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Economic Development Committee - Parliament of Victoria

Inquiry into the Impact of the Goods and Services Tax in Victoria

MembersStaffTERMS OF REFERENCE FOR THE ECONOMIC DEVELOPMENT COMMITTEEChairman's ForewordExecutive SummaryCommittee Findings

Inquiry into the Impact of the Goods and Services Tax on Small and Medium Sized Businesses in

Victoria

REPORT No. 1ORDERED TO BE PRINTED

NOVEMBER 2000

by Authority.

Government Printer for the State of Victoria

No. 43 - Session 1999/2000

Parliament of Victoria

Economic Development Committee

Report into the Impact of the Goods and Services Tax on Small and Medium Sized Businesses in Victoria.

ISBN 0731184203

MembersHon. Neil Lucas, P.S.M., M.L.C. (Chairman)

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Hon. Theo Theophanous, M.L.C. (Deputy Chairman)

Hon. Ron Best, M.L.C.

Hon. Geoff Craige, M.L.C.

Hon. Kaye Darveniza, M.L.C.

Hon. John McQuilten, M.L.C.

*Hon. Andrea Coote, M.L.C.

* Replaced the Hon. Wendy Smith, M.L.C. on the Committee 6/9/2000

StaffMr. Richard Willis, Executive Officer

Ms. Anne Morgan, Office Manager (until Sept. 2000)

Ms. Tania Esposito, Office Manager (from Sept. 2000)

Ms. Karen Ellingford, Research Officer

Mr. Mark Ryan, Research Officer

The Committee's Address is:

Level 8, 35 Spring Street

MELBOURNE 3000

Telephone: (03) 9651-3592

Facsimile: (03) 9651-3691

E-mail: [email protected]

Website: http://www.parliament.vic.gov.au/edevc

Parliamentary Committees Act 1968

TERMS OF REFERENCE FOR THE ECONOMIC DEVELOPMENT COMMITTEEIMPACT OF THE GOODS AND SERVICES TAX IN VICTORIA

The Governor in Council, under section 39 of the Parliamentary Committees Act 1968 issues the following terms of reference to the Economic Development Committee for inquiry into the Goods and Services Tax in Victoria:


mailto:[email protected]

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a) Assess the impact on the Victorian economy of the GST on the competitiveness of small and medium sized businesses with particular reference to regional Victoria including an examination of:

I. LPG prices;

II. petrol prices;

III. electricity prices;

IV. compliance costs; and

V. the cost of Government services

b) Report by the first day of the Spring 2000 Parliamentary session.

Dated: 29 February 2000

Responsible Minister:

Steve Bracks

Premier

Clerk of the Executive Council

Chairman's ForewordThis Report of the Economic Development Committee is in response to a Terms of Reference from the Victorian Premier to assess the impact of the Goods and Services Tax on the competitiveness of small and medium sized business in Victoria.

An overview of the Committee's evidence and findings is provided in the Executive Summary on the following pages. The nature of the Reference and the Committee's investigations has resulted in the Committee's Report containing a series of findings rather than any recommendations to the State Government.

I trust that the Committee's Report will prove to be a useful body of work for the Victorian Department of State and Regional Development, the Commonwealth Treasury and the Australian Taxation Office in terms of initial feedback from businesses on the implementation of the GST.

For the purpose of this Chairman's Foreword, I should take the opportunity to briefly explain the process by which the Reference was issued to the Committee and the variation to the Reference was made during the final consideration of this Report in October.

Shortly after receiving the Reference in March, the Committee resolved to write to the Premier seeking an extension to the reporting date and a broadening of the Terms of Reference. The Premier refused the Committee's request advising it was important the Government received the Committee's Report by the first sitting day of the Spring 2000 Session.

The Committee's workload and large number of public hearings did not allow for the Report to be finalised by the due date and consequently a brief Interim Report advising of the Inquiry's progress was tabled on 29th August. The Committee completed its regional hearings in mid September and agreed to table its Report in October.

During initial deliberations on the draft report, the Committee noted that the Premier had made a variation to



the Terms of Reference and reporting date. The variation required the Committee to examine the impact of the first two quarterly Business Activity Statements as well as ongoing compliance assistance provided by the Commonwealth Government. The reporting date was extended to 30th April 2001.

On balance, the Committee considered that, in view of the timing of the variation and the Premier's initial refusal of the Committee's request for an extension, this Report should proceed to be tabled in October 2000 with a second report on the variations to the Reference to be tabled in April 2001. Extensive Committee deliberations resulted in this Report being tabled on 2nd November 2000.

The majority of Members on the Committee believed to delay this Report until next year would require re-advertising of the newly worded Terms of Reference and a re-hearing of the vast majority of evidence presented in public hearings. The Committee believes it has a responsibility to the large number of people who contributed to the Inquiry to table a first report based on the evidence received on the initial Reference.

On behalf of the Committee, I should acknowledge the valuable contributions made by various organisations and individuals during the course of the Inquiry.

The Committee commenced its investigations in April when it held informal briefings with key bodies including the Chairman of the New Tax System Advisory Board, Assistant Commissioners from the Australian Taxation Office, representatives from CPA Australia, the Victorian Regulator-General and the Royal Automobile Club of Victoria. These briefings were extremely valuable in terms of providing Members with a background to the key aspects of the New Tax System as it relates to the Terms of Reference.

The Committee held extensive public hearings in Melbourne and throughout regional Victoria. The findings within this Report are largely based on evidence received at these public hearings. Consequently, the Committee is extremely grateful to all witnesses who gave up their time to provide evidence at the hearings, particularly the many small business operators and accountants who contributed during a very busy period.

Valuable public evidence was also received through written submissions and appreciation is extended to those who contributed written material to the Committee.

The Committee engaged the services of two consultants during the Inquiry, namely Mr Eugene Boyle from RSM Bird Cameron and Mr Anthony White from Econtech. The work of the consultants is referred to throughout the Committee's Report and proved to be a valuable addition to the Committee's ongoing research work. To this end, I would like to thank Mr Boyle and Mr White for their important contributions.

Finally, on behalf of the Committee, I extend appreciation to the continued hard work and dedication of the Committee staff throughout the course of the Inquiry. The Committee's administrative and research team has been ably lead by its Executive Officer, Mr Richard Willis with support from its Office Managers, Ms Anne Morgan and Ms Tania Esposito and Research Officers, Ms Karen Ellingford and Mr Mark Ryan.

I look forward to continuing the Committee's investigations into the impact of the GST on Victorian businesses with a second report due early next year.

Hon. Neil Lucas, PSM MLC

Chairman


Executive SummaryBackground

On 29th February 2000, the Economic Development Committee received a Terms of Reference to inquire into



the Impact of the Goods and Services Tax on the competitiveness of small and medium sized businesses, with a particular reference to regional Victoria.

In carrying out this Inquiry, the Committee was required to examine the impact of the GST on LPG and petrol prices, electricity prices, compliance costs and the cost of Government services.

The Committee was required to report to Parliament by the first day of the Spring 2000 Parliamentary Session.

On 10th October 2000, the Premier made variations to the Terms of Reference and reporting timeline.

This Report No.1 addresses the evidence received throughout the Inquiry relating to the initial Terms of Reference. A second Report on the variations to the Reference will be tabled by 30th April 2001.

Introduction of the Goods and Services Tax

The introduction of the Goods and Services Tax on 1st July 2000 is the key element of the Commonwealth Government's major taxation reforms.

The GST affects all Australians as consumers of goods and services. However, the implementation of the New Tax System has had a particular impact upon businesses in terms of implementation and compliance costs.

Chapter 2 of this Report provides an outline of how the GST affects businesses from 1st July 2000, including an overview of the Australian Business Number, tax reporting requirements and the ability of businesses to claim input tax credits on the GST component of business acquisitions. The Committee noted the importance of input tax credits in so far as it was required to examine the GST impact on business costs.

GST Compliance Costs

A major concern for businesses in preparing for the GST was the accompanying compliance costs.

The Committee finds that the level of GST compliance costs for small and medium sized businesses varies significantly depending on:

· the size and type of business;

· the extent of computer systems purchased and level of associated training; and

· the use of professional accounting services.

On average, GST compliance costs for small businesses were found to be in the region of $6,000, which included purchase of new computers, GST software and training. The average compliance costs for medium sized business (up to 99 employees) was approximately $19,000. Some businesses had spent as little as $200 on compliance costs while other businesses had spent upwards of $50,000 on sophisticated computer systems.

In attempting to quantify GST compliance costs, the Committee was mindful that other tax reforms, such as Pay As You Go (PAYG), were accompanied by compliance costs. In addition, the Committee found that some businesses had used the introduction of the GST as a catalyst for upgrading computer systems and, as a consequence, their compliance costs went beyond the basic GST requirements.

Importantly, all businesses will incur ongoing GST compliance costs in terms of time and money spent preparing monthly or quarterly Business Activity Statements. The Committee found that the extent of these compliance costs will vary depending on the type of business and the level of reliance on professional accounting services. Evidence put to the Committee in regional public hearings suggests that many small businesses will be relying heavily on their accountants in preparing their initial BAS returns.

The outcome of further investigations into ongoing compliance costs will be included in the Committee's



second GST Report.

Fuel Prices

The Committee was required to assess the impact of the GST on fuel prices at a time when the rising cost of crude oil and a decrease in the value of the Australian dollar to record lows had combined to push petrol and diesel prices beyond the $1.00 per litre mark in Melbourne.

The Committee was mindful of these other forces but was required to assess the GST component of fuel price rises and its effects on businesses.

In order to offset the impact of the GST on fuel, the Commonwealth Government reduced the excise duty on petrol and diesel by 6.7 cents per litre from 1st July 2000. In addition, the Government expected a further reduction of 1.5 cents per litre to be passed on to motorists by the oil companies as a result of anticipated cost savings from the New Tax System. The oil companies indicated these savings could not be achieved in the short term and that a more realistic level of savings would be 0.1 to 0.4 cents per litre.

As a result, the Committee found that the lower than expected reduction in fuel excise at the time of the GST introduction, and the inability of oil companies to pass on the full 1.5 cents per litre savings in the short term, has resulted in the GST increasing the cost of petrol and diesel by between 1.1 and 1.4 cents per litre from the 1st July based on a price of 90 cents per litre.

The Committee notes that from a business point of view, 1/11th of fuel costs will be reimbursed through GST input tax credits.

The Committee notes that the expanded Diesel Fuel Rebate Scheme and the recently introduced Diesel and Alternative Fuels Grants Scheme should create benefits for regional businesses, however, the extent of these benefits may not be apparent for at least six months.

Interestingly, the petrol price variation between Melbourne and most regional locations in Victoria has reduced since the introduction of the GST. The extent of the narrowing of this variation has been between 0.1 and 7.7 cents per litre.

Electricity and Gas Prices

The Committee's Terms of Reference required an assessment of the GST impact on electricity prices from the point of view of small and medium sized business consumers. During the course of the Inquiry, the

Committee considered it would be relevant to extend these investigations to include gas prices in view of the role of the Victorian Office of the Regulator-General.

The Electricity and Gas Industry Tariff Orders establish a `pass through' mechanism which allows the impact of a change in taxes to be passed through to consumers. The Office of the Regulator-General has indicated that the GST is defined as a change in tax for the purpose of the Tariff Orders.

For electricity prices, the pass through mechanism will account for the impact of the GST from 1st July 2000 to 31st December 2000 for electricity and franchise retailer businesses. In relation to gas prices, the pass through amounts will be for the period 1st July 2000 to 31st August 2001 when the Tariff Order for gas retail businesses expires.

The Committee found that as a result of the introduction of the GST, electricity prices will increase as follows:

(i) Electricity prices will increase by between 9.85 per cent and 9.91 per cent depending on each electricity distribution area. On average, this would equate to an annual increase of $81 to $82 based on the Maximum Uniform Tariff (MUT) prices for small business consumers and an increase of $856 to $861 for medium business consumers.

(ii) In the case of large electricity customers, where MUTs do not apply and distribution charges vary, the GST payable on electricity will increase in proportion to the higher distribution charges. Consequently, large



customers in the Powercor distribution area of western and north western Victoria will be paying a relatively higher amount of GST on electricity supplies than eastern Victoria and metropolitan Melbourne.

After receipt of input tax credits, small and medium business consumers could obtain a net benefit of between 0.082 per cent and 0.136 per cent on electricity charges used for business purposes.

With respect to gas prices the Committee found that:

(i) Gas prices for small and medium business accounts will increase by between 9.86 per cent and 10.00 per cent depending on each gas distribution area. On average, this would equate to an annual increase of between $234 and $237 for small business consumers and an annual increase of between $3,326 and $3,373 for medium business consumers.

(ii) After receipt of input tax credits, small and medium business consumers could obtain a net benefit of 0.127 per cent for TXU customers and 0.0545 per cent for Ikon customers for gas consumed for business

purposes. Origin Energy customers would not receive a net benefit after input tax credits as the GST-induced tariff increase is the full 10 per cent.

Cost of Government Services

In introducing the GST, the Commonwealth Government made the vast majority of Federal, State and Local Government services used by business exempt from the GST. As a result, the overall impact of the GST on the cost of government services used by businesses is negligible.

The Committee found that some non-statutory services including inspection services, the cost of publications, photocopying, hire of facilities and information services will increase by between 8 and 10 per cent as a result of the GST, depending on the level of savings to be passed on arising out of the tax changes.

Competitiveness of Small and Medium Sized Businesses

Evidence presented to the Committee on the extent to which the GST has impacted on business competitiveness was limited due to the short period of time that has elapsed since the GST was introduced. The impact of the first two quarterly BAS returns on business competitiveness will be dealt with in the Committee's second report due in April 2001.

The Committee found that business competitiveness should not be affected where input tax credits can be claimed, however, this will depend on the size and type of business and its location.

However, the Committee did find that the comparative level of GST compliance costs for small business compared to large business may result in some small businesses becoming less competitive than larger businesses in similar industry sectors.

There was considerable media attention on business closures at the time of the GST's introduction. On this matter the Committee found that, while the GST can be seen as a contributing factor in accelerating the closure of some small businesses, there is little evidence to indicate that businesses have closed solely as a result of GST compliance and implementation.

However, the Committee's evidence indicates that businesses that were cash based, marginal or unprepared to change business practices prior to the introduction of the GST were more likely to close, partly as a result of GST implementation and compliance, than were the more profitable businesses.

The Committee also found that the competitiveness of small and medium sized businesses could be affected as a result of GST reporting requirements if:

· a business has not adequately prepared for submitting the first Business Activity Statement due on 11th November 2000;

· a business with cash flow problems has difficulty in submitting the GST payments by the due date;



· a business does not receive GST refunds from the ATO in a sufficient period of time; or

· a business decided to absorb the initial GST price increases in its existing prices; this could be seen as a positive or negative effect on competitiveness.

The Committee will be examining these issues in greater detail in its second report due in April 2001.

Committee FindingsFinding 2.1 (page 18)

The Committee finds that, despite ACCC guidelines indicating businesses can recoup compliance costs in re-pricing, the strong perception among businesses was that prices could not increase beyond the ACCC pricing guidelines for certain commonly purchased goods or services despite incurring net compliance costs as a result of the GST.

The effect of this confusion was that some businesses were reluctant to increase prices to recoup net compliance costs and as a result were faced with reduced profits.

Finding 2.2 (page 18)

The Committee finds that the perceived negative effect on profitability of GST compliance costs may have contributed to the closure of some businesses.


The Committee finds that as a result of the 48.5 per cent withholding tax and the inability of unregistered businesses to claim input tax credits, businesses not registered for the GST will be faced with higher business costs.


The Committee finds that the so-called `black economy' will always exist to some extent despite the introduction of the GST and need for businesses to register for an Australian Business Number.


The Committee finds that the GST and ABN may reduce `black market' transactions between businesses due to the need to claim input tax credits. However, the Committee found no evidence as to the extent of business to business black market transactions before the introduction of the GST.


