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SOUTH AUSTRALIAN TAX REVIEWMOTOR TRADE ASSOCIATION OF SOUTH AUSTRALIA

SUBMISSION

10 APRIL 2015

Submitted by MTA on behalf of the 1,100 MTA members operating in South Australia.

The Motor Trade Association of South Australia (MTA) is the peak body for the retail motor industry in South Australia and is the only employer-based organisation in the state dedicated to protecting and preserving the interests of the retail motor industry.

The retail motor industry is one of the most important in South Australia with an annual turnover of approximately $8 billion and direct employment to 30,000 South Australians.

The MTA itself is a significant employer in the state, employing 60 staff and approximately 500 apprentices. It is therefore important to note the significance of the organisation and its members to the South Australian economy. The MTA represents all sectors of the retail motor trades and supports over 1,100 members across the state providing a diverse range of services to members to ensure the retail motor industry prospers.

The MTA strongly supports the South Australian Government’s review into our state tax system and appreciates the opportunity to participate in improving the effectiveness and efficiency of taxation in our state.

This submission has been developed in consultation with our members. It has involved a three-pronged approach; direct consultation with members, member workshops and an independent survey report of members in conjunction with accounting and advisory firm, BDO.

Constitutional constraints and the effective Commonwealth monopoly on income tax have forced the state to rely on multiple inefficient and contentious taxes and levies to fund essential state services and infrastructure. The outcome of this review must chart a clear pathway for our state to implement tax reform that provides all taxpayers with confidence, stability and fairness in our system.

INTRODUCTION

Should you require any further information or have any questions, please contact Paul Unerkov, Chief Executive Officer on 08 8291 2010 or [email protected].

The MTA represents businesses across all retail motor sectors of industry in rural, regional and metropolitan areas of SA. These businesses vary considerably in size and employment levels from large multisite operators (up to 1,200 employees) to sole traders.

The MTA recognises that sufficient government revenue is required to ensure that South Australians are able to access high quality services and infrastructure and understands that the review of the state taxation system is not simply about cutting taxes. MTA is concerned to see a fair tax system for all South Australians, including business owners, both on an ethical basis and because the fairness of the tax system for all is vital to maintaining the lifestyle we enjoy.

As highlighted in the State Tax Review Discussion Paper1 the potential areas of state taxation reform are limited. In addition to GST revenue distributed by the Federal Government, six taxes (payroll tax, property conveyance duties, land tax, motor vehicle taxes, and taxes on gambling and insurance) make up the majority of state revenue.

The South Australian Government’s vision for South Australia is one where people and business thrive. Whilst it is acknowledged by the MTA that arrangements across Australian tax jurisdictions will vary as a result of each one’s revenue raising capabilities and economic environments, the MTA believe that South Australia is a high taxing state which is restrictive of business and negatively impacts on community and commercial prosperity.

On reviewing the detail included in State Tax Review Discussion Paper2 this belief is supported when comparable taxes are assessed against neighbouring states. For example:

• The payroll tax liability on a $ 1,000,000 payroll is 45% higher in South Australia than New South Wales• Land tax on a $ 600,000 commercial property is 70% higher in South Australia than Victoria• Conveyance duties on the transfer of a $ 400,000 property is 21% higher in South Australia than in New

South Wales• Stamp duty on the transfer of a $ 20,000 passenger vehicles is 15% higher in South Australia than Victoria.

The current South Australian business environment does not support ‘entrepreneurship, investment and job creation’ evidenced by the highest unemployment rate in Australia at 6.9% in February 2015. Bold reforms are required to improve the competitive environment for businesses in our state and encourage productivity and growth.

MTA members have indicated the major focus for tax reform is in the areas of property and payroll taxes as well as the abolition of stamp duties especially on the transfer of property and motor vehicles.

Whilst the MTA understands and acknowledges that the current payroll tax system is not high by comparative standards, it believes it to be over-complicated in that it exempts many businesses whilst grouping others in ways which we believe are economically inefficient.

The abolition of the current payroll tax system with revenue replaced through changes to the GST regime is preferred by the MTA members.

