paid by businesses on inventories is refundable. As the WST was previously reflected in the values of inventories - particularly those held by retailers - its removal has a downward affect on the level of, and subsequently changes in, inventories.
- Exports of goods and services - most exports of goods and services are not subject to the GST. However, overseas tourists pay GST on goods and services consumed in Australia. While they are able to claim refunds in respect of GST paid on certain goods taken out of the country, the overall effect is one of an increase in prices paid by visitors.
A5.14 In terms of the production measure of GDP (for which current price estimates are only provided annually), TNTS has the biggest impact on the item 'taxes less subsidies on products', which is added to estimates of industry value added at basic prices to obtain estimates of GDP at purchasers' (i.e. market) prices.
Impact of the new tax system on national accounts aggregates - volume and price measures
- Imports of goods and services - this aggregate was unaffected by TNTS, as imports were and currently are valued on the basis of prices in the country of their origin.
A5.15 The introduction of the GST and other tax changes had no direct impact on chain volume measures of GDP and other aggregates. This is because the impact of tax reform on the current price estimates is a price effect, and as such it is removed in the derivation of the chain volume measures.
A5.16 The effects of TNTS on prices were reflected in the two types of price measures provided in the national accounts - implicit price deflators and chain price indexes. The former, which are derived by dividing the chain volume measures into the current price measures, reflect both the 'pure' price effect as well the impact of compositional changes associated with tax reform. The chain price measures, on the other hand, only reflect the 'pure' price effect.
Seasonally adjusted and trend estimates
A5.17 Because most of the impacts of tax reform on estimates of movement were transitory, users need to exercise caution in interpreting seasonally adjusted and trend estimates of movements in current price aggregates for periods affected by TNTS. As movements in seasonally adjusted estimates include both changes in trend and irregular elements, the direct impacts of the tax changes, which are trend breaks, flowed straight into the seasonally adjusted estimates. Ideally, the impact of TNTS on trend estimates should have been reflected as a break in series. However, as it was not generally possible to quantify the impact of the tax changes, it is generally not possible to reflect TNTS as a break in trend series. Therefore, TNTS had an impact on movements in trend estimates, although these impacts are smoothed and spread over a number of periods due to the nature of the calculation of trend estimates.
A5.18 As the price impacts of TNTS are generally removed in the compilation of chain volume measures, the seasonally adjusted and trend estimates for these aggregates are not affected by the direct impacts of TNTS. However, movements in these estimates are affected by indirect impacts, such as those associated with changes in expenditure patterns.
A5.19 Much of the source data for the national accounts comes from ABS surveys of businesses. The Urgent Issues Group of the Australian Accounting Research Foundation (AARF) addressed the issue of accounting for the GST and signalled a clear preference for a net system of recording by businesses. However, where it has not been practicable for businesses to report in strict accordance with the AARF's preference and the SNA’s net system of reporting, the ABS collects the data in accordance with businesses’ accounting practices, and adjusts these where necessary.
A5.20 One exception to the ABS preference for net reporting relates to reporting of turnover by retail and selected services businesses. An important use of these data is to measure components of household final consumption expenditure in the national accounts, where it is appropriate that the measure be inclusive of GST.
A5.21 The consumer price index (CPI) measures final transaction prices inclusive of taxes on products, and hence reflects the net effect of the tax changes included in TNTS. This aligns with the inclusion of these taxes in household final consumption expenditure. Therefore, the CPI continues to be suitable for deflating current price estimates in order to compile chain volume measures for those components of household final consumption expenditure where the CPI is used for this purpose.
A5.22 The various producer price indexes produced by the ABS, which are used to deflate other current price estimates in order to compile chain volume measures, are compiled on a basis that is consistent with the net system of recording. However, chain volume measures for some aggregates are compiled using proxy price indexes in the absence of price indexes directly pertaining to the aggregates. In some cases, during the transition period, the tax changes caused changes in the proxy price indexes that were different to those that would have been observed in the 'correct' price indexes - if such indexes were compiled. To ensure that this did not have unintended consequences for the chain volume measures, the ABS adjusted its methods for compiling these measures where necessary. An example of such an adjustment was in the compilation of chain volume measures for gross fixed capital formation, because the proxy price indexes used did not reflect the impact of the removal of WST on asset prices.