The Committee finds that the extent of `black market' transactions involving consumers is likely to increase (as avoiding GST adds another reason in addition to pre-existing tax avoidance), particularly in the service industry where input tax credits are negligible or can be transferred to other clients.


The Committee finds that those businesses that required complex point-of-sale systems and computer upgrades were consequently faced with higher GST compliance costs.


The Committee finds that the level of GST compliance costs for small and medium sized businesses varies significantly according to:







Based on surveys examined and evidence collected, the Committee finds that, on average, GST compliance costs for small businesses were approximately $6,000, which included the purchase of new computers, GST software and training. Further, the Committee notes that the average GST compliance cost for medium businesses (up to 99 employees) was approximately $19,000. The Committee therefore finds that the Commonwealth Government's $200 voucher assistance package for GST implementation was totally inadequate.


The Committee finds that some businesses had spent as little as $200 in compliance costs while other businesses had spent upwards of $50,000 on sophisticated computer systems.


The Committee finds that many businesses had used the introduction of the GST as a catalyst for upgrading computer systems that may eventually lead to improved business operations, however, some businesses had questioned the value of these upgrades for their business operations.


The Committee finds that all businesses will incur ongoing GST compliance costs in terms of time and money spent in preparing monthly or quarterly Business Activity Statements and ongoing additional business operations. These ongoing costs may affect some business' competitiveness or profitability.

The extent of these compliance costs will vary depending on the type of business and the reliance on professional accounting services and will be addressed in the Committee's Report No.2 on the GST in April 2001.


The Committee finds that many small businesses will be relying heavily on their accountants in preparing their initial BAS returns. The accounting profession has had a significant increase in business as a result of the GST which has added to the cost of businesses that are their clients.


The Committee finds that the results of the RSM Bird Cameron compliance cost survey indicate:

· GST compliance costs for small businesses range from $5,000 - $20,000 depending on the level of computer upgrades;

· the majority of businesses spent between 100 and 300 hours in preparing for and implementing the tax changes; and

· the majority of businesses predicted ongoing compliance costs of between $1,000 and $4,999.




The Committee finds that the results of the VECCI compliance cost survey compiled two weeks after the commencement of the GST indicate:

· the average GST compliance costs for small businesses (defined as 0-19 employees) was $6,814; and

· the average GST compliance costs for medium businesses (defined as 20-99 employees) was $19,305.

The Committee notes that VECCI's definition of the size of small and medium businesses is larger than the Committee's interpretation and this may have resulted in larger average compliance costs.


The Committee finds that the impact of the GST on petrol prices has been higher than expected as a result of the higher cost of crude oil and the declining value of the Australian dollar.


The Committee finds that domestic retail conditions and petrol pricing have seen fluctuations in the level of GST paid across Victoria.


The Committee finds that as a result of the ongoing indexation of the petrol and diesel fuel excise, the GST payable on fuel will fluctuate twice a year in line with movements in the Consumer Price Index.


The Committee finds that the lower than expected reduction in the fuel excise at the time of the GST introduction, and the inability of oil companies to pass on the full 1.5 cents per litre saving in the short term, has resulted in the GST increasing the cost of petrol and diesel by between 1.1 and 1.4 cents per litre from the 1st July 2000, based on a price of 90 cents per litre. CPI indexation of the fuel excise resulted in a further 0.64 cents per litre being added to petrol and diesel prices from 1st August 2000.

The Committee notes that from a business point of view, 1/11th of fuel costs will be reimbursed through GST input tax credits (see section 4.8).


The Committee finds that some regional locations are paying higher amounts of GST on petrol as a result of higher base prices in those locations.


The Committee finds that LPG prices throughout Victoria have risen by more than 10 per cent since 1st July 2000 due to higher international prices of LPG.


The Committee finds that LPG prices in Melbourne rose by 9.5 cents from May to September and by 16.6 cents by 9th October, however, the 10 per cent GST would have lead to an increase of only 3.6 cents, based on the May price of 36 cents.


The Committee finds that as a result of the GST, motorists in some regional Victorian locations will pay a higher amount of GST on the cost of LPG than metropolitan motorists given the higher LPG prices in these regional locations. However, businesses will be able to claim 1/11th of the cost of LPG as an input tax credit.




The Committee finds that Victoria will be hardest hit by the GST LPG price rise in view of the fact that approximately half of Australia's LPG-converted vehicles are registered in the State.


The Committee finds that the price of diesel fuel in Victoria has increased significantly since 1st July 2000 with the GST component of the increase being approximately two cents per litre.


The Committee finds that the expanded Diesel Fuel Rebate Scheme and the recently introduced Diesel and Alternative Fuels Grants Scheme should create benefits for regional businesses, however, the extent of these benefits may not be apparent for at least six months.


The Committee finds that the distances between Melbourne and remote Victorian regional locations, such as Mildura, and the resulting higher petrol prices in these regions, would suggest the Commonwealth Government may need to re-evaluate the remote and regional definition within Victoria for the purpose of the Fuel Sales Grants Scheme.


The Committee finds that the petrol price variation between Melbourne and 19 regional locations in Victoria has reduced in all cases except in Warrnambool, Hamilton and Portland for the period June to September 2000. The extent of the narrowing of this variation has been between 0.1 and 7.7 cents per litre.


The Committee finds that the full impact of the GST on fuel for businesses will not be known until after completion of the first Business Activity Statements and the payment of reimbursements by the ATO. The Committee will report on this in its second GST Report with respect to GST reporting requirements.


The Committee finds that the impact of the GST on petrol, diesel and LPG prices for businesses will in most cases be offset by input tax credits for business fuel purchases.


The Committee finds that as a result of the introduction of the GST, electricity prices will increase as follows:

(i) Electricity prices will increase by between 9.85 per cent and 9.91 per cent depending on each electricity distribution area. On average, this equates to an annual increase of $81 to $82 based on the Maximum Uniform Tariff prices for small business consumers and an increase of $856 to $861 for medium business consumers.

(ii) In the case of large electricity customers, where MUTs do not apply and distribution charges vary, the GST payable on electricity will increase in proportion to the higher distribution charges. Consequently, large customers in the Powercor distribution area of western and north western Victoria will be paying a relatively higher amount of GST on electricity supplies than eastern Victoria and metropolitan Melbourne. The difference for a large customer using 450,000 kWh could be as high as $1,380 per annum.




The Committee finds that after receipt of input tax credits, small and medium business consumers could obtain a net benefit of between 0.082 per cent and 0.136 per cent on electricity charges used for business purposes.


The Committee finds that as a result of the introduction of the GST, gas prices will increase as follows:

(i) Gas prices for small and medium business accounts will increase by between 9.86 per cent and 10.00 per cent depending on each gas distribution area. On average, this equates to an annual increase of $234 to $237 for small business consumers and an annual increase of $3,326 to $3,373 for medium business consumers.

(iii) After receipt of input tax credits, small and medium business consumers could obtain a net benefit of 0.127 per cent for TXU customers and 0.0545 per cent for Ikon customers for gas consumed for business purposes. Origin Energy customers will not receive a net benefit after input tax credits as the GST-induced tariff increase is the full 10 per cent.


The Committee finds that the overall impact of the GST on the cost of government services used by business is negligible given that:

· the vast majority of Federal, State and Local Government services used by business are exempt from the GST as a result of the Commonwealth Government's Section 81 Determination; and

· businesses can claim the GST payable on any government services as an input tax credit.

The Committee finds that some non-statutory services including inspection services, the cost of publications, photocopying, hire of facilities and information services will increase by between 8 and 10 per cent as a result of the GST depending on the level of savings to be passed on arising out of the tax changes.


The Committee finds that compliance costs for local government varied significantly from as low as $8,750 to $337,000 and that these additional costs will have to be budgeted for.


The Committee finds that the overwhelming evidence indicated it would be difficult to assess the impact of the GST on competitiveness until at least 6 months has passed since the GST's introduction on 1st July 2000.


The Committee finds that the completion of the first quarterly Business Activity Statements due, on 11th November 2000, will provide some indications as to how the GST may impact upon business competitiveness. A clearer indication may be evident in February 2001 after the second quarterly BAS is submitted.


The Committee finds that consideration of the impact of the GST on business competitiveness should take into account a number of other influences including:

· movements in the Consumer Price Index;

· increase in interest rates; and



· a fall in the value of the Australian dollar.


The Committee finds that business competitiveness should not be affected where input tax credits can be claimed, however, this will depend on the size and type of business and its location.


The Committee finds that the comparative level of GST compliance costs for small business, compared to large business, may result in some small businesses becoming less competitive than larger businesses in similar industry sectors.


The Committee finds that, while the GST can be seen as a contributing factor in accelerating the closure of some small businesses, there is little evidence to indicate that businesses have closed solely as a result of GST compliance and implementation.


The Committee has been unable to determine the extent to which the GST has led to businesses closing given there are a number of other factors, both economic and personal, that have contributed to business closures leading up to the 1st July 2000.


The Committee finds that businesses that were cash based, marginal or unprepared to change business practices prior to the introduction of the GST were more likely to close partly as a result of GST implementation and compliance than were more profitable businesses.


The Committee finds that the competitiveness of small and medium sized businesses could be affected as a result of GST reporting requirements if:




· a business decided to absorb the initial GST price increases in its existing prices (this could be seen as a positive or negative effect on competitiveness).

The Committee will continue to monitor the competitiveness of small and medium sized businesses as the full impact of ongoing compliance costs is felt, and report accordingly in its second Report due April 2001.


The Committee has been unable to obtain firm evidence of the GST impact on exports due to the limited reporting deadline. However, business expectations indicate that the competitiveness of Australian export businesses should be enhanced as a result of the abolishment of a range of embedded taxes and the GST exemption on exported goods and services.




The Committee finds that some export businesses required additional financial structures to assist their cash flow requirements to meet GST payments, which are only later reclaimable.


The Committee finds that there has been a positive side to GST compliance in that many businesses have upgraded computers and business systems which may lead to better business practices and improved productivity.


The Committee finds that there was no clear evidence to suggest Victorian businesses will be any more or less competitive than similar businesses interstate as a result of the introduction of the GST.


The Committee finds that the results of various business expectations surveys are mixed in terms of the impact of the GST on business competitiveness. The Committee notes that the timing of the surveys, and the fact that they are largely based on expectations, would indicate further studies are required to accurately assess the GST's impact on business competitiveness.

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1.1 Terms of Reference1.2 Timing and Scope of Inquiry1.3 Process for Gathering Evidence1.4 Interim Report1.5 Variation to Terms of Reference

Introduction

1.1 Terms of ReferenceOn 29th February 2000, the Victorian Premier issued the Economic Development Committee with a Reference to assess the impact on the Victorian economy of the Goods and Services Tax on the competitiveness of small and medium sized businesses, with particular reference to regional Victoria.

The Reference included an examination of:

· LPG prices;

· petrol prices;

· electricity prices;

· compliance costs; and

· the cost of Government services.

The Committee's Report was required to be tabled in the Legislative Council by the first day of the Spring 2000 Parliamentary session.

The Committee extended its investigations to include an examination of diesel prices and gas prices. Diesel is a source of fuel used by many businesses particularly in the transport and agricultural sectors and any consideration of the GST impact on fuel prices should also include the impact on diesel fuel. With respect to gas prices, the Victorian Office of the Regulator-General is responsible for determining GST price impacts on electricity as well as gas. It was therefore logical that the Committee looked at the changes in gas prices as a result of the GST.

1.2 Timing and Scope of Inquiry

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Upon receiving the Terms of Reference, the Committee met to discuss the timing and scope of the Report.

The Report deadline of the first day of the Spring Session was seen as a major impediment to the Committee's investigations, particularly as the GST did not commence until the 1st July 2000, effectively two months before the Report was due.

The Committee also believed the scope of the Terms of Reference was narrow and did not allow for any consideration of the net benefits arising out of the broader taxation reform.

In view of the above concerns, on 3rd March 2000 the Committee resolved as follows:

"That a request be forwarded to the Government regarding the Terms of Reference for the Inquiry into the Goods and Services Tax in Victoria, seeking an extension of the reporting date to April 2001, and also requesting the Government to extend the Terms of Reference to a broader consideration of the consequences of the GST, and in support of the requests the Government be advised that:

· the current reporting date would allow only a cursory review of the impact;

· it is generally accepted that prices and costs will take some time to stabilise as market forces take effect over the medium term; and

· the proposed inquiry focuses only on prices and costs and therefore will not canvass the net benefits which will be achieved as a result of taxation reform."

The Committee wrote to the Premier on 6th March seeking an extension to the Terms of Reference and reporting date.

The Premier responded on 29th March stating:

"The Committee has raised a valuable point in regards to the maturity of the GST and the stability of prices and costs of goods and services over the medium term. Nonetheless the Victorian Government is concerned that as of 1 July 2000, there will be an impact on LPG prices, petrol prices, electricity prices, compliance costs and the cost of Government services as a result of the GST.

To which end, I would request that the Committee adhere to the original Terms of Reference and reporting deadline."

The Committee's initial concern related to the short time in which to assess prices and costs after 1st July. Throughout the Committee's public hearings, it became clear that the major limitation on the Committee's deadline was the fact that the Report would be tabled prior to the first lodgment of a business' quarterly Business Activity Statement. This was considered to be the first real test of how the GST would impact upon a business.

The vast majority of witnesses, including small and medium sized businesses, accountants, and key organisations, indicated it may take between 6 to 12 months to find out the impact of the GST on businesses. Evidence suggested it would be difficult to make any assessment until after the lodgment of the first quarterly Business Activity Statements by the 11th November 2000 deadline.

Despite these limitations and in view of the Premier's directive, the Committee commenced the Inquiry with the aim of tabling a Report in early September, which is historically the time when the Spring Session of Parliament commences.

1.3 Process for Gathering Evidencehttp://www.parliament.vic.gov.au/edevc/inquiries/GST/Report%20One-01.htm (2 of 4) [16/05/2002 9:13:02]


The introduction of the GST on 1st July affected the timing and nature of evidence sought by the Committee. The Committee could not obtain evidence on the impact of the GST on prices or the impact of the GST on business competitiveness until after 1st July. However, the Committee could begin to assess compliance cost issues and implementation issues prior to the commencement of the GST.

The Committee advertised its Terms of Reference in the major daily newspapers on 3rd April 2000 and wrote to a number of key organisations and individuals seeking written submissions. Only a small number of written submissions were received (see Appendix 4). In view of the lack of written submissions, the Committee was required to proactively gather evidence through a series of public hearings in Melbourne and regional Victoria.

During April/May, the Committee received a number of in-camera briefings from relevant organisations as a means of informing Members of key issues relating to the GST.

The Committee commenced its public hearings in late July to allow for the instability of prices and uncertainty in the initial weeks of the GST to pass before gathering evidence from businesses on the impact of the GST.

A large number of hearings were held throughout August in Melbourne and regional Victoria (Traralgon, Bendigo and Benalla). Further regional hearings were held in Warrnambool and Horsham in September.

1.4 Interim ReportFor the purpose of the Legislative Council, the first sitting day of the 2000 Spring Session was set as 29th August 2000. It became clear that the Committee's investigations and Final Report would not be completed in time to meet this deadline.

In view of the Committee's workload and the need to receive evidence throughout August and September, the Committee resolved to table an Interim Report on the 29th August 2000. The aim of this Report was to meet the Committee's reporting obligation to table by the first sitting day of the 2000 Spring Session, and to advise Parliament that the Final Report would be tabled in October 2000.

A copy of the Committee's Interim Report is provided in Appendix 2.

1.5 Variation to Terms of ReferenceOn 10th October 2000, the Victorian Premier, through the Governor-in-Council, made variations to the Committee's Terms of Reference and Reporting Date. The variations were made during the Committee's final deliberations on this Report.

A copy of the Government Gazette Notice is attached in Appendix 3.