Property taxes as they are currently applied in South Australia are a concern to the MTA at a number of levels.

EXECUTIVE SUMMARY

1Government of South Australia. State Tax Review Overview. (2015)2Government of South Australia (2015) State Tax Review Discussion Paper

Stamp duty on conveyances is unfair as it penalises those who need or desire to move rather than applying to those who have the capacity to pay creating a barrier to effective use of property. Stamp duty on conveyances also creates economic costs from inefficient allocation of property resources.

The multiple current land taxes in South Australia increase compliance costs to business, create confusion and require more payments to Government for taxes levied on the same land. This significant inefficiency is magnified when more than half the potential state land tax base is exempt from existing Land Tax3.

Efficient taxes raise adequate revenue without distorting the decisions of producers and consumers. The current regime does not meet these criteria and therefore the MTA advocates for the consolidation of all taxes applied on land value including Land Tax, Emergency Services Levy, Council Rates and Water Rates into an annual broad based land tax with minimal exemptions levied on the site value of land.

Motor vehicle stamp duties in South Australia are payable on registering a new vehicle or transferring ownership of a vehicle to a third party. The duty charged primarily depends on the value of the vehicle.

The MTA contends that this duty creates an administrative burden for businesses that sell cars and creates environmental and safety costs to the state through lowering the frequency and the value of motor vehicle transactions.

An increase in annual registration fees for motor vehicles is supported by the MTA as a method to abolish stamp duty on motor vehicle transfers, simplify the compliance load on business, increase environmental and safety outcomes and not have a detrimental effect on state revenue. Any upward adjustments to annual registration fees must however not result in competitive disadvantage to businesses in our state.

The MTA supports the growing consensus that GST reform is a vital component of the economic restructuring required to maintain and grow our national infrastructure, services and standard of living. The South Australian Government must therefore be a leader in the national debate.

Whilst acknowledging that consumption taxes have the potential to affect the socio-economically disadvantaged in our community, a well-designed structural transformation of the system that broadens the GST base, reduces the numerous exemptions and adjusts the GST rate has the ability to ensure that:

• those that require assistance receive it through appropriate annual support payments• the rates of tax levied on income can be reduced; and • most of the inefficient state taxes currently applied can be abolished.

Tax reform can be a complicated, prolonged and difficult process. It is, however, one that is imperative that South Australia addresses urgently. The Government must be acknowledged for starting the tax reform discussion. The MTA looks forward to being involved in that discussion and making a positive contribution.

3Business Council of Australia (2015) ‘The Future of Tax’ Australia’s Current Tax System

MOTOR TRADE ASSOCIATION PRINCIPLES FOR STATE TAX REFORM

The MTA has applied the following principles in forming this submission to government regarding state tax reform.

FINANCIAL CAPACITY

It is important that any changes to the taxation system in this state do not have any detrimental effects to South Australian financial capacity in terms of quantum and volatility. As it stands South Australia has the third lowest assessed fiscal capacity4 in the nation. Any reforms endorsed by the state must aim to rectify this.

PROMOTE ECONOMIC GROWTH AND PRODUCTIVITY

Review outcomes should result in a more efficient, sustainable, equitable and simple taxation system in South Australia. These outcomes must assist businesses grow and increase their productivity.

REDUCTION IN RELIANCE ON COMMONWEALTH FOR REVENUE

Where possible, modifications to the state tax system should result in a reduction on the reliance on the Commonwealth for funding thereby improving South Australian financial autonomy and flexibility.

4Australian Government – Commonwealth Grants Commission (2013) Report on GST Revenue Sharing Relativities

MOTOR TRADE ASSOCIATION RECOMMENDATIONS

SIMPLIFY AND STREAMLINE OUR SYSTEM

South Australia must seek to substantially simplify the taxation system in our state to reduce the overall compliance costs to government and the public. A simpler system that is reliant on a less number of taxes but broader based taxes will be easier to understand for all stakeholders. This ease of understanding will assist in increasing tax compliance, reducing cost of that compliance and diminishing the prospect for tax base erosion and avoidance.

