Delivering further tax reform

One of the objectives of the Intergovernmental Agreement on the Reform of Commonwealth-State Financial Relations (the IGA), signed by the Australian Government and all states in 1999, was the achievement of a new national tax system, including the elimination of a number of existing inefficient taxes which were impeding economic activity. As part of this objective, the GST was intended to replace a group of inefficient indirect taxes, one Commonwealth and nine state taxes. The state taxes included in the IGA were identified by the states themselves as undesirable on efficiency and equity grounds.

Under the IGA, wholesale sales tax and accommodation taxes were abolished on 1 July 2000, financial institutions duty and stamp duty on quoted marketable securities were abolished on 1 July 2001 and, after review by the Ministerial Council for Commonwealth-State Financial Relations, bank account debits tax will be abolished in all states by 1 July 2005.

The IGA also provided that the Ministerial Council will, by 2005, review the need to retain stamp duty on the following:

• non-residential conveyances;
• non-quotable marketable securities;
• leases;
• mortgages, bonds, debentures and other loan securities;
• credit arrangements, instalment purchase arrangements and rental arrangements; and
• cheques, bills of exchange and promissory notes.

The reason for agreeing to a review of these taxes, rather than setting a firm date for their abolition, reflected uncertainty in 1999 about when GST revenue would be sufficient to fund their abolition. It was understood that if GST revenue proved to be sufficient at the time of the review, the states would abolish these stamp duties.

The GST is now estimated to deliver significant windfall gains to all states and provides the revenue capacity to abolish most of these taxes.

In light of this growing GST windfall, at the Ministerial Council meeting on 23 March 2005, the Australian Government put forward a timetable for the elimination of the majority of the above taxes, with the remaining tax to be reviewed later and a further timetable agreed.

The Australian Government’s proposal involves the abolition of the following indirect state taxes by 1 July 2006: stamp duty on non-quotable marketable securities; stamp duty on leases; stamp duty on mortgages, bonds, debentures and other loan securities; stamp duty on credit arrangements, instalment purchase arrangements and rental arrangements; and stamp duty on cheques, bills of exchange and promissory notes.

Further, stamp duty on business conveyances other than real property would be abolished by 1 July 2007. This would include the components of business conveyances (such as goodwill, supply rights of a business and intellectual property) listed at Clause A3 (ii) of the original Intergovernmental Agreement, signed by all states in April 1999.

The Australian Government also proposed that stamp duty on business conveyances of real property cease to apply from a date to be determined by the Ministerial Council on the basis that no state will be worse off in any year.

To ensure no financial disadvantage to any state as a result of the Australian Government’s proposed timetable for the elimination of further inefficient taxes, the Australian Government will extend the transitional period to 30 June 2009, subject to the states agreeing to the Australian Government’s proposal. This will provide compensation through BBA to any state which has a shortfall between its GST revenue and its GMA after the implementation of further tax reform under the IGA. It is estimated that, as a result of the Australian Government’s proposal, BBA of $563.1 million over the three years from 2006-07 will be provided to the states.

The significant GST windfall gains the states are receiving, along with the Australian Government’s provision of BBA where needed, make this proposal affordable for all states. Even after the proposed tax cuts, it is estimated that the states will receive a GST windfall of around $9 billion over the period 2004‑05 to 2009‑10.

Under this proposal, the IGA will be upheld and the full benefit of tax reform will be available through the abolition of a range of inefficient business stamp duties listed in the IGA.

Six of the eight jurisdictions have responded to the Australian Government’s proposal with their own timetable for the abolition of the taxes, and the Government is considering its response to them.

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