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Reform of input taxes too hard for now

03 May 2010 4:31PM
One topic addressed in the Henry tax review, published yesterday, is the unsatisfactory, but pragmatic, arrangements for the treatment of financial services under the form of value added tax (or goods and services tax) that applies in Australia.When Australia finally got its GST in 2000 the government opted to follow the European model and to collect the tax on the inputs, or expenses, incurred by banks and other financiers.There is thus no tax on the value added provided by banks from the bulk of their activities, including most transaction banking services, deposit services and lending. (GST does apply to many select activities, such as processing payments for merchants or financial advice.)Like many taxes, this distorts the use and pricing of resources.The tax review estimates that "input taxing" banking services means that businesses overpay more than $700 million in GST each year while consumers underpay around $4 billion in GST each year.To put that in context, businesses pay around $7 billion a year to banks in Australia (according to RBA data) and consumers pay around $5 billion in fees.The review discusses some other models for taxing consumption other than a VAT/GST.One of these the review describes as the "addition method financial services tax", and is based on the wages and economic rent incurred by financiers in providing services to domestic businesses and households.Such a tax could dovetail with an alternative model for taxing consumption also discussed in the review, basically a "cash flow tax" that looks to financial flows through bank accounts to work out a business' tax liability (rather than taxing business receipts with an allowance for tax paid on purchases, as at present).The Australian government has shown no interest in other models of consumption taxes and made any review of the rate of the GST (10 per cent) a topic outside the scope of the review.The review notes that Singapore (which has tinkered with its input tax regime) and New Zealand (which has made some financial services in effect free of GST) may have a competitive edge over Australia as a regional financial centre.Reform of financial services taxation did not rate a mention in the "never, ever" list of tax reforms included in Wayne Swan's media statement yesterday.So there is some prospect of reviewing input taxation on financial services, just not soon.

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