The Government’s main priority should be to commence reforming our tax system by consolidating the over 15 different, largely inefficient, state taxes, simplify the method for collection of the ones remaining and create an environment that does not distort business investment decisions and a place for business to thrive. The MTA believes that any simplification of the system will not work against the principles of equity and fairness.

The MTA suggest that taxes and levies that account for insignificant components of overall state revenue result in the cost of collection outweighing the benefits of the revenue gained.

A more efficient expansive tax system, less focused on impeding growth and the transfer of assets, is also considered by the MTA to be less volatile thereby supporting revenue sufficiency. It is these current taxes we believe distort incentives to work and invest in our state.

It is further envisioned by our members that state and local government imposts should also be consolidated where they are levied on essentially the same basis. This will support business reducing their compliance costs.

CONSOLIDATE MORE THAN 15 DIFFERENT, LARGELY INEFFICIENT TAXES

SIMPLIFY THE METHOD FOR PAYMENT AND COLLECTION OF THE REMAINING TAXES

CREATE STATE REVENUE THAT IS LESS VOLATILE AND DIMINISHES OPPORTUNITY FOR TAX BASE EROSION OR AVOIDANCE


ABOLITION OF PAYROLL TAX

The MTA calls for the South Australian Government to abolish the imposition of payroll tax in our state. According to the ‘BDO State Business Survey’ of our members reforming payroll tax is the most important priority for businesses after WorkCover improvements. The MTA acknowledges the Government for the regulatory changes to the Return to Work scheme to be implemented from 1 July 2015.

In 2014-2015 it is projected5 that South Australia will collect $ 1,147 million in payroll taxes representing 26% of our own sourced revenue. This is the highest percentage of state generated income.

The payroll tax regime in all states of Australia is complex and has universal effects on competition through the decisions made by business on where to locate and operate their business. The current payroll tax threshold also negatively affects business decisions to expand operations and increase wages and employment as the businesses approach the threshold for liability. This ultimately operates as a disincentive to grow business and productivity in our state.

The Henry Review6 in 2010 found that payroll tax is the third most inefficient Australian tax which causes in excess of 40 cents of economic damage for each dollar of additional revenue raised. The MTA is of the opinion that this is one of the significant reasons as to why it should be abolished.

Payroll tax is seen as not only one of the most detrimental taxes in terms of influence on economic activity but also one of the most deceptive given its low level of visibility. Few workers would be aware that they accept the economic burden of this tax as has been identified in the Henry Review. The key concern from this finding is that payroll tax pushes more workers who would have been productive in the taxed sector into lower productivity jobs in the untaxed sector where employment is easier. This economic inefficiency is holding back South Australian labour productivity.

According to a survey conducted by the CPA Australia, it estimated that 40 % of small businesses see payroll tax as an impediment to employment7:

• 40 % of small businesses and 45 % of CPAs believe payroll tax is a barrier to employment; and• of the small businesses that consider payroll tax a barrier, 80 % believe the rate is too high, 65 % believe the rate

should be lower and applied to all businesses and 77 % believe the cost is passed on to consumers.

At the verge of payroll tax obligations it is suggested from our engagement with business that they will elect to remain inefficiently small so as not to exceed the payroll tax threshold. This is not beneficial for our state or the business.

Tax Reform in South Australia that aims to reduce and eventually abolish payroll tax is necessary for business in our state to grow and obtain a competitive advantage over other jurisdictions in our country. The MTA acknowledges this reform is a significant shift from the currently accepted tax systems in Australia.

5Government of South Australia (2015) State Tax Review Discussion Paper6Henry, K., Harmer, J., Piggott, J., Ridout, H. and Smith, G. (Henry Review) (2010) Australia’s Future Tax System: Final Report to the Treasurer, Treasury, Canberra 7CPA Australia, Media Release 13 March 2002

ABOLISH PAYROLL TAX IN SOUTH AUSTRALIA

REPLACE FOREGONE REVENUE THROUGH REFORM TO GST REGIME

The MTA recommends that an appropriate solution to replace the foregone payroll tax revenue derived in South Australia is through changes to the GST regime. A broadening of the GST base, a reduction in exemptions and an adjustment to the rate must be actioned.