Essentially, the variations require the Committee to investigate two additional areas:

· the adequacy of the compliance assistance package and ongoing support provided by the Commonwealth government for the New Tax System; and

· the impact on small and medium sized businesses of the New Tax System's reporting requirements including the impact of providing the first two Business Activity Statement returns and associated tax payments.



The Committee's reporting deadline was also extended to 30th April 2001.

The Committee will report separately in April 2001 on the above two issues added to the Reference.













2.1 The New Tax System2.2 Introduction of a Goods and Services Tax2.3 GST Requirements on Businesses2.4 GST Avoidance

2. Overview of the Goods and Services Tax

2.1 The New Tax SystemThe introduction of a Goods and Services Tax on 1st July 2000 is the key element of the Commonwealth Government's major taxation reforms.

The tax reforms come under the banner of `A New Tax System' (ANTS) which essentially has 4 key components:

· personal tax changes;

· business tax changes;

· indirect tax changes; and

· a new Tax Office.

The indirect tax changes principally comprise the introduction of a 10 per cent Goods and Services Tax.

The Committee's Report focuses on the impact that the introduction of the GST has had on small and medium sized businesses. The GST affects all Australians as consumers of goods and services. However, it is not part of the Committee's Terms of Reference to assess the GST impact on the general consumer, only in so far as consumer spending impacts upon a business.

In preparing for the GST implementation, businesses are also faced with significant changes arising out of the Review of Business Taxation (Ralph Review). These changes include:

· Australian Business Number (ABN);

· Fringe Benefits Tax (FBT);

· Pay As You Go (PAYG); and

· Business Activity Statement (BAS)











A review of the Pay As You Go system and Fringe Benefits Tax is outside the Committee's Terms of Reference and is therefore not included in this Report. Suffice to say that evidence put to the Committee by businesses

indicates these separate reforms constitute major changes to the way a business is required to present reports and make payments to the Australian Taxation Office.

The issue of GST compliance costs, dealt with in Chapter 3, is complicated by the fact that there are costs of compliance associated with the other tax reforms including PAYG, BAS and FBT.

The Business Activity Statement and Australian Business Number are directly linked to the GST and are therefore dealt with in the Committee's Report.

For the purpose of this Report, it is not intended to provide an extensive background to the reasons for the introduction of The New Tax System (ANTS) other than to highlight that it came to fruition as the result of increasing disenchantment with the former tax system.

The previous revenue structure was seen as failing to reflect the needs of modern Australia, in that it was perceived as being inefficient, ineffective and costly to administer as well as acting as a disincentive to investment and economic growth.

The aim of ANTS, as promoted by the Australian Taxation Office, is to "provide a fairer and more consistent tax system for all Australians, help make Australian businesses more competitive internationally, and ensure a secure and broad revenue base for the States and Territories to supply services such as roads, hospitals

and schools."1

2.2 Introduction of a Goods and Services Tax2.2.1 Background

As an indirect tax, the GST aims to curb problems arising from the over reliance on the direct taxation system.

Over time, the Australian economy has moved towards a system reliant upon higher levels of direct taxation, with a lower share of revenue coming from indirect taxation. Adoption of such a policy is contrary to

international trends, whereby the majority of Australia's trading partners and competitors have already embraced the raising of revenue needs by way of indirect taxation. The move away from indirect taxation

has effectively placed the burden on the Personal Income Tax System and hence predominantly upon salary and wage earners.

In common with many other OECD countries, Australia has employed the GST in an endeavour to provide a reliable, secure and increasing income stream to fund its revenue demands, thereby allowing it to continue to provide and increase the quantity and quality of the services that it provides to the nation.

The implementation of the GST saw the introduction of a consumption based tax at a flat rate of 10 per cent and the immediate abolition of the Wholesale Sales Tax, together with a number of existing State taxes. It is proposed that additional State-based taxes will be abolished over the five-year transitional period to 1st July 2005.

Ultimately, the GST has been responsible for the abolition of the following revenue types from the Australian economy:

· Wholesale Sales Tax;

· Financial Institution Duty (FID);

· Debit taxes;



· Stamp duty on marketable securities; and

· Bed taxes.

2.2.2 What is the GST?

The GST is a multi-stage tax. It is based on the "value-added" tax model adopted by many of the OECD countries that have already employed the concept of consumption-based taxation. The tax, at a rate of 10 per cent, is applied to the retail price paid at the point of ultimate consumption of most goods and services in Australia, including those that are imported. While imports will attract the GST, goods and services consumed outside of Australia (exports) will not attract the GST.

Businesses registered for the new tax charge a GST amount when they sell or otherwise supply goods or services to both consumers and other registered entities. The percentage of the GST increase will vary depending on any savings or compliance costs of a business associated with the New Tax System. The Australian Competition & Consumer Commission (see 2.2.7) have indicated prices cannot increase by more than 10 per cent.

Business entities purchasing goods and services for the purpose of conducting a business will offset the GST paid on their business inputs against their own GST liability arising from taxable supplies. This credit-offset process continues until the supply is ultimately made to an end-use consumer and as such guarantees that the tax is only charged on the value added by each business involved in the value supply chain.

Concern has been expressed regarding the ability of future Commonwealth Governments to increase the rate of the GST. In a gesture to address these concerns, any increase in the rate of GST will have to be:

· by way of introduced legislation; and

· unanimously agreed to by the State Premiers and Territory Chief Ministers; and

· passed by both Houses of the Federal Parliament.

2.2.3 What will be GST-free?

It is important to remember that while most goods and services supplied in Australia are subject to the GST, some items remain GST-free. The essence of a supply being GST-free means that while the supplier does not charge GST in their price on supply, they will still be able to claim input tax credits for the GST incurred as a cost component in the operation of their business.

Under the Australian model the following categories of goods and services have been classified as GST-free:

· most basic food for human consumption;

· exports of both goods and services;

· supplies of sewage, water and drainage services;

· approved childcare;

· most education and health services; and

· most government fees and charges.

In a major departure from the previous regime of a Wholesale Sales Tax, where exempt entities were not required to pay the "tax" contribution up-front and later seek a refund, businesses making GST-free supplies will incur the initial cost and claim back their input tax credits in the normal course of business.



2.2.4 How will the GST be implemented?

Revenue inflows from the GST commenced on 1st July 2000.

In order to achieve the implementation date and ensure a smooth transition to the New Tax System, the Commonwealth Government, through the Department of the Treasury, established the GST Start-Up Assistance Office with an allocation of $500 million to implement four programs to assist businesses with the introduction of the GST.

These programs are set out below.

· Direct assistance in the form of a $200 redeemable certificate to all businesses that register for the GST. This certificate was primarily designed to be used to upgrade accounting systems, obtain training or financial advice. This program had a three-fold benefit. First, accompanying the certificate was a booklet of registered suppliers who accepted the certificate as whole or part-payment for services rendered. Secondly, many of these suppliers offered discounts to certificate holders and thirdly, tax deductions could be made for the new accounting system which would, in normal circumstances, only be achieved through depreciation over a number of years. Such tax deductions applied to all new accounting systems purchased prior to 30th June 2000.

· Organisation Delivered Assistance. This program refers to the provision of training seminars to industry groups.

· Advisory Education Program. This program refers to the provision of training to business enterprise centres, government development centres, treasurers of community groups, etc.

· Business Skills Education Program. This program provided a GST assistance telephone line run by the Society of Certified Practicing Accountants (CPAs).

The GST Start-Up Assistance office closes on 31st December 2000 when the funding allocation expires.

2.2.5 How will the GST Revenue Be Spent?

In accepting that the GST is a Commonwealth administered tax initiative, an Accord struck between the individual States and Territories and the Federal Government will see the "roll-out" of the GST revenue to State and Territory Governments.

In return, the States and Territories will:

· contribute to the costs of administering the GST;

· abolish a number of their previous State based taxes; and

· cease to receive funding under the Financial Assistance Grants Programme.

The Accord between the Federal Government and States and Territories also provides a guarantee from the Commonwealth that, following the introduction of the GST, no State or Territory will be worse off financially than they were under the Financial Assistance Grants Programme.

2.2.6 GST Re-pricing and the Role of the Australian Competition & Consumer Commission

One of the major challenges that businesses were faced with in the lead up to 1st July and the initial period after the introduction of the GST was the re-pricing of goods and services. For small businesses, particularly the retail sector, GST re-pricing, the role of the Australian Competition & Consumer Commission (ACCC) and consumer reaction to re-pricing have been of significant concern.



There are principally two issues to be considered in relation to "price controls" and the introduction of the GST, these being:

· cost reductions associated with the abolition of Wholesale Sales Tax; and

· consumer exploitation and excessive profit taking or profiteering.

In an attempt to ensure that consumers are protected from unscrupulous price exploitation, excessive profit taking or profiteering on the introduction of the GST, the Federal Government legislated to provide the ACCC with special transitory powers to formally monitor retail prices.

The mandate provided to the ACCC enabled it to monitor retail prices, both in the twelve months in the lead-up to and the twelve months subsequent to the introduction of the GST. In the course of its operations, the ACCC is empowered to ensure that consumers benefit from cost reductions associated with the abolition of Wholesale Sales Tax and are not exposed to greater than necessary price increases associated with the implementation of the New Tax System.

In consultation with the States, the Commonwealth Government has ensured that the ACCC has the statutory authority to take action against unfair business practices that adjust prices contrary to or that are inconsistent with the New Tax System. Breaches of the price control legislation will carry penalties of up to $10 million.

In the lead up to 1st July 2000, the ACCC released its well publicised guide to how commonly purchased goods and services were likely to be affected by the GST. Significant media coverage was given to the ACCC's price exploitation powers.

In a public hearing on 27th July 2000, Dr David Cousins, Commissioner, Australian Competition & Consumer Commission, commented on complaints received in relation to possible GST price exploitation:

"In terms of the calls and complaints, et cetera, we have received about 65 000 since 1 July. About half of the calls would be in the realm of complaints. Many of the complaints are not matters that raise breaches of the Trade Practices Act. People do not like to see prices rising. They will complain, but it is not necessarily a breach. It is not necessarily outside our expectations. So we are looking at about 3000 to 4000 matters involving potential breaches of the act, and of those quite a few are minor.

In response to those minor matters the commission has written to all the businesses that are affected pointing out the potential breach and indicating that we expect if there has been a breach that it be corrected.

In response to the major matters we are certainly following them up in some detail. We have in excess of 1000 at the moment that we are looking at in some detail. We seek responses from people and generally it takes some time to follow up on that. That is really our work at this stage. We have a very active period in front of us for the next six months at least of scrutinising evidence and of the

repricing that has occurred." 2

The Committee notes that the ACCC is continuing to monitor prices following the introduction of the GST and has been active in its GST enforcement role which is largely driven by customer complaints. There have been a number of publicly documented cases since 1st July where court enforceable undertakings have lead to businesses rectifying the excessive price rises by actions such as providing refunds to customers, placing corrective advertisements in newspapers and implementing trades practices compliance programs.

Despite the ACCC's pricing guidelines, the Committee found that there was, and to some extent still is, genuine confusion over GST re-pricing. Added to this is the fear of many small businesses in increasing prices by more than the ACCC pricing guidelines and the resulting impact higher price increases will have on



consumption patterns.

The problem many businesses are faced with is the need to recoup compliance costs via price increases in order to maintain profit levels.

The ACCC guidelines indicate "businesses may adjust their prices to recoup reasonably incurred net additional compliance costs associated with the New Tax System. Some examples of compliance costs may be:

· new accounting software required to comply with new reporting requirements;

· providing staff training on GST issues; and

· attending GST seminars and obtaining GST-specific advice.

Where these costs are of a capital nature, such as a new accounting system, any cost impact on prices should be spread over several years in line with accounting depreciation rules. A regularly scheduled computer upgrade, however, could not be claimed as a compliance cost.

Additional compliance costs should be offset in part or whole by any benefits you may receive such as:

· Savings in not having to deal with the old tax system, for example, the removal of WST;

· Additional assistance provided by the Government such as the value of goods or services purchased with the $200 Direct Assistance Certificate;

· Efficiency gains associated with compliance such as improved efficiency from the introduction of a new computer;

· Cash flow benefits from collecting GST in advance of payment to the ATO; and

· Tax deductibility, including the immediate write-off of plant acquired before 1 July 2000."3

The ACCC have stated that the overall price of a product cannot increase by more than 10 per cent as a result of the New Tax System changes. However, a business can factor in compliance costs together with any savings that may be achieved as a result of the tax changes so long as the net affect does not exceed 10 per cent.

The ACCC pricing guidelines indicated to businesses and consumers the likely effect of the GST on certain products. For instance, men's clothing was estimated to rise by between 8 and 9.8 per cent, footwear by between 8 and 9.4 per cent and books by between 8.8 and 9.1 per cent.

From the evidence received by the Committee, it appeared that many businesses felt restricted by these pricing guidelines and were also unaware that compliance costs could be factored into GST price changes up to the full 10 per cent.

Mr Tim Piper, Executive Director, Australian Retailers Association Victoria commented on the need for retailers to recoup compliance costs in re-pricing:

"Prior to the introduction of the GST it was to be a 10 per cent - 10-is-10-is-10 - price increase. Yet there were many cases where increasing prices by only 10 per cent would mean some retailers would lose out because there was no wholesale sales tax to be taken into account. They had to introduce a 10 per cent GST, plus they had compliance costs to pay, so obviously they were out of pocket. Despite that, the ACCC said we could

not increase prices by more than 10 per cent." 4

Mr Steven Bates, Secretary of the Bendigo branch of CPA Australia was another witness who spoke



about the affects of ACCC re-pricing guidelines:

"There has certainly been an increase in the compliance costs to small businesses. The big question concerns their uncertainty about whether they can recover those extra costs through their businesses and increased charges, especially with the ACCC stating that maximum prices can be put up by only 10 per cent. Many businesses were fearful of introducing a normal price rise as well as a 10 per cent GST. The problem is that many small businesses are not making a huge profit anyway. They do not have the benefits of a big business. An increase in the

compliance costs will reduce their prices and competitiveness." 5

Finding 2.1

The Committee finds that, despite ACCC guidelines indicating businesses can recoup compliance costs in re-pricing, the strong perception among businesses was that prices could not increase beyond the ACCC pricing guidelines for certain commonly purchased goods or services despite incurring net compliance costs as a result of the GST.

The effect of this confusion was that some businesses were reluctant to increase prices to recoup net compliance costs and as a result were faced with reduced profits.

Finding 2.2

The Committee finds that the perceived negative effect on profitability of GST compliance costs may have contributed to the closure of some businesses.

2.3 GST Requirements on Businesses2.3.1 Registering for GST and ABN / Input Tax Credits

All business entities, be they individuals, companies, partnerships, trusts or other bodies that engage in the supply of goods or services for reward are required to register for the GST if their annual sales turnover is in excess of $50,000. Not-for-profit entities also have to register for the GST if their turnover (not including donations) exceeds $100,000.

Entities, be they for-profit or not-for-profit, with annual turnovers below these thresholds can still register, but on a voluntary basis. Obviously entities that do not register will not charge any GST on their sales income, but they will not be able to claim back the GST cost components that they incur in the process of operating their non-registered business entity.

When registering for the GST, businesses also register for an Australian Business Number. Businesses with a turnover less than $50,000 may choose not to register for the GST but will still need to obtain an ABN. All existing businesses were required to register for the GST by 31st May 2000.

By registering for the GST, businesses are entitled to claim input tax credits for the GST payable on goods and services they acquire for the purpose of conducting their business or partly for the purpose of the business. An input tax credit is 1/11th of the acquisitions.

The claiming of input tax credits is dealt with in detail throughout this Report, particularly in examining the effect of GST price increases on the costs of fuel, electricity and government services. In short, the input tax credit offsets the GST payable on any goods or services

By not registering for the GST, businesses will be faced with higher business costs. A business dealing with an unregistered business is unable to claim input tax credits for those acquisitions. Unregistered businesses are charged a 48.5 per cent withholding tax on goods and services they supply to other businesses. This is seen as a significant incentive for businesses to register for the GST.