In survey results obtained by the MTA8, businesses were asked about possible GST reforms. In that survey respondents replied that were the GST rate to be adjusted in order to decrease other taxes, it was payroll tax that they were most in favour of reducing.

8Australian Chamber of Commerce and Industry, 2013 Pre-Election Survey

RECOMMENDATION


TAXES ON LAND

Currently in South Australia there are three main taxes that are levied on land in our state.

The first is property conveyance duties, or stamp duties, which are applied to the transfer of ownership of land and buildings.

The second tax that the state Government imposes is land tax calculated on site value to property owners who do not meet the significant criteria for exemptions.

Thirdly, tax is levied on land by municipal councils in the form of council rates, imposed on the capital or improved value of land.

In addition to the taxes detailed above it could be posited that further ‘land taxes’ are applied in South Australia being Emergency Services Levy and Water Rates.

The MTA argues that to meet its objectives of sustainability, simplicity, equity and efficiency, South Australia should reform its taxation system to apply a broad based annual land tax to be levied from as wide a base as possible with minimal exemptions.

CONVEYANCE DUTIES

The MTA believe that there is no role for stamp duty on conveyances in South Australia. Tax collection from conveyance duties are projected to be 20% of total revenue collection in 2014-20159 making it one of our highest sources of revenue. In Australia, conveyance duties are applied at twice the average rate of OECD countries10.

The Henry Review in 2010 left the nation in no doubt as to the detrimental impacts of conveyance duties. In fact it was noted that a majority of stamp duty revenue derived is attributed to the value of building transfers rather than the transfer of land itself.

Stamp duty on conveyances also inflicts a greater financial liability on people who need to move. This does not meet the equity criteria for the application of taxes or does it promote the efficient use of resources within the economy.

In addition to the inequitable application of conveyance duties as a source of state revenue, it is proved by the Government’s admission, that it is an extremely volatile one.

The MTA recommends that the unfairness, volatility and inhibiting nature of the existing taxes on land be addressed urgently.

It is acknowledged that conveyance duties are simple to collect by government. However, as detailed by the Henry Review the relative simplicity of stamp duty ‘has long ceased to justify its continued use in the face of the costs it imposes on Australia society’11.

RECOMMENDATION

9Government of South Australia (2015) State Tax Review Discussion Paper10Henry, K., Harmer, J., Piggott, J., Ridout, H. and Smith, G. (Henry Review) (2010) Australia’s Future Tax System: Final Report to the Treasurer, Treasury, Canberra11Henry, K., Harmer, J., Piggott, J., Ridout, H. and Smith, G. (Henry Review) (2010) Australia’s Future Tax System: Final Report to the Treasurer, Treasury, Canberra

LAND TAX, COUNCIL RATES, EMERGENCY SERVICES LEVY

The concerns of the MTA with respect to the current application of land taxes in South Australia are their inefficiencies and distorting effects on the allocation of land between alternative uses.

The threshold and current exemptions from the obligation to pay land tax in South Australia come at considerable cost to the government by narrowing the taxation base, creating inequitable outcomes for land owners and contribute to the inefficient and unproductive use of land in our state.

The basic principle of an efficient tax is that it should raise the revenue required without distorting the decisions of producers or consumers. Land Tax as it stands in South Australia does not satisfy that criteria.

The MTA’s position on Land Tax in South Australia is that it should be applied more widely with limited exemptions based upon the unimproved site value of land. The reformed Land Tax would be applied per individual land holding on an annual basis.

The broadening of the Land Tax base and its application to almost all South Australian land owners would be required in order to replace the existing Land Tax, Emergency Services Levy and local government council rate regimes.

Whilst it could be suggested that these last two ‘low rate’ taxes are relatively efficient and fair, the simple number of taxes imposed on varying land values results in complications, confusion and inefficiencies. It currently requires more payments by taxpayers for effectively the same tax.

Simplify the application of Land Tax, create a regime that is equitable and non-distortionary and streamline the system of collections in South Australia.

WATER RATES

The MTA view is that of the levies associated with providing water infrastructure based on property value require simplification resulting in a collection of this charge by the state government through the broadened annual land tax.

ABOLISH CONVEYANCE DUTIES ON THE TRANSFER OF LAND

ABOLISH THE EXISTING LAND TAX REGIME IN SOUTH AUSTRALIA

CONSOLIDATE ALL LEVIES, RATES AND TAXES APPLIED ON THE VALUE OF LAND

INTRODUCE A BROAD BASED ANNUAL TAX LEVIED ON THE SITE VALUE OF INDIVIDUAL LAND HOLDINGS TO PROMOTE EFFICIENT, PRODUCTIVE LAND USE AND STABLE SOURCE OF REVENUE FOR SOUTH AUSTRALIA

RECOMMENDATION


ABOLITION OF STAMP DUTY – TRANSFER OF MOTOR VEHICLES

Currently stamp duty applies in South Australia when ownership of a motor vehicle transfers including when a new vehicle is registered for the first time. As has been established earlier in this submission stamp duties have a high economic cost per dollar of revenue raised. In the instance of stamp duty on motor vehicle transfer the MTA believes that cost is not only economic.

The MTA believe stamp duties are taxes on motor vehicle users which create a compliance burden for business and ultimately tax families and business capital. This levy increases the cost of investing in motor vehicles in our state negatively leading to a reduction in the acquisition of motor vehicles and an increased age of the SA car fleet. The average age of passenger vehicles in Australia is 9.8 years; the figure for South Australia was 11.0 years. The average age of vehicles on South Australian roads has not changed for many years.

This situation has consequences for the safety, emissions, fuel-efficiency and reliability standards of the SA fleet. Older vehicles, quite apart from deterioration over time, were not manufactured to the same technical standards, in regard either to safety or environmental performance, as more modern vehicles.

This discrepancy in emission standards and safety equipment increases risks to not only the operators of the vehicles, but also the public and the environment generally. Respected academic experts on motor vehicle accidents have estimated that, if the distribution of vehicle ages in South Australia were representative of the distribution of vehicle ages in Australia, instead of being more than a year older, there would be 3.5% fewer serious and fatal crashes in the state.

The existing stamp duty regime on transfer of the ownership of motor vehicles, places South Australian businesses and consumers at substantial detriment due to the higher cost to purchase vehicles here in comparison to other Australian states. At the very least our government must ensure a uniform approach to the application of stamp duty based on actual sale price of new and used vehicles in South Australia.

Our preference to reform this part of the South Australian tax system though, is to recommend that stamp duties on the transfer of the ownership of motor vehicles should be abolished and replaced with higher annual registration fees resulting in no detrimental impact to state revenue. The MTA does caution however, that any increases in annual registration fees should not result in businesses in South Australia being at a competitive disadvantage in comparison to those in other states.

ABOLISH STAMP DUTY ON TRANSFER OF OWNERSHIP OF MOTOR VEHICLES

INCREASE THE ANNUAL REGISTRATION FEES ON MOTOR VEHICLES TO ENABLE RECOUPMENT OF FOREGONE STATE REVENUE

REFORM GOODS AND SERVICES TAX

REFORM GOODS AND SERVICES TAX

The MTA supports the growing national consensus that GST changes are a vital factor in the broader economic reform required to maintain and grow the economy as our nation transitions to non-natural resource driven growth.

The Australian GST regime currently has one of the lowest GST rates and the most significant number of exemptions in the OECD.

The economic and demographic changes in the Australian, and particularly the South Australian, economy suggest the time is right to consider a move away from reliance on direct taxes and a shift to a greater emphasis onto indirect taxes.

Whilst it is acknowledged by the MTA that the current government in South Australia does not wish to ‘leap straight into a debate about expanding or increasing GST’12, the MTA calls on the government to be a leader in the national debate to reform this tax to result in improved, simplified, efficient and equitable outcomes for South Australians and South Australian businesses.

The OECD and the Korea Institute of Public Finance have conducted a joint study13 into the effects of consumption taxes, such as the Australian GST, in 20 OECD countries. Many argue, including the current state government, that consumption taxes are regressive in nature in that the disadvantaged in our community are most impacted by these taxes. This is due to the fact that a larger proportion of their incomes are spent on staple items. When calculated as a percentage of income this could be considered accurate, however this study demonstrates that the reverse is true in most cases when calculated as a percentage of expenditure over their lifetimes.

The MTA’s position is that the final design of GST reforms must take into consideration the following:

• assessment of all other tax mix switches, • welfare impacts across different socio-economic groups, • fiscal implications at all levels of government (including the implications on horizontal and vertical equalisation), and• implementation issues such as grandfathering and compliance costs.

Having said this, the MTA supports a broadening of the GST base, a reduction in GST exemptions and an adjustment to the rate of GST in order to reduce the number of inefficient state taxes currently imposed in South Australia.

To assist households with the additional costs associated with GST adjustments, the MTA backs the redistribution of a significant component of the increased GST revenue through annual support payments to the more disadvantaged in our society. A component of the increased revenue must then be distributed across all taxpayers through adjustments to the federal personal income tax system and the balance should be then distributed to states to compensate for the elimination of inefficient state taxes.

It is understood that as things stand this proposal does not reduce the reliance by South Australia on the Commonwealth which is why it is important that our government takes a leading role in this important state and national debate. Their advocacy and leadership must not only address the application of the GST on Australian taxpayers but also the methodology relating to how the revenue is distributed through the existing Horizontal Fiscal Equalisation regime.

12Government of South Australia (2015) State Tax Review Discussion Paper 13OECD/Korea Institute of Public Finance (2014), The Distributional Effects of Consumption Taxes in OECD Countries, OECD Tax Policy Studies, No. 22

RECOMMENDATION

THE SOUTH AUSTRALIAN GOVERNMENT MUST LEAD THE NATIONAL GST DEBATE

BROADEN THE GST BASE

REMOVE GST EXEMPTIONS

ADJUST THE GST RATE

ENSURE SUFFICIENT PROPORTION OF INCREASED GST REVENUE IS DISTRIBUTED TO SOUTH AUSTRALIA TO COMPENSATE FOR REDUCTION OF THE NUMEROUS, INEFFICIENT AND VOLATILE TAXES IN OUR STATE.

The MTA recognises the unique and demographic challenges that South Australia currently faces and commends the South Australian government for not only addressing poorly performing regulatory schemes such as WorkCover but also for initiating a discussion regarding reform of the taxation system in our state.

The MTA believes that the circumstances in which South Australia finds itself mandates a visionary, structural taxation reform. The commercial world demands that we must now compete globally to attract people and capital to create a dynamic commercial environment. The existing tax regime does not support this imperative when comparing our state to our major Australian competitors. We need to create a competitive edge.

The requirement for an enduring, secure and efficient tax base to support the South Australian community now dictates that we commence the movement away from taxes on transactions such as stamp duties, seek to broaden the base on which we apply imposts such as property taxes and secure sources of revenue that are less distortionary and impeding than the myriad of taxes that we currently have in place.

In instigating this discussion South Australia is well placed to engineer a tax system that:

• raises sufficient revenue for an efficient level of spending by government• better supports economic growth and competitiveness • supports a more efficient and productive state• maintains a strong level of equity• simplifies our tax system.

The MTA appreciates the opportunity to participate in this discussion and looks forward to seeing the Government’s roadmap for change from this point.

CONCLUSION

CONCLUSION

REFERENCES

1. Government of South Australia. State Tax Review Overview. (2015)

2. Government of South Australia (2015) State Tax Review Discussion Paper

3. Business Council of Australia (2015) ‘The Future of Tax’ Australia’s Current Tax System

4. Australian Government – Commonwealth Grants Commission (2013) Report on GST Revenue Sharing Relativities


6. Henry, K., Harmer, J., Piggott, J., Ridout, H. and Smith, G. (Henry Review) (2010) Australia’s Future Tax System: Final Report to the Treasurer, Treasury, Canberra

7. CPA Australia, Media Release 13 March 2002

8. Australian Chamber of Commerce and Industry, 2013 Pre-Election Survey





13. OECD/Korea Institute of Public Finance (2014), The Distributional Effects of Consumption Taxes in OECD Countries, OECD Tax Policy Studies, No. 22

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