The ATO advised that 2.47 million businesses and individuals that lodged applications by 31st May, were guaranteed to have their ABNs by 1st July. The ATO further advised that up to 200,000 late applications would not be faced with the 48.5 per cent withholding tax.

Finding 2.3

The Committee finds that as a result of the 48.5 per cent withholding tax and the inability of unregistered businesses to claim input tax credits, businesses not registered for the GST will be faced with higher business costs.

2.3.3 Business Activity Statements

The Business Activity Statement is a single A4 form that shows the total GST payable by a business and the total amount of input tax credits. The input tax credits are offset against the total GST payable to determine a net amount payable or refundable. The BAS also covers other tax payments including income tax and fringe benefits tax.

For businesses with an annual turnover less than $20 million, the BAS will be submitted quarterly for the periods ending 30th September, 31st December, 31st March and 30th June. Larger businesses and any other business if it chooses to do so, will submit monthly statements.

The BAS will impact upon cash flows of businesses. The ATO has legislatively undertaken to process BAS within 14 days to ease potential cash flow difficulties. Evidence to date suggests some small businesses are opting for monthly rather than quarterly returns to allow them to keep a close focus on business dealings and cash flow. The issue of cash flows and Business Activity Statements are discussed in Chapter 7 and will constitute a major part of the Committee's further investigations and second GST report due in April 2001.

The ATO has extended the first quarterly BAS deadline from 21st October to the 11th November for small businesses.

The preparation of the first Business Activity Statement is considered to be the next major challenge for businesses after preparing for the GST on 1st July.

As mentioned in Chapter 1, the overwhelming evidence put to the Committee suggests it will not be possible to accurately assess the impact of the GST on businesses until the first and possibly second BAS (due in February) instalments are made.

2.4 GST AvoidanceOne of the objectives of introducing the Australian Business Number was to reduce the extent of GST avoidance.

The Committee heard evidence on the extent to which GST and the introduction of ABNs would reduce the so-called `black economy'. Examples of this evidence are provided below.

Mr Steven Bates, CPA Australia, Bendigo branch:

"It will solve a lot of the business-to-business black money, because with ABNs and GST it all has to be documented. When the transaction is between a business and a residential person - for example, if someone mows your front or back lawn and charges you $20, you cannot claim it because it is your house and you do not care whether it includes GST or not, so you just say, `Here is 20 bucks, off you go' - that will not change. In fact, that will probably get even bigger. I would say that more people will probably say, `How much for cash and how much to be recorded?', but only when it is someone who cannot claim a tax credit for it. I

think there will be even more cash than before." 6



Mr Jim Mason, Secretary, Bendigo Regional Chamber of Commerce:

"Certainly some business owners have commented that this has forced them to get into the 21st century. Some people do not like change, and this has actually forced them to make change. So there have been certainly some positives in the longer term. I think there probably will be some positives there, but there are some who have said they do not have a problem with it. Other people have made comments such as it probably will not totally block the cash economy, but it will certainly tighten it up a bit. I am sure there are heaps of people looking at ways around it

now." 7

Mr Ken Claughton, Manager Indirect Tax, Pitcher Partners:

"For example, plumbing, building or carpet cleaning services at home all become effectively some percentage more expensive than they were before 1 July. It may be that householders will be more encouraged to look for somebody who will perform those services for cash rather than for somebody who is registered for the GST. Businesses, of course, will look the other way: they will look for somebody who is registered for the GST so that they can claim their input tax credits. Householders, because of the increased costs, may be encouraged to look for more people in the black economy. To that extent there may be some encouragement

for people to enter." 8

Mr Brian Welch, Executive Director, Master Builders Association of Victoria:

Mr THEOPHANOUS - Will it create a new black market?

Mr WELCH - Yes, it will. Many people would have been faced with this dilemma: `If I make myself conspicuous because I have been working in the cash economy - damn, they might catch up with me for all the things I have done in the past. But if I just keep working from house to house doing the odd job, it will be very hard to catch me unless some honest home owner decides to tip me in'. Some experience overseas suggests that there is an increase in black market operations

at the lower end. 9

Ms Kim D'Arma, GST Sign Post Officer, North Eastern Victoria Area Consultative Committee:

"The perception about the black economy, as mentioned earlier, has always existed in Australia and it always will. A builder told me he has been working that way for a long time and cannot see the GST affecting him. That is an issue for the ATO. One man who does small home maintenance jobs told me his customers are saying, `That's your price for the job; what is your price for cash?'. That is at the other end, with consumers wanting cash prices. There is pressure on the business person to try to stick to the rules.

Ms DARVENIZA - Do you think it will increase the black market?

Ms D'ARMA - In my opinion, yes, but not based on any facts." 10

Mr Don Maling, Proprietor, Edible Deli, Benalla:

"To put it bluntly, I do not think it is doing anything to stop the black market, which is one of the hidden aims of goods and services tax. All it has done so far is to drive it out to the fringe - for example, we run a registered kitchen in registered premises in the main street. We pay rent. What we now face is businesses run from home, from registered kitchens with no overheads. I doubt whether they pay

GST." 11



Finding 2.4

The Committee finds that the so-called `black economy' will always exist to some extent despite the introduction of the GST and need for businesses to register for an Australian Business Number.

Finding 2.5

The Committee finds that the GST and ABN may reduce `black market' transactions between businesses due to the need to claim input tax credits. However, the Committee found no evidence as to the extent of business to business black market transactions before the introduction of the GST.

Finding 2.6

The Committee finds that the extent of `black market' transactions involving consumers is likely to increase (as avoiding GST adds another reason in addition to pre-existing tax avoidance), particularly in the service industry where input tax credits are negligible or can be transferred to other clients.


1 Australian Taxation Office, Guide to GST, Nov., p.3

2 Minutes of Evidence, 27/07/00, p. 39

3 Australian Competition & Consumer Commission, `Price Exploitation and The New Tax System - A Compliance Guide for Small Business', May 2000, p.6


5 Minutes of Evidence, 9/8/2000, p.160



















3.1 Background to GST Compliance3.2 Factors Affecting the Level of Compliance Costs3.3 GST Start-Up Compliance Costs3.4 Recurrent Compliance Costs3.5 RSM Bird Cameron Survey on Compliance Costs3.6 VECCI Compliance Cost Survey

3. GST Compliance Costs

3.1 Background to GST ComplianceAs with any legislative change, the introduction of the GST in Australia on 1st July 2000 was accompanied by the requisite compliance structures.

Although some Australian businesses had previously been exposed to, and directly involved with the administration of Wholesale Sales Tax (WST), the extent to which the GST impacts on businesses, both in terms of volume of transactions and the number of those involved in compliance, is more far reaching.

The initial GST model proposed for Australia would have seen the introduction of a consumption based tax of 10 per cent on most goods and services provided in Australia. However, after extensive debate in the public and political forums, most basic foods together with health and education goods and services were excluded,

creating additional complexities in the system, particularly in terms of compliance.

In the lead up to 1st July, businesses were faced with costs, both financial and time related, in becoming `GST ready'. Much has been written, and will be written over the next 12 months, in relation to the extent of GST compliance costs for businesses.

This chapter analyses the Committee's evidence relating to GST compliance costs based on:

· evidence provided by witnesses in public hearings;

· a GST compliance cost survey undertaken by the Victorian Employers' Chamber of Commerce & Industry; and

· a GST compliance cost survey undertaken by the Committee's GST consultants, RSM Bird Cameron.

The Committee notes that the Victorian Department of State and Regional Development has commissioned a study into GST implementation that will collect data on compliance costs for small businesses in Victoria. It is understood the results of the survey will be available in early 2001.











3.2 Factors Affecting the Level of Compliance CostsEvidence gathered by the Committee clearly indicates that the level of compliance costs varies greatly from one business to the next.

In examining GST compliance costs, the Committee was referred to a paper prepared by Dr Jeff Pope from the Department of Economics at Curtin University dealing with factors affecting GST compliance costs. Dr Pope cited the following factors as important in determining compliance costs in dollar terms:

· "size of the firm;

· economies of scale;

· type of industry;

· size of the average transaction and number of invoices handled per business;

· mix of GST rates and borderline issues (ie. exempt g&s) per business;

· status (in terms of education and experience) of person completing the GST return;

· use of accountants by business;

· type of accounting system;

· attitudes to GST; and

· number of entities registered (at the aggregate level)." 12

Evidence provided to the Committee in the public hearings confirms Dr Pope's findings.

Naturally the size of a business will be a major factor in determining the extent of compliance costs. While compliance costs for small businesses may be small in total compared to large businesses, the Committee's evidence confirms that there is a disproportionate cost of compliance on small businesses compared to large businesses due to economies of scale.

Compliance costs will also vary significantly according to the type of business. This has been exacerbated by GST exemptions, particularly on basic food items.

The Committee found that other major factors affecting the level of compliance costs were a business' accounting systems, training and use of accountants.

Some businesses were required to start from scratch in terms of buying computers, GST software and, in many instances, undertaking extensive training. Other businesses simply purchased new GST software programs often at a cost of only a few hundred dollars.

At the other end of the scale, a food retailer such as a supermarket proprietor, may have up to 2,000 different products, some of which are GST free and some of which are taxable. These businesses were required to re-price all items, noting which were taxable and which were exempt.

The Committee found that these businesses required complex point-of-sale systems which lead to higher compliance costs. An example of compliance costs put to the Committee that illustrates this point is the case of the Warrnambool Co-operative Society.

Ms Janet Clark, Accountant, Warrnambool Co-operative Society:



"Obviously, post 1 July we had the ticketing issue. We have a retail store, so we had to meet all the ticketing and notice requirements on time. Again, we are a rural store and we sell petrol, so a lot of training was put into that. A lot went into re-ticketing and stationery because we are computerised. To date $53 000 can be put down to the GST implementation. I estimate the cost of the re-ticketing process, which simply went to wages, would probably be another $7000. Plus, of course, there have been some stationery issues, although we obviously endeavoured to run down everything so that there was a minimal loss in stationery prior to the GST implementation." 13

Similarly, the Committee was given an example of a supermarket in Nhill that spent up to $50,000 on equipment upgrades.

Mr Rob Gersch, Proprietor, Zero Inn Motel/Restaurant, Nhill:

"Friends of ours have a supermarket in Nhill. They spent between $40 000 and $50 000 on new equipment to upgrade. When you come into a business like a supermarket and the food industry there certainly are some problems there and there have been some additional costs for them." 14

However, using supermarkets as an example, the Committee heard from a supermarket proprietor in Benalla that his GST compliance costs were $8,500.

Mr Dennis Scott, Proprietor, Scotty's IGA Supermarket, Benalla:

"I have spent $8500 and, sure, I can claim $2500 back, if I am lucky, but I will still be $6000 out of pocket." 15

The examples above and further cases listed in this chapter highlight the large variations in GST compliance costs and the higher costs for those businesses which have complex point of sale systems which include GST applicable and GST non-applicable products.

Finding 3.1

The Committee finds that those businesses that required complex point-of- sale systems and computer upgrades were consequently faced with higher GST compliance costs.

The Committee also noted that a number of small to medium sized businesses have used the GST as a trigger for upgrading their business systems.

In particular, evidence indicates that many businesses are taking advantage of the immediate tax deductions for the purchase of new equipment and software and are therefore going beyond merely preparing for the GST. The Committee examines this issue further in Chapter 7 when dealing with the impact of the GST on the competitiveness of small and medium sized businesses.

Dr Pope's study indicated a major problem with estimating GST start-up costs is the problem of joint costs. Pope cites the example of where "...a computer and its associated software is used, say, half for GST compliance work (including PAYG) and half for management purposes. Yet the purchase or upgrade has occurred because of the GST and, it could be argued, would not otherwise have been made, particularly in the case of small business." 16 The question then arises as to whether 50 per cent or 100 per cent of the capital outlay should be assigned as a GST compliance cost.

Early in this Report, the Committee referred to the significant changes arising out of the Review of Business Taxation (Ralph Review), including Fringe Benefits Tax (FBT) and Pay As You Go (PAYG).

The Committee also notes that any consideration of GST compliance costs should be separated from other tax changes which in itself is not an easy task.



3.3 GST Start-Up Compliance CostsIn order to obtain first hand knowledge of small and medium sized business compliance costs and other GST related issues, the Committee conducted public hearings in Traralgon, Bendigo, Benalla, Warrnambool and Horsham. Evidence was received from a wide range of people including regional businesses, local accountants and chambers of commerce.

Throughout the hearings, witnesses were asked to quantify GST compliance costs. In particular, the Committee sought evidence on start-up costs (pre 1st July) and recurrent costs (preparing BAS returns).

The response from witnesses indicates there are large variations in the level of compliance costs. Costs varied from the low $100s to in excess of $50,000. The differences reflect the factors referred to earlier in this chapter.

The Committee also received evidence highlighting certain difficulties encountered in GST compliance, both start-up and recurrent. These problems are discussed in the following section.

3.3.1 Computer Costs and Training

The sampling of evidence provided below indicates the large differences in computer hardware and software costs. In addition to the computer upgrades many businesses were required to undertake relevant computer training which varied depending on their previous computer skills and knowledge.

For basic computer systems and GST compatible software, some witnesses suggested costs and training would be in the vicinity of $5,000:

Mr Michael Gunn, Manager, Coffey Hunt & Co. Accountants, Warrnambool:

"The cost of the computer plus the relevant training is probably, say, $5000, or something like that. Then there is the time spent training. That is only the time for the computer and the time we give them to get established. However, they would spend a lot of their own time on it, which is time they are not spending on the farm. They are spending a lot of time getting up to speed so they can handle it." 17

Mr Roy Henwood, Manager, Wimmera Business Centre:

"I would suggest that if the person had no computer experience at all, the compliance cost figure would be in the middle range of $5000 to $6000 when taking into consideration the amount of time he or she would have to devote to learning how to use a computer, becoming familiar with accounting terms when using a package such as Quick Books, TAPS Cashbook or MYOB. It would be $2000-worth of computer and $500-worth of package, and on top of that you would probably have to commit $2500 in time and training." 18

The $2,500 in time and training referred to above by Mr Henwood would relate to people unfamiliar with computers.

Other witnesses indicated new computers, software and training costs were between $2,000 and $5,000. The lower end of the scale would suggest little computer training was required.

Ms Angela Feery-Richards, Manager, Priority Works Services, Horsham:

"Preparing for the GST cost me $2178, and that is incorporating some of my time. It was not so bad for me because, firstly, I am fairly computer literate, and secondly, I had already set up my accounts with MYOB 10 when I went into



business. It was not a huge issue other than the fact I had to get the upgrade because of the payroll component." 19

Mr Peter Beasley, Chairman, Latrobe Regional Chamber of Commerce:

"In our personal situation it cost us about $1100 to upgrade our computer system in the vineyard and it was just over $1200 in software to get everything up to date. I have had figures ranging from 2000 to 6000 for small businesses to upgrade their computer systems to cope with the new system. Generally, and I think everybody is agreed, once it settles, once they overcome the first returns, it is going to become a lot simpler." 20

Mr Max Bickford, sheep farmer from Ravenswood:

"So far as setting up for the GST is concerned, I had to upgrade my computer. I had to get new software, which is new, beaut and wonderful, but it would not fit on the old computer. That was about $2000. The upgrade cost me around $160." 21

While it appeared that many businesses had managed to purchase new computers and software and undertake relevant training for less than $5,000, some businesses advised the Committee that compliance costs were closer to $10,000.

Mr Steven Bates, CPA Australia, Bendigo branch:

"To get proper computer systems and software you are probably looking at $5000 to $10 000 - and then advice. That is probably what they have spent to implement it. That is not much of a drama in a big business worth $1 million, but for a small business it is huge." 22

Mr Kristian Wenckowski, Colliers Golden Key Bootery, Bendigo:

"The compliance cost, from a small business point of view, knocked us around a little. We think we have spent in our humble little store about $7500." 23

Mr Tim Piper, Executive Director, Australian Retailers Association Victoria:

"Most retailers will have changed their systems, and a lot of them - I would probably say the majority, not much beyond that - probably put in automated point-of-sale systems that they did not have before. That would have cost anything from $6000 upwards, and some businesses, even small businesses, have spent tens of thousands of dollars to introduce that system. They complain about that. Obviously it will make them more efficient, but in the short term it is a fair impact on them in terms of the dollars they had to put into their business that they were not necessarily expecting." 24

3.3.2 Were the extent of GST compliance costs necessary?

The Committee consistently heard evidence to suggest many businesses outlayed unnecessary amounts of money in purchasing new computers in preparation for the GST. For instance, a number of farmers who previously never used computer systems in their business, were lead to believe they were required to spend several thousand dollars on computer hardware and software when they actually could have continued using a manual cash book system.

The Committee notes that the Victorian Farmers' Federation was selling a multi-column cash book for approximately $50 that would adequately fulfill a manual GST reporting system.



Some of the evidence highlighted below suggests that accountants and computer company advertising had influenced some businesses in upgrading computer systems beyond the minimum GST requirements.


"Many accountants forced - and I use that word - their clients to either upgrade from the Quicken program to Cashbook or MYOB. I could be cynical and say it was purely to get the $200 voucher off them, but I won't. A lot of people have changed because they believed they had to change. Many people who have gone away from the simple handwritten cashbook to computer packages should never have been encouraged to go that way. The accountants themselves are telling people they will not deal with them unless they have this or that package. I believe there will be some sort of backlog." 25

Ms Kim D'Arma, GST Sign Post Officer, North Eastern Victorian Area Consultative Committee:

"MYOB Australia Ltd ran huge advertisements. I should have counted the number of people who asked me whether they should buy MYOB. They thought they had to buy it. It was more a matter of advertising and the media blowing up the whole GST situation and businesses got the wrong end of the stick. I think some accountants may have put pressure on, saying, `You really have to lift your game, your books aren't good enough'. There may have been pressure from those quarters. For every five good accountants, there would be a sixth less scrupulous bugger. That worried the signpost officers. It was okay once you explained to them that their books would be fine. Even the mixed suppliers can keep manual books well. I spoke to farmers at the two seminars I held only a couple of weeks ago; they had never kept books. They were keen and took away the information on cash books, which was among the good information produced by the ATO. They said, `I can do this and that, I can fill it in'. They face other issues like recipient-created tax invoices that saleyards create for the farmers' livestock. One guy brought it along to the session and said, `How do I record this?'. Once it is explained and understood they decide they can do it." 26

3.3.3 GST Start-Up Assistance Voucher

In Chapter 2, the Committee referred to the GST Start-Up Assistance Office within the Commonwealth Department of the Treasury that was allocated $500 million to implement four programs to assist businesses with the introduction of the GST. Direct assistance took the form of a $200 redeemable certificate to all businesses that registered for the GST. The certificate was designed to assist businesses in upgrading accounting systems and/or obtaining training or financial advice.

The Committee notes that while the $200 voucher was generally accepted, it was considered by many small businesses to be insufficient in alleviating GST compliance costs.

Mr Chris Foster, Partner, Green Taylor Accountants, Horsham:

"Probably the biggest compliance costs that clients would have had would be for education. They would have received a $200 voucher, which is probably not adequate for small businesses; most of those who attended a number of seminars and briefings as well would have spent more than that." 27

Mr Chris Buckingham, President, Moe Development Group:

"...... I would suggest that the $200 rebate or break, or whatever you want to call it, was a bit of a joke, it might buy a small accounting package." 28



Mr Erin O'Brien, Warrnambool Business Action:

"I really believe that in the implementation stages of the GST and with the $200 vouchers and everything there was just an enormous rip-off by the accountants. Some of the accountants - not only in Warrnambool, of course - were charging $200 for filling in the ABN application forms. That is just totally ridiculous and a waste of time. So businesses in some instances let themselves down by not doing some of their own work. It has been enormous business for accountants, and small businesses have paid far too much money in the initial setting up for GST." 29

Mr O'Brien's comments above touch on another issue dealing with accounting services. The Committee heard evidence on accounting services and fees, more in relation to ongoing compliance costs. This is dealt with in section 3.4.

Finding 3.2

The Committee finds that the level of GST compliance costs for small and medium sized businesses vary significantly according to:




Finding 3.3

Based on surveys examined and evidence collected, the Committee finds that on average, GST compliance costs for small businesses were approximately $6,000, which included the purchase of new computers, GST software and training. Further, the Committee notes that the average GST compliance cost for medium businesses (up to 99 employees) was approximately $19,000. The Committee therefore finds that the Commonwealth Government's $200 voucher assistance package for GST implementation was totally inadequate.

Finding 3.4

The Committee finds that some businesses had spent as little as $200 in compliance costs while other businesses had spent upwards of $50,000 on sophisticated computer systems.

Finding 3.5

The Committee finds that many businesses had used the introduction of the GST as a catalyst for upgrading computer systems that may eventually lead to improved business operations however some businesses had questioned the value of these upgrades for their business operations.

3.4 Recurrent Compliance Costs

The Committee collected evidence after the 1st July when businesses had experienced the costs involved in preparing for the introduction of

the GST. During the Committee's August/September hearings, most businesses were also preparing for submitting their first quarterly BAS

returns due on 11th November.



Evidence put to the Committee indicates GST compliance costs will not end at 1st July 2000 and in fact will continue, to a lesser extent, in the future particularly with respect to ongoing reporting requirements.

Again, in his study on GST compliance costs, Dr Pope notes the importance of distinguishing between temporary (start-up) and permanent (recurrent) compliance costs and that, theoretically at least, an inverse relationship of some degree would exist between the magnitude of start-up and recurrent costs. Pope states that "start-up investment in computer hardware, software and on-line systems should lead to much lower recurrent costs." 30

Some of the Committee's evidence on recurrent compliance costs, particularly accounting costs, is referred to below.

Ms Kim D'Arma, GST Sign Post Officer, North Eastern Victorian Area Consultative Committee:

"The issue we are most worried about now is the business activity statements. Every signpost officer I have talked to has been worried about the reliance of small business on their accountants. The far-ranging charges of accountants has been of concern. One fellow from the north of the state was charged $1000 to register a business for an ABN and to have his first talk with the accountant. One person in Benalla had a 1 hour meeting with his accountant who registered him for his ABN and the bill was $500. All signpost officers said the same, that if an accountant falls over, where will the businesses be? However, for every accountant who is doing that, there are another three or four fantastic accountants who are empowering their people and saying, `No, you can do your BAS. I can teach you. I will help you with your first one but you can do it'. So there are many good ones out there too, and those people are putting their hands up and asking for lessons on BAS." 31

Ms Jo Bourke, Project Manager, Wimmera Development Organisation:

"The way the majority of small businesses are dealing with that is by using an agent, as in an accountant, or getting advice from an outside source. My feeling is that most small businesses are not able to work their way through the change by

themselves. That is to do with the terminology and access to information. Probably once we get past the initial 12 months of the implementation, I think businesses

will take some of that back within their own organisations, but because it is a bit of an unknown there is uncertainty about the how-tos of reporting and even the collation of the right sort of information, and people have outsourced that." 32

Mr Darren Harris, Warrnambool Business Action:

"There seem to be ongoing accountancy costs. Basically, every person you speak to has an accountant employed, perhaps not full time but they seem to be spending a lot of time on the phone consulting their accountants. The accountants are doing very well out of it and profiting quite well. Small business will struggle with it for a while. The bottom line is that I think it will be very good, but it is a matter of just how business, particularly small business, will cope to get to the other side of it." 33


"I believe the accountants have created a lot of their own problems by making businesses too reliant on their services. We have had certain accounting firms - not the one that was here this morning - early in the piece that were advertising, `Don't worry about GST, we will handle it for you'." 34

The evidence above would suggest that many small and medium sized businesses will be relying heavily on their accountants in preparing the initial BAS returns. This will lead to a continuation of GST compliance costs with respect to ongoing accounting fees.



Finding 3.6

The Committee finds that all businesses will incur ongoing GST compliance costs in terms of time and money spent in preparing monthly or quarterly Business Activity Statements and additional business operations. These ongoing costs may affect some business' competitiveness or profitability.

The extent of these compliance costs will vary depending on the type of business and the reliance on professional accounting services and will be addressed in the Committee's Report No.2 on the GST in April 2001.

Finding 3.7

The Committee finds that many small businesses will be relying heavily on their accountants in preparing their initial BAS returns. The accounting profession has had a significant increase in business as a result of the GST which has added to the cost of businesses that are their clients.

3.5 RSM Bird Cameron Survey on Compliance CostsThe Committee engaged the services of RSM Bird Cameron Accountants to assist in its technical research for this Inquiry. Part of this consultancy work involved the conduct of a survey of businesses to determine the extent of GST compliance costs for small and medium sized businesses.

The purpose of the survey was to identify:

· the particular areas in which businesses incurred costs in the lead-up to the introduction of the GST; and

· the particular areas in which businesses expect to incur additional costs post 1st July 2000 in terms of ongoing compliance costs.

3.5.1 Methodology

Approximately 170 businesses (from both metropolitan and rural Victoria) were questioned regarding the nature of their particular compliance costs. The survey targeted typical small businesses with a total of no more than 10 business participants.

In addition, an independent survey was conducted among representatives of RSM Bird Cameron's Victorian branch offices to gather anecdotal evidence regarding the issues of GST and compliance costs faced by businesses.

In order to ensure that the information collected was representative of Victorian industry, questionnaires were sent to businesses on an industry / location basis. Information was obtained from a wide range of industry sectors.

The survey categorised organisations surveyed on the basis of:

· industry sector;

· size of labour force (number of employees);

· annual turnover; and

· level of automation (accounting and financial reporting).

Within these respective categories, the issues surrounding compliance costs were assessed in terms of type,



amount and timing of the expenditure incurred. Businesses were also asked to quantify the time required to comply with GST requirements.

The survey also sought answers regarding the impact of the GST on sales, turnover and customer patronage in the lead up to 30th June 2000, the period immediately after 1st July 2000, in the following six months and, ultimately, in the twelve months to 30th June 2001.

3.5.2 Survey Findings

At least 80 per cent of businesses surveyed experienced costs associated with staff training, accounting services and/or software up-grades.

Many businesses have invested in technological based solutions to GST compliance, evidenced by the high proportion of businesses that were either first-time purchasers of hardware and software or that upgraded existing accounting reporting systems.

The range of implementation expenditure varied dramatically, from $1,500 to $65,000, although the majority (72 per cent) of businesses spent between $5,000 and $20,000 (refer Chart 3.1). Expenditure was dependent, to a large degree, on the level of technological automation or sophistication of both the existing and new financial reporting systems.

Chart 3.1 Value of Costs Incurred

(Source: RSM Bird Cameron)

Some businesses also indicated that they had incurred time related and opportunity costs additional to their stated expenditure, although they were unable to put a dollar value to these costs.

Businesses spent substantial amounts of time in the lead-up to 1st July preparing for the legislative changes and altering the prices of their goods and services. As the graph below shows, 45 per cent of surveyed businesses spent between 100 and 300 hours, whilst a further 30 per cent spent up to 1000 hours on compliance issues. Only 15 percent spent less than 100 hours (refer Chart 3.2).

Chart 3.2 Amount of Time Spent Implementing GST



(Source: RSM Bird Cameron)

Businesses are faced with on going GST compliance costs, particularly in relation to Business Activity Statements which will be completed either monthly or quarterly.

Given the timing of the Committee's reporting obligations, the cost of ongoing administrative requirements could not be accurately determined. However, those surveyed considered the major cost components to be BAS, internal accounting time commitments, staff training and record keeping.

Asked to predict ongoing compliance costs, 47 per cent of those surveyed believe that their costs will be between $1,000 and $4,999 per annum, and 12 per cent predict expenditure of $5,000-$9,999. A further 23 per cent predict expenditure of $10,000-$19,999, whilst 18 per cent are expecting costs greater than $20,000.

In terms of a business' expected ongoing compliance costs, the following is a ranked breakdown of the most common expenditure areas from the survey responses:

1. BAS Preparation and filing

2. Internal Accounting Costs

3. Internal Staff Training Costs

4. Record Keeping

5. Systems

6. External Accounting Costs

Finding 3.8

The Committee finds that the results of the RSM Bird Cameron compliance cost survey indicate:

· GST compliance costs for small businesses range from $5,000 - $20,000 depending on the level of computer upgrades;



· the majority of businesses spent between 100 and 300 hours in preparing for and implementing the tax changes; and

· the majority of businesses predicted ongoing compliance costs of between $1,000 and $4,999.

3.6 VECCI Compliance Cost SurveyBetween 10th and 24th July 2000, the Victorian Employers' Chamber of Commerce & Industry (VECCI) undertook a survey of its members as input into the Committee's Inquiry. A copy of the survey is provided in Appendix 7.

The survey was sent to a stratified sample of 750 businesses in both metropolitan and regional Victoria. Only 130 responses were received, a response rate of only 17 per cent.

Businesses were segregated into three categories, small (0-19 employees), medium (20-99) and large (>100) and covered a wide range of industry sectors.

It should be noted that the size of small and medium business under VECCI's definition is probably larger than the Committee's interpretation of small and medium sized businesses. Most of the evidence put to the Committee was from micro businesses with less than five employees. Accordingly, VECCI's survey results on compliance costs may be distorted in comparison with the Committee's evidence.

In view of the timing of the survey, businesses were only asked to estimate their start-up compliance costs, rather than recurrent compliance costs.

In terms of the cost (both monetary and time consumed) of GST compliance, Table 3.1 below reports the findings of the VECCI survey.

Table 3.1 GST Compliance Burden - Estimated Dollar and

Time Costs by Business Size

Ave compliance cost ($) Ave compliance cost (hours)

Small 6, 814 142

Medium 19, 305 342

Large 56, 075 806

Total 19, 286 311

(Source: Victorian Employers' Chamber of Commerce & Industry)

At the industry level, not surprisingly, the retail/wholesale sector reported the highest average dollar cost ($17,881), followed by education, health and community services ($14,215) and transport and storage ($12,275).

When asked what level of burden GST compliance would entail, small firms anticipated the highest level of inconvenience or burden, with the anticipated burden decreasing for medium firms, decreasing further still for large businesses (refer Table 3.2).



Table 3.2 GST Compliance Burden by Business Size

Significant burden Moderate

burden

Negligible

burden

Small 46 % 33 % 20 %

Medium 37 % 58 % 5 %

Large 32 % 59 % 9 %

Total 41 % 45 % 14 %

(Source: Victorian Employers' Chamber of Commerce & Industry)

At the industry level, an above average proportion of respondents in the transport and storage and manufacturing sectors anticipated a significant GST compliance burden.

Finding 3.9

The Committee finds that the results of the VECCI compliance cost survey compiled two weeks after the commencement of the GST indicate:

· the average GST compliance costs for small businesses (defined as 0-19 employees) was $6,814; and

· the average GST compliance costs for medium businesses (defined as 20-99 employees) was $19,305.

The Committee notes that VECCI's definition of the size of small and medium businesses is larger than the Committee's interpretation and this may have resulted in larger average compliance costs.

12 Pope, Jeff , "Factors Affecting the Compliance Costs of the Goods and Services Tax in Australia" Paper presented at ATAX Compliance Cost Symposium, Sydney 26-27 April 200, p. 4




16 Pope, Dr Jeff, op.cit; p.8
















30 Pope, Jeff, op.cit; p.3




34 Minutes of Evidence, 19/9/00 p. 403













4.1 Introduction4.2 Factors Affecting the Price of Fuel4.3 Commonwealth Government Fuel Excise4.4 Changes in Victorian Petrol Prices4.5 Changes in Victorian LPG Prices4.6 Impact of the GST on Diesel Fuel4.7 Effect of the GST on Regional Petrol Prices4.8 Impact of GST on Fuel for Businesses

4. Fuel Prices

4.1 IntroductionDuring the course of the Committee's Inquiry, the subject of rising fuel prices became a major issue facing

Australian motorists and State and Federal Governments. As will be outlined in this chapter, there are a number of factors affecting the price of fuel including the cost of crude oil, the value of the Australian dollar,

domestic retail market conditions and Government taxes.

The Committee has been mindful of the above factors, however, it has been required to limit its investigations and findings to the impact of the GST on fuel. In assessing the GST effect on fuel prices, the Committee notes that as other forces lead to increases in the cost of fuel, the GST payable on higher prices will also increase.

The Committee's Terms of Reference required an examination of the impact of the GST on petrol and LPG prices. Given that many businesses, particularly rural businesses, are large consumers of diesel fuel, the Committee broadened its investigations to include diesel fuel.

It is also important to note that the Committee's investigations focussed on the impact of the GST on fuel prices for businesses, not general consumers. As a consequence, the Committee notes that registered businesses will claim input tax credits for the GST payable on fuel used for business purposes and as such the effect of the GST on fuel will differ between businesses and the general public.

As part of The New Tax System, petrol, diesel and LPG prices are now subject to a 10 per cent goods and services tax from 1st July 2000. In applying the GST to fuel prices, the Commonwealth Government reduced the excise on petrol and diesel and introduced various fuel rebate schemes. There is currently no Government excise on LPG.

This chapter outlines the effect of changes to the taxation of petrol, diesel and LPG including an examination of the effect of a reduction in the fuel excise and the introduction of schemes such as the Fuel Sales Grants Scheme and an expansion of the Diesel Fuel Rebate Scheme.











An issue of great concern to regional and rural Victoria is the disparity in fuel prices compared to metropolitan Melbourne. The Committee has attempted to examine the impact of the GST on country fuel prices, taking into account the other factors influencing prices.

4.2 Factors Affecting the Price of Fuel

Before examining the impact of the GST on petrol, LPG and diesel prices, it is necessary to provide a brief overview of the other factors affecting fuel prices, particularly in view of the recent price rises.

4.2.1 Breakdown of Petrol Prices

While Government taxes account for approximately 50 per cent of the total price of petrol and diesel, the price of crude oil accounts for around 45 per cent with the remaining five per cent attributed to freight costs, wholesaler and retailer costs and profits.

Table 4.1 below illustrates how the price of unleaded petrol can be broken down since the introduction of the GST:

Table 4.1 Average August prices for unleaded petrol (cents per litre)

(figures rounded to nearest decimal point)

Melbourne Average

non-metro

Import price 44.0 44.0

Commonwealth Government Excise 37.7 37.7

GST 8.5 8.9

Freight 0.6 1.7

Wholesaler costs & profit -1.2* 0.6

Retailer/distribution costs & profit 4.3 5.9

Retail price 93.9 97.6

(Source: RACV/Shell Fuel Watch, Royal Auto - Nov. 2000)

*represents a wholesaler loss

4.2.2 Crude Oil Prices

The price of crude oil is reflected by supply and demand on world markets. A key world benchmark indicator



is West Texas Intermediate crude oil.

Australia's local oil refineries constantly compete with imported petrol from large refineries in Asia. Consequently, the price of petrol at Australian refineries is based on international petrol prices. Singapore import prices are the benchmark for the refinery price of Australian petrol.

The refinery price of petrol, based on Singapore prices, was approximately 45 cents per litre in mid August 2000 compared to approximately 37 cents in May/June this year.

During a public hearing on 21st August 2000, Mr Brian Nye, Executive Director of the Australian Institute of Petroleum, commented on the reasons for these price rises:

"In July, Singapore spot prices for unleaded gasoline increased by 9 per cent over June, due to supply shortages caused by maintenance shutdown in Singapore, fires in Kuwait and Indonesian refineries, lower exports than expected from China, and unanticipated imports by Taiwan following a late start up of a new refining capacity there. The supply shortages caused an increase in refined product in Singapore, with a consequent impact on prices in Australia. However, over the past few years, supply-demand conditions have frequently resulted in failure to cover the costs of petroleum production." 35

4.2.3 Value of Australian Dollar

The cost of crude oil has been compounded in recent months by the dramatic fall in the value of the Australian dollar. Twelve months ago the $AUD was worth approximately 64 cents to the US dollar. By June 2000 the $AUD was sitting at 60 cents to the $USD. The $AUD reached an all time low during October 2000 when it fell to below the 52 cent mark.

The RACV's Manager Government Policy, Mr David Cumming, commented on the impact of the devalued Australian dollar on petrol prices:

"Obviously the fact that the dollar has remained down, coinciding with high crude prices, has had a huge impact. The linkage of the three, plus the GST, has been poorly handled policy. Motorists will pay dearly. We believe the trend for crude oil will exist for another two years. We do not know where the dollar will end up." 36

4.2.4 Domestic Retail Market Conditions

The oil companies and distributors determine the retail price of petrol based on a number of factors, most notably the volume of petrol sales, location of the outlet and competition from retailers. These factors, together with freight costs, can be attributed to the higher petrol prices in non-metropolitan areas. The

disparity between country and city petrol prices is examined in section 4.6.

In studying movements on petrol prices, the Committee notes that prices fluctuate significantly within any given week. During September, the price of unleaded petrol in Melbourne was often around 98 cents to $1.00 per litre on a Friday. By Tuesday or Wednesday, the price had generally fallen to 90-92 cents.

The oil companies state that price variations are due to the intense competition and heavy discounting cycles.

Mr Brian Nye, Executive Director of the Australian Institute of Petroleum:

"As in other states, the retail petroleum industry in Victoria is characterised largely by retail outlets that are run by franchised or independent operators, rather than directly operated by the four refiner-marketer oil companies. The Federal Petroleum Marketing Sites Act constrains the refiner-marketer companies to setting the retail price at about 5 per cent or less of national retail outlets. Most sites where the price is set by the refiner-marketers are in the major metropolitan areas around Australia. Intense competition in those markets frequently leads to



retail prices being set lower than wholesale list prices.

The vast majority of sites in country Victoria are in less competitive markets and are operated by branded independents who have a supply contract with one of the refiner-marketers or a distributor, independent chains such as Liberty and Safeway, or in a small number of cases, franchisees of the oil companies. Therefore in a vast majority of cases the final price charged at the petrol pump is not set by the refiner-marketer companies, but is set by local operators according to prevailing local market conditions." 37

Given the fluctuations in prices, fuel prices quoted throughout this Report are generally average monthly prices.

An assessment of the impact of the GST on petrol prices has been made difficult due not only to high crude oil prices and a fall in the Australian dollar, but by the fluctuation in domestic retail conditions.

Anyone purchasing petrol mid week can pay up to 8 or 9 cents less than people purchasing by the weekend. The GST payable on the cheaper petrol will therefore be less.

Finding 4.1

The Committee finds that the impact of the GST on petrol prices has been higher than expected as a result of the higher cost of crude oil and the declining value of the Australian dollar.

Finding 4.2

The Committee finds that domestic retail conditions and petrol pricing have seen fluctuations in the level of GST paid across Victoria.

4.3 Commonwealth Government Fuel Excise The Commonwealth Government has an excise, or fuel tax, on leaded petrol, unleaded petrol and diesel fuel as a means of raising revenue for road funding programs. There is no excise currently imposed on (LPG). Petrol has been excised by the Federal Government since the early 1900s. Excise of diesel fuel was introduced in 1957.

The excise is adjusted twice a year, in February and August, to coincide with movements in the Consumer Price Index (CPI). As a result of this ongoing indexation, the GST payable on petrol and diesel will fluctuate accordingly.

The higher than expected petrol prices in recent months has lead to growing calls for the freezing of the twice-yearly indexation of the excise. While this matter is still being debated by the State and Federal Governments, the Committee notes that the Federal Government is unlikely to freeze the fuel excise because of the effect this would have on the federal budget, together with flow-on economic effects.

Prior to 1st July 2000, the Commonwealth excise on fuel was 44.1 cents per litre for unleaded petrol and diesel, and 46.2 cents per litre for leaded petrol.

During the announcement and subsequent implementation of The New Tax System, the Government made a commitment that the price of petrol need not rise as a result of the GST. In order to offset the 10 per cent GST impact on fuel prices, the Government indicated it would reduce the excise rate by an appropriate amount. A total reduction of 8.2 cents per litre was required to ensure petrol prices did not rise if the price was 90 cents per litre or less.

On 22nd June 2000, the Assistant Treasurer announced that the excise duty on fuel would be reduced by 6.7 cents per litre from 1st July 2000. In addition, the Government expected a further reduction of 1.5 cents per litre to be passed on to motorists by the oil companies as a result of anticipated cost savings from the New



Tax System.

The excise reduction resulted in a new excise rate of 37.48 cents per litre for unleaded petrol and diesel and 39.72 cents for leaded petrol as at 1st July 2000. The excise rates are exclusive of GST.

The excise was indexed to CPI on 1st August 2000 which resulted in a further 0.64 cent excise. The unleaded petrol and diesel excise currently stands at 38.12 cents with the excise for leaded petrol being 40.4 cents.

The oil companies have indicated the Government's 1.5 cents per litre projection is a long term proposition and that the best that could be passed on immediately is 0.1 cent per litre.

Mr Jim Starkey, the outgoing Executive Director of the Australian Institute of Petroleum commented on the 1.5 cents projected savings in a public hearing on 21st September 2000:

"The government's decision was to reduce the excise on petrol by 6.7 cents a litre. To have achieved a neutral position following the introduction of GST, they were expecting to see another 1.5 cents supplied by the oil companies. We could not do that. It is just simply not there. We have, as Brian has said, indicated that we will pass through all the effects of GST savings on our industry, but initially that is a very small amount. In a sense, most of the 1.5 cents a litre that was required to achieve that neutrality was not delivered." 38

The Australian Automobile Association commissioned economic modeling firm, Econtech, to assess the effect of the GST on petrol prices under different excise reductions. Econtech found that "in 2000/2001, not all long-term cost savings will be available and the cost saving in supplying petrol is estimated at 0.4 cents per litre, not 1.5 cents per litre." 39

Mr Brian Nye, Executive Director of the Australian Institute of Petroleum further argued the oil companies' case with respect to the anticipated cost savings:

"While the industry is committed to passing on any savings arising from the new tax system and commenced doing so from 1 July, it has indicated that 1.5 cents per litre equates to around one quarter of annual production, distribution and marketing costs for petrol and diesel, and savings of that magnitude would therefore not be achievable from 1 July.

Research commissioned by the Australian Automobile Association from Econtech has shown that half the projected long-term cost savings are in the local oil industry, with the other half related to the strengthening of the Australian dollar as a result of the new tax system, leading to lower world crude oil prices when converted to Australian dollars." 40

The Committee notes that the lower than expected reduction in the fuel excise, coupled with the inability of the oil companies to immediately pass on the full amount of the Government's projected savings, has resulted in the GST increasing the cost of petrol and diesel by between 1.1 to 1.4 cents per litre from the 1st July based on a petrol price of 90 cents per litre. This is based on the projected immediate savings estimated by the oil companies of 0.1 cents and by Econtech's modelling of 0.4 cents per litre.

The Committee notes that further GST related rises are due to higher prices caused by other factors mentioned earlier in this chapter.

The following exchange between the Hon. Theo Theophanous, MLC and Mr Jim Starkey from the Australian Institute of Petroleum illustrates the effect this may have on businesses:

Mr THEOPHANOUS -From the Committee's point of view the 1.5 cents the Federal Government put into its model has not been delivered and consequently the GST has cost motorists 1.5 cents beyond what was initially supposed to occur. It was supposed to be a neutral situation. Have I got that right?



Mr STARKEY - Yes.

Mr THEOPHANOUS - Is that true for businesses as well as for ordinary motorists? Are businesses also 1.5 cents worse off?

Mr STARKEY - Businesses can claim the input credit for GST, so to the extent that it is 1.5 cents less than it might otherwise have been, they are getting 1.5 cents a litre less, but they are better off than under the previous arrangements where they could not claim any of it. 41

Finding 4.3

The Committee finds that as a result of the ongoing indexation of the petrol and diesel fuel excise, the GST payable on fuel will fluctuate twice a year in line with movements in the Consumer Price Index.

Finding 4.4

The Committee finds that the lower than expected reduction in the fuel excise at the time of the GST introduction, and the inability of oil companies to pass on the full 1.5 cents per litre savings in the short term, has resulted in the GST increasing the cost of petrol and diesel by between 1.1 and 1.4 cents per litre from the 1st July 2000 based on a price of 90 cents per litre. CPI indexation of the fuel excise resulted in a further 0.64 cents per litre being added to petrol and diesel prices from 1st August 2000.

The Committee notes that from a business point of view, 1/11th of fuel costs will be reimbursed through GST input tax credits (see section 4.8).

4.4 Changes in Victorian Petrol PricesAs stated earlier, an assessment of fuel price movements since the introduction of the GST should take into account the other forces that have lead to higher prices.

Table 4.2 below shows movements in the average monthly petrol prices within Victoria from June to September 2000.

Table 4.2 Victoria Unleaded Petrol Prices

Monthly Average, June - September 2000

Location June July August Sept. Change between June & Sept.

MELBOURNE 84.6 88.8 94.0 95.5 +10.9

Bairnsdale 93.8 97.3 100.7 102.3 +8.5

Ballarat 88.6 89.8 92.7 96.4 +7.8

Benalla 90.6 93.2 97.5 100.6 +10.0

Bendigo 89.6 92.2 97.4 99.3 +9.7



Echuca 94.9 97.2 99.3 100.8 +5.9

Geelong 85.0 88.0 94.3 95.8 +10.8

Hamilton 91.2 93.9 98.8 103.2 +12.0

Horsham 92.8 94.9 96.7 96.0 +3.2

Mildura 95.6 97.9 102.4 105.2 +9.6

Moe 93.9 95.9 98.9 99.9 +6.0

Orbost 97.2 97.5 101.5 104.8 +7.6

Portland 90.6 93.0 99.8 103.5 +12.9

Sale 93.9 95.6 97.8 100.7 +6.8

Shepparton 91.3 94.2 98.0 100.2 +8.9

Swan Hill 94.5 97.7 102.6 103.5 +9.0

Traralgon 94.9 96.6 99.1 100.7 +5.8

Wangaratta 87.8 86.9 94.1 97.5 +9.7

Warrnambool 86.0 91.5 97.6 99.3 +13.3

Wodonga 89.9 93.0 97.5 100.3 +10.4

(Source: Informed Sources, Australian Petrol Pricing Reports)

It should be noted that these prices are average prices for each month. In Melbourne for the month of September, the average price was 95.5 cents, however, Informed Sources Petrol Pricing Reports indicate that there was a recorded monthly low of 88.9 cents and a monthly high of 103.0 cents.

The last column in Table 4.2 indicates the difference between June prices and September prices. The largest increases were experienced in Warrnambool (13.3), Portland (12.9), Hamilton (12.0), Melbourne (10.9) and Geelong (10.8). By contrast, Horsham had an increase of only 3.9 cents.

Despite the large increase in Melbourne prices, some regional locations are paying higher amounts of GST on petrol as a result of higher base prices. Using the August prices as an example, Melbourne motorists pay 8.6 cents GST out of the total price of 94 cents. However, Mildura motorists pay a GST of 9.3 cents out of a total price of 102.4 cents per litre.

It should be re-emphasised that these GST related price rises will not impact upon businesses in the same way as general motorists in view of the ability of businesses to claim the GST component of petrol costs back as an input tax credit. This is discussed further in section 4.8.



The difference between country and city fuel prices is discussed in detail in section 4.7 along with an assessment of the Fuel Sales Grants Scheme introduced by the Commonwealth Government to alleviate the added impact of the GST on country motorists.

If it is accepted that the excise reduction of 6.7 cents resulted in 1.5 cents not being passed on to motorists, together with the 1st August CPI indexation of 0.64 cents, it can be argued that since August, changes in the New Tax System and excise rates have lead to a further 2 cents being added to the price of petrol.

In the case of the 10.9 cents per litre increase in Melbourne petrol prices since June, approximately 8.9 cents of this increase can be attributed to other factors including higher crude oil prices reflected in a weakened Australian dollar.

Finding 4.5

The Committee finds that some regional locations are paying higher amounts of GST on petrol as a result of higher base prices in those locations.

4.5 Changes in Victorian LPG PricesBefore illustrating the changes in LPG prices since the 1st July, it is necessary to briefly outline how LPG

prices are set, bearing in mind there is no Government excise on LPG.

LPG is sourced from local supplies in Bass Strait. Local prices are benchmarked to Saudi-Arabian contract prices. Prices reflect supply and demand and are set monthly through marketplace tenders.

Mr Ian Maloney, General Manager of Elgas Pty. Ltd, Australia's largest supplier of LPG, explained reasons for increases in LPG prices during his appearance in a public hearing on 27th July, 2000:

"In broad terms, if you have high oil prices you have high LPG prices. The LPG price, however, can move up and down at different times and by different amounts from those of oil. It is more affected by northern hemisphere weather than oil prices tend to be, although oil prices definitely are, so we tend to have a greater seasonality. In more recent times we have been seeing some impact in our region of growth in LPG use in China and India, and some changes in supply balances that are also affecting LPG. We expect on an ongoing basis - and it has happened recently - that if oil stays up at $28 to $30 a barrel, LPG international costs will tend to stay high. If oil prices collapse back down to $10 a barrel, or whatever, LPG prices will go down. In the shorter term, from month to month and over quarterly periods, you can easily have a month where oil prices might drop off by $1 a barrel but LPG will go up by $20 a tonne, or a cent a litre. You can expect to see them move in separate ways in the shorter term and together in the longer term." 42

The Committee notes that there have been recent calls for an inquiry into the pricing of LPG in Victoria and the transparency of the LPG industry. The RACV has been particularly vocal in calling for a review. The Victorian Government, through the Department of Consumer and Business Affairs, established a Victorian Fuel Prices Monitoring Initiative in April 2000 and is continuing to monitor fuel price trends including LPG prices.

Mr David Cumming, Manager Government Policy, RACV:

".....we believe there is something basically wrong with the way LPG is priced, right back to the wellhead in Bass Strait. We have been calling on the current government to have an inquiry into how LPG is priced. We can give you a breakdown of petrol, but we cannot do that with LPG. It is the most secretive industry around, and there is definitely something wrong with the way it comes up with its base price. I think we have to start from there. The tax does not worry us, because as I mentioned for years motorists using LPG have been getting a free



ride on the roads and have made no contribution towards road damage. We do not have a problem with LPG motorists paying a tax." 43

While it was not within the Committee's Terms of Reference to investigate LPG prices in the wider context, the above comments, to some extent, illustrate the difficulty in differentiating the impact of the GST on LPG prices and the other factors affecting price increases.

Recent movements in Victorian LPG automotive prices are shown in Table 4.3 below:

Table 4.3 Average monthly LPG Prices for Selected Locations in Victoria

May July August September

Melbourne 36 41.5 43 45.5

Bendigo 42 48.5 48.9 48.9

Mildura 48 52.9 52.9 52.9

Swan Hill 47 54.5 54.5 54.5

(Source: Shell Australia Petrol Pricing)

The Committee notes that during adoption of its Report in mid-October, LPG prices had risen sharply throughout Victoria and particularly in Melbourne:

LPG Prices as at 9th October 2000 were:

· Melbourne 52.6

· Bendigo 53.0

· Mildura 57.2

· Swan Hill 56.3

These increases seemed to be inconsistent with petrol and diesel increases in Victoria and movements in the price of crude oil during the same period.

The introduction of the GST on 1st July resulted in the cost of LPG rising by the full 10 per cent. However, the ACCC had previously estimated that LPG autogas should only rise by up to 8.8 per cent as a result of the New Tax System after embedded savings were taken into account.

Table 4.3 above indicates LPG prices in Melbourne rose by 9.5 cents from May to September. The 10 per cent GST should have lead to an increase of only 3.6 cents based on the May price of 36 cents.

Because of the higher LPG prices in country locations, particularly areas such as Mildura and Swan Hill, the GST payable on LPG is higher than in metropolitan areas. Once again, the impact of the GST increases on business is minimal in view of input tax credits for business related costs.

While the Government has introduced various fuel rebate schemes for petrol and diesel, no such schemes exist for LPG consumers. In particular, the Fuel Sales Rebate Scheme does not apply to LPG which will adversely affect country motorists using LPG.



The RACV believes Victoria will be hardest hit by the GST gas price rise as more than half the nation's LPG-converted vehicles are registered in the State.

Mr Ian Maloney from Elgas commented on the cheaper fuel costs for LPG users compared to petrol:

"The positive side for LPG users is that they are still saving a lot of money compared to their position if they had stayed on petrol. They are still well in front. Their perceptions are probably harsher than those of some petrol users because their percentage increase has been higher. That has been driven largely by the fact that LPG is excise free, which establishes the low-base price, so if petrol goes up 5 cents because of international movements and LPG goes up the same order of magnitude, the LPG user experiences a higher percentage increase, although not necessarily a higher dollar amount." 44

While no rebates exist for LPG, the Commonwealth Government has introduced special LPG deals for businesses to encourage conversion to gas.

Mr Maloney also provided comment on these packages:

"As part of the general ANTS package there is a program that is targeted at the heavier vehicles of 3 1⁄2 tonnes and above that would normally use diesel. There is a 50 per cent conversion subsidy for the cost of putting a truck on to either LPG or natural gas. That would rebate 50 per cent of the additional cost or the conversion cost.

In addition, there is also what is called a clean fuel credit, which is an additional credit that would come to someone who is running the said vehicle on LPG or natural gas which is designed to offset the diesel rebate." 45

Given the Inquiry's reporting deadline, the Committee did not receive evidence on the impact of these LPG conversion discounts. The Committee will consider reporting on these conversion packages in its second GST

report.

Finding 4.6

The Committee finds that LPG prices throughout Victoria have risen by more than 10 per cent since 1st July 2000 due to higher international prices of LPG.

Finding 4.7

The Committee finds that LPG prices in Melbourne rose by 9.5 cents from May to September and by 16.6 cents by 9th October, however, the 10 per cent GST would have lead to an increase of only 3.6 cents based on the May price of 36 cents.

Finding 4.8

The Committee finds that as a result of the GST, motorists in some regional Victorian locations will pay a higher amount of GST on the cost of LPG than metropolitan motorists given the higher LPG prices in these regional locations. However, businesses will be able to claim 1/11th of the cost of LPG as an input tax credit.

Finding 4.9

The Committee finds that Victoria will be hardest hit by the GST LPG price rise in view of the fact that approximately half of Australia's LPG-converted vehicles are registered in the State.

4.6 Impact of the GST on Diesel Fuelhttp://www.parliament.vic.gov.au/edevc/inquiries/GST/Report%20One-04.htm (10 of 19) [16/05/2002 9:14:29]


4.6.1 Diesel Fuel Price Increases

As previously mentioned, diesel fuel is subject to the same Government excise that applies to unleaded petrol. Accordingly, the issue of the GST impact on the ongoing indexation of the excise also applies to diesel fuel.

Like petrol prices, diesel prices have risen dramatically in recent months, with the GST component of this increase being approximately 2 cents per litre.

Table 4.4 below shows diesel prices in the 10 week period 17th July to 18th September.

Table 4.4 Victorian Diesel Prices - 17th July to 18th September 2000

17/7 24/7 31/7 7/8 14/8 21/8 28/8 4/9 11/9 18/9

Melbourne 88.5 88.5 88.5 88.5 92.4 96.1 99.6 99.4 101.7 103.1

Bendigo 90.7 90.9 91.9 92.7 94.1 97.6 102.1 103.5 104.7 105.2

Mildura 93.9 94.1 94.7 95.4 96.2 97.5 99.7 100.8 100.9 102.5

(Source: Shell Australia Petrol Pricing)

The figures illustrate the extent of diesel price increases since July. Up until late August this year, the price of unleaded petrol was generally a few cents higher than diesel fuel. However, since that time the price of diesel has jumped significantly and is now several cents higher than petrol. Once again, the majority of this increase is due to crude oil price rises.

One of the benefits of the New Tax System for regional Victoria is the expansion of the Commonwealth Government's diesel fuel rebates. These rebates are briefly outlined below.

4.6.2 Diesel Fuel Rebate Scheme

Prior to 1st July 2000, the Diesel Fuel Rebate Scheme provided a rebate for part of the excise or customs duty paid on diesel fuel purchased for certain eligible off-road uses. Qualifying uses include agriculture, forestry, fishing, mining, hospitals and other medical institutions.

From 1st July, the Scheme was expanded to provide a full rebate of the customs or excise duty paid on diesel. In addition to the existing eligible uses, rail transport and marine use have been included. Forestry will continue to have access to only a partial rebate.

4.6.3 Diesel and Alternative Fuels Grants Scheme

In addition to extending the Diesel Fuel Rebate Scheme, the Government's newly introduced Diesel and Alternative Fuels Grants Scheme commenced on 1st July for certain on-road transport activities. The on-road scheme will apply to fuel used from 1st July 2000.

Generally, the grant will be available to businesses and other entities for on-road use of diesel and alternative fuels in vehicles with a gross vehicle mass (GVM) of 4.5 tonnes or more and registered for use on public roads. But for vehicles with a GVM of 4.5 tonnes or more, but less than 20 tonnes, the grant is generally not payable for trips solely within a defined metropolitan area.

Given the timing of the Inquiry and limited reporting deadline, the Committee was unable to collect evidence



and assess the impact of these diesel rebate schemes. However, the expectations are that the rebates should provide significant benefits for regional and rural Victoria.

The ATO have indicated the new schemes should result in the following benefits:

· "the cost of diesel for eligible heavy transport will fall by about 23 cents a litre (a fall of about 30 per cent after the grant and GST input tax credit);

· more businesses will be eligible for either a fuel rebate or grant; and

· eligible businesses will be able to claim a rebate or grant on more types of fuel." 46

Mr Geoff Crick, Treasurer, Victorian Farmers Federation:

"The immediate benefits to regional and rural Victoria as we see them, particularly in agriculture, are in the transport area with the reductions in excise on fuels specific to the transport industry, the introduction of the alternative fuels rebate scheme and the continuation of the off-road diesel rebate scheme. The flow-on benefits to the entire rural community are significant in that area." 47

The Committee does note that in view of the existing high diesel fuel prices, the initial anticipated benefits of the diesel rebates may be eroded by the higher prices.

Finding 4.10

The Committee finds that the price of diesel fuel in Victoria has increased significantly since 1st July 2000 with the GST component of the increase being approximately two cents per litre.

Finding 4.11

The Committee finds that the expanded Diesel Fuel Rebate Scheme and the recently introduced Diesel and Alternative Fuels Grants Scheme should create benefits for regional businesses, however, the extent of these benefits may not be apparent for at least six months.

4.7 Effect of the GST on Regional Petrol Prices4.7.1 Reasons for Country and City Price Differential

One of the key issues facing governments is the disparity in petrol prices between the city and the country. Fuel price statistics provided earlier in this chapter illustrate this price differential.

Mr Brian Nye, Executive Director, Australian Institute of Petroleum, outlined reasons for the higher country fuel prices:

"In metropolitan areas retail competition is strong due to high population and traffic density and many operators seek to gain market share by discounting their products. In country areas prices are generally higher for three fundamental reasons: lower volumes being sold, requiring higher unit margins; a less competitive environment due to less passing trade and the consequent lack of incentive to discount to increase market share; and the additional transport costs." 48

Shell Australia explains the price differential on its website:

"Delivering fuel to country service stations costs more than metropolitan delivery. In Victoria the average difference between country and city freight costs is 0.9 cents per litre. Because of the wide geographic spread of country service stations



and the relatively small quantities they sell, it is often impractical to supply these service stations directly from terminals which adds to distribution costs. Consequently, most country service stations are supplied by distributors rather than being directly supplied by Shell. These distributors incur their own operational costs which they seek to recover in the market.

The other major factor which increases the costs of selling petrol in country locations is that country service stations typically sell less than half the fuel of a metropolitan service station. This means that retailers in the country require higher fuel margins in order to remain viable. For example, to recoup wages costs of $100,000, a typical metropolitan site requires a fuel margin of 2.5 cents per litre. In a typical country service station which sells only half as much fuel, 5.0 cents per litre is required to fund the same cost.

The extent and nature of competition in country and city markets also helps to explain some of the differences in petrol prices. Metropolitan service stations generally operate in a more intensely competitive market than their country counterparts. Metropolitan consumers have a much larger number of outlets to choose from. This concentration of outlets means that once price discounting commences in one location, it tends to spread throughout the metropolitan area very quickly. In many country towns, particularly those with little passing traffic, the potential to increase sales through discounting is limited." 49

4.7.2 Fuel Sales Grants Scheme

During the GST implementation period, the Commonwealth Government recognised that the GST would generally widen the city-country price differential. As a means of dealing with these fuel price variations the Commonwealth Government has introduced the Fuel Sales Grants Scheme.

The scheme was designed so that, taken with the excise cut, the price of petrol and diesel need not rise as a result of the GST. The grant is intended to be paid to fuel retailers and distributors of petrol and diesel in

regional and remote areas of Australia and consequently be passed on to motorists in lower prices.

For regional areas, the grant rate will be 1 cent per litre, and for remote areas, 2 cents per litre. For isolated cases where fuel prices are beyond $1.20 per litre in very remote areas, fuel retailers may apply to the ATO for an additional grant. In Victoria, a 1 cent grant applies for the entire State, other than metropolitan areas.

Mr David Cumming from the RACV commented on a problem with the way in which the boundaries for the Fuel Sales Grant were determined:

"Another glaring problem, as you may be aware, is that Victoria has been designated as a regional area. Therefore, you will get only the 1 cent subsidy, not a remote rebate, in the country. Out of the blue they announced that they would use the accessibility remote index for Australia. That was a federal Department of Health and Aged Care document that dealt with health care. They have plucked this out of who knows where and linked it with petrol prices. So far as I can understand it, you have to drive for about 7 hours to get to Mildura. Surely the 2 cent subsidy should apply there, but because the document is set out and because technically Mildura is not that far from Bendigo, where there is a hospital" 50

Finding 4.12

The Committee finds that the distances between Melbourne and remote Victorian regional locations such as Mildura, and the resulting higher petrol prices in these regions, would suggest the Commonwealth Government may need to re-evaluate the remote and regional definition within Victoria for the purpose of the Fuel Sales Grants Scheme.

During the Committee's Inquiry, there were reports that the 1 cent subsidy was not being passed on to motorists. The ACCC was in the process of investigating this matter at the time the Committee was tabling



this Report.

When examining the price variations between metropolitan areas and non-metropolitan areas outlined in the Table 4.5 below, it would appear that the 1 cent grant may be attributed to the closing of the country-city price gap.

Apart from Warrnambool, Hamilton and Portland there has been a reduction in the variations with metropolitan prices in all other regional locations.

Table 4.5 Victoria Unleaded Petrol Prices

Country - Metro Variance July -September 2000

Location Variance for

June

Variance for

July

Variance for August

Variance for

Sept.

Variance between June-Sept.

Bairnsdale 9.2 8.5 6.7 6.8 -2.4

Ballarat 4.0 1.0 -1.3 0.9 -3.9

Benalla 6.0 4.4 3.5 5.1 -0.9

Bendigo 5.0 3.4 3.4 3.8 -1.2

Echuca 10.3 8.4 5.3 5.3 -5.0

Geelong 0.4 -0.8 0.3 0.3 -0.1

Hamilton 6.6 5.1 4.8 7.7 +1.1

Horsham 8.2 6.1 2.7 0.5 -7.7

Mildura 11.0 9.1 8.4 9.7 -1.3

Moe 9.3 7.1 4.9 4.4 -4.9

Orbost 12.6 8.7 7.5 9.3 -3.3

Portland 6.0 4.2 5.8 8.0 +2.0

Sale 9.3 6.8 3.8 5.2 -4.1

Shepparton 6.7 5.4 4.0 4.7 -2.0

Swan Hill 9.9 8.9 8.6 8.0 -1.9

Traralgon 10.3 7.8 5.1 5.2 -5.1



Wangaratta 3.2 -1.9 0.1 2.0 -1.2

Warrnambool 1.4 2.7 3.6 3.8 +2.4

Wodonga 5.3 4.2 3.5 4.8 -0.5

(Source: Informed Sources, Australia Petrol Pricing Reports)

Finding 4.13

The Committee finds that the petrol price variation between Melbourne and 19 regional locations in Victoria has reduced in all cases except in Warrnambool, Hamilton and Portland for the period June to September 2000. The extent of the narrowing of this variation has been between 0.1 and 7.7 cents per litre.

4.7.2 Econtech Modelling on Regional Petrol Prices

Economic modelling firm, Econtech, undertook consulting work on behalf of the Committee focussing on the effects of the New Tax System on regional Victorian petrol prices. A copy of the consultant's report is

provided in Appendix 6.

The report shows the NTS effects for 14 different Victorian regional locations on the movement of petrol prices from 2000/01 to the long term, relative to a June 2000 base price.

The analysis takes into account the following:

· the introduction of a 10 per cent GST;

· the associated cut in petrol excise of 6.7 cents per litre;

· the Fuel Sales Grants Scheme subsidy in regional Victoria of 1.0 cents per litre;

· the likely time path of cost savings in petrol supply as a result of the NTS; and

· the time path of the second round effect of the NTS on petrol excise rates via automatic CPI indexation.

The Table 4.6 below provides a summary of Econtech's findings.

Table 4.6 NTS Effects on Regional Victorian Petrol Prices

Strike Price 2000/01 NTS Effect

2000/01 Consumer Price

Long-Term NTS Effect

Long-Term Consumer Price

Yarra Valley 86.8 -0.2 86.6 -0.7 86.1

Albury-Wodonga 89.9 0.1 90.0 -0.6 89.3

South Gippsland 90.4 0.1 90.5 -0.5 89.9



Shepparton 91.3 0.2 91.5 -0.5 90.8

Sale 93.7 0.4 94.1 -0.4 93.3

La Trobe Valley 94.6 0.5 95.1 -0.3 94.3

Echuca 94.9 0.5 95.4 -0.3 94.6

Geelong 85.0 -0.3 84.7 -0.8 84.2

Warrnambool 86.0 -0.2 85.8 -0.8 85.2

Ballarat 88.6 0.0 88.6 -0.6 88.0

Woodend 91.3 0.2 91.5 -0.5 90.8

Bendigo 89.6 0.1 89.7 -0.6 89.0

Swan Hill 94.5 0.5 95.0 -0.3 94.2

Mildura 95.6 0.5 96.1 -0.3 95.3

Average 90.9 0.2 91.1 -0.5 90.4

(Source: Econtech)

Table 4.6 shows that under the excise cut of 6.7 cents per litre and combined with the Fuel Sales Grant Scheme announced by the Commonwealth Government, the average price of petrol at the 14 regional sites is expected to increase by 0.2 cents per litre to 91.1 cents per litre as a result of the NTS.

However, the long-term effect of the NTS on petrol prices is more favourable with an average reduction of 0.5 cents up to the end of 2006, reflecting the diminishing contribution of the NTS to the CPI and increased petrol supply cost savings.

4.8 Impact of GST on Fuel for Businesses4.8.1 Net Effect of GST on Fuel After Input Tax Credits

The Committee needs to be mindful that it is investigating the impact of the GST on fuel from the point of view of business consumers.

Importantly, businesses will be able to claim input tax credits for fuel purchased for business activities. Only businesses that are registered for the GST can claim input tax credits.

For example, the GST component of a petrol price of 99 cents per litre is 9 cents. Given that a business is able to claim 1/11th of the cost of petrol (assuming the total cost relates to business purposes) it will receive 9 cents back as an input tax credit when it completes a Business Activity Statement. Based on this example, the effect of the GST for businesses is negligible.

Mr Rod Burns, RSM Bird Cameron, Bendigo commented on the benefits to businesses of input tax



credits:

"I have clients who have a lot of petroleum costs, but I have not had dealings with them to this point to find out their feelings on the impact. That will be one of those things realised when they start doing the reporting and see the credits they are getting back. They will start to wake up to the benefit in getting that GST back. Farmers have always had exemptions and rebates in the past. However, normal business people will suddenly now get part of their fuel costs back, where they have never got anything back in the past. They are the ones who might see the benefit to them from the input tax credits" 51

Finding 4.14

The Committee finds that the full impact of the GST on fuel for businesses will not be known until after completion of the first Business Activity Statements and the payment of reimbursements by the ATO. The Committee will report on this in its second GST Report with respect to GST reporting requirements.

Finding 4.15

The Committee finds that the impact of the GST on petrol, diesel and LPG prices for businesses will in most cases be offset by input tax credits for business fuel purchases.

4.8.2 Impact on Higher Fuel Prices on Consumer Spending

While the Committee is not examining the impact of the GST on general consumers, there is a potential flow-on effect of higher fuel prices for businesses.

The perception of some regional businesses was that higher petrol prices, due mainly to world oil prices, may have an effect on consumer travelling and spending in regional Victoria.

Ms Jo Bourke, Project Manager, Wimmera Development Association:

"There is probably a feeling in regional areas that the impact of increasing fuel prices is affecting the competitiveness of regional businesses. We pay transport costs for everything we do and also for the end users, the consumers; it is a cost that takes money away from other economic activities. We have to spend money on fuel in all the activities that we undertake and that takes spending money away from other services." 52


"I note that the Ccommittee's terms of reference include the LPG and petrol prices. The GST really has not given us the benefits we have expected from fuel prices, for many reasons, of which the Committee is well aware, as I am. It is having a major impact on the cash flow of the region. The average family is probably spending $300 or $400 more on petrol this year than last year, and that is $300 or $400 per family that is not being spent in the region on other commodities." 53

Ms Margaret Pollock, Secretary, Horsham Traders Group:

"The impact of the GST on petrol has been somewhat overshadowed by the strange jumping around that petrol prices have undergone. It will certainly affect us. More than 50 per cent of my own customers are not in Horsham. They have to travel to me, and they will travel less frequently. So they will not be in Horsham as often, and we have even noticed a reliance on sending their goods back to them by a freight company or a small contractor rather than their coming into town. They have organised everything: they have seen me once, they have gone home, and when the goods are ready for them they are packed off, given to the



contractor and picked up at the gate. That is just an interesting twist on that one." 54

Mr Chris Buckingham, President, Moe Development Group"

"In terms of the first part of your question about the impact of LPG and fuel, it is certainly hurting business. It has to. I mean you only have to drive through this area and pay for petrol yourself and you will pay 95, 96c a litre for petrol and 46c for LPG, give or take a few cents. That certainly affects our ability as a community to compete in terms of the metropolitan area." 55





39 Econtech, The Effects of The New Tax System on Petrol Prices Under Different Excise Reductions, 30 June 2000, p.1







46 Australian Taxation Office, Tax facts, Diesel Fuel Rebate Scheme and the introduction of the Diesel and Alternative Fuels Grants Scheme, p.1



49 http://www.shell.com.au/petrolpricing/vic/country_vic.asp







http://www.shell.com.au/petrolpricing/vic/country_vic.asp



5.1 Introduction5.2 Structure of Victoria's Electricity and Gas Industries5.3 Role of the Regulator-General in Making GST Determinations5.4 GST Determinations for Electricity and Gas5.5 Electricity Price Review 2001-2005

5. Electricity and Gas Prices

5.1 IntroductionThe Committee's Terms of Reference required an assessment of the GST impact on electricity prices from the point of view of small and medium sized business consumers. During the course of the Inquiry, the Committee considered it would be relevant to extend these investigations to include gas prices.

Within Victoria, there exists a statutory framework in which electricity and gas prices are regulated by the Office of the Regulator-General. Broadly, the Regulator-General has the legislative objective of:

· promoting competitive market conduct;

· preventing the misuse of monopoly and market power; and

· ensuring that users and consumers benefit.

The Office of the Regulator-General is responsible for the following regulated industries: electricity, gas, water, grain, ports, and rail. For the purposes of the Committee's Inquiry, electricity and gas prices are subject to GST from 1st July 2000. Water and sewerage supplies are GST exempt.

It should be noted that the Office of the Regulator-General is responsible for determining GST price impacts on electricity and gas for the period 1st July 2000 until full contestability is in place (1st January 2001 for electricity and 1st September 2001 for gas). Responsibility for monitoring prices in contestable markets will rest with the Australian Competition & Consumer Commission.

This chapter will outline the process carried out by the Office of the Regulator-General in determining GST price impacts on electricity and gas, including reference to the separate 2001 electricity price review conducted by the Office during the course of the Committee's Inquiry.

An assessment of the effect of the GST on electricity and gas prices, as it relates to businesses, is also provided. However, by way of introduction, it is necessary to firstly provide an overview of the structure of Victoria's electricity and gas industries.











5.2 Structure of Victoria's Electricity and Gas Industries5.2.1 Electricity Industry

The Victorian electricity industry was restructured in 1994 when the Government established five new electricity distributors (AGL, CitiPower, Eastern Energy, Powercor and United Energy). A transmission company, GPU PowerNet, owns and operates Victoria's transmission network under direction from the National Electricity Market Company.

The five distributors referred to above also operate as franchise retailers and have a monopoly right to sell electricity to customers in defined geographical regions. AGL, CitiPower and United Energy are the distributors and franchise retailers for metropolitan Melbourne. The rural distributors are TXU (formerly Eastern Energy) and Powercor. TXU supplies electricity to eastern Victoria while Powercor covers south western Victoria, the Murray and Goulburn Valleys, and the Wimmera region.

The process of full deregulation will be complete by 1st January 2001, when small and medium customer classes will be able to choose the suppliers of their electricity (contestability). Customers consuming more than 160 megawatt-hours per year are currently contestable.

With the disaggregation of the industry in 1994, a regulatory framework was established with the introduction of the Office of the Regulator-General. The role of the Office is outlined in section 5.3.

5.2.2 Gas Industry

The Victorian gas industry was disaggregated in 1997 leading to the establishment of 3 distributors: Westar, Stratus and Multinet. Three separate retailers were also established: Kinetik Energy, Energy 21 and Ikon Energy.

For the purpose of geographical distribution, the retail companies distribute gas supplies as follows:

· Kinetik Energy - north eastern and outer western suburbs of Melbourne and north central Victoria;

· Energy 21 - parts of eastern Melbourne, the Mornington Peninsula and northern and eastern Victoria; and

· Ikon Energy - western, central and south eastern suburbs of Melbourne.

Like the electricity industry, full deregulation of the gas industry is occurring progressively. Larger consumers already have access to a contestable market. From 1st September 2001, all customers, including households and small businesses will be able to choose their supplier.

Again, the industry is regulated by a legislative framework overseen by the Office of the Regulator-General.

5.3 Role of the Regulator-General in Making GST Determinations5.3.1 Tariff Order Requirements

Electricity and gas prices are regulated by separate Tariff Orders pursuant to the Electricity Industry Act 1993 and Gas Industry Act 1994, respectively. The Tariff Orders expire when full retail contestability is in place.

The Electricity and Gas Industry Tariff Orders establish a `pass through' mechanism which allows the impact of a change in taxes to be passed through to consumers. The Office of the Regulator-General has indicated

that the GST is defined as a change in tax for the purpose of the Tariff Orders.



For electricity prices, the pass through mechanism will account for the impact of the GST from 1st July 2000 to 31st December 2000 for electricity and franchise retailer businesses. In relation to gas prices, the pass through amounts will be for the period 1st July 2000 to 31st August 2001 when the Tariff Order for gas retail businesses expires.

The Tariff Orders require the regulated businesses to obtain approval for price increases in relation to the GST. This approval is by way of the Regulator-General making a determination with respect to the GST `pass through' amounts. The approval periods are for the remaining life of each tariff order.

In making a GST determination, the Office of the Regulator-General was required to ensure that the `pass through' amounts would leave the regulated businesses in an economically neutral position, that is; the regulated business should not experience financial gains or losses as a result of the GST.

In addition, there is a requirement that approval of any pass through amount should be by applying an equal percentage increase to each component of customers' accounts.

The Tariff Orders require that in making a determination the Regulator-General has regard to a number of issues including:

· total additional costs incurred by the regulated business as a result of the tax change;

· any reductions in other taxes that offset the GST; and

· amounts of electricity and gas provided to classes of customers.

5.3.2 Process for Making a Change in Tax Determination

The Tariff Orders set out a process for making a change in tax determinations.

The initial process involved the release of a consultation paper in March 2000 and guidelines in April 2000 setting out a process and timetable to allow the Office of the Regulator-General to make a determination as soon as practicable after 1st July 2000.

A formal notification phase took place in May/June 2000 whereby each business provided a submission outlining levels of cost savings based on economic modelling, compliance costs in preparing for the GST and cash flow benefits associated with the introduction of the GST. All regulated businesses jointly engaged the Deloitte Consulting firm to undertake the economic modelling which was reviewed by independent auditors.

The Office released a draft determination in late June 2000 for a brief period of public review and feedback. A final determination was made by the Regulator-General on 3rd July 2000, the first business day after the introduction of the GST.

During the Committee's initial meeting with the Regulator-General, there was some discussion on how the pass through amounts would be distributed within each customer class.

The Regulator-General had indicated the pass through amounts would be allocated as a proportion of the revenue contributions of each group of customers. Under this method customers would have different GST percentage increases. The Committee argued that a consistent pass through amount should apply to all customers.

The Regulator-General subsequently determined that the same percentage increase would be applied to all customers of a particular electrical or gas business. Percentage increases will therefore vary depending on each regulated business.

The Regulator-General, Dr John Tamblyn, explained his Office's reasoning in determining the distribution of pass through amounts when giving evidence to the Committee on 14th August 2000:

"We settled on an approach of taking distribution business by distribution business, which



you see here, because our view and advice was that that is the approach currently taken under the tariff order - the existing arrangements - that it is an approach of taking distribution business by distribution business. Following that through, we looked at the specifics of the individual businesses - their cost structures, their approach to this matter, their different approaches to billing and compliance costs - and we felt that the economically neutral effect on the businesses required us to look at them business by business, and the legal framework did not allow us to take that statewide approach. That was our reasoning. We certainly looked at and considered what the tariff order guidance would allow us to do, but we did feel that its being economically neutral in its impact required us to take this business-by-business approach." 56

Further comment is provided on the effect of this distribution decision later in this chapter.

Before outlining the final GST determinations, it is necessary to provide some explanation of the definitions of customer classes for the purpose of electricity and gas supply.

5.3.3 Definition of Customer Classes

The Tariff Orders refer to different customer classes based on the volume of electricity and gas consumed. These classes are small, medium, large and high voltage. When the Office of the Regulator-General refers to small customers it is quite different to the Committee's examination of small businesses.

The size of a business (small, medium or large) is generally defined in terms of annual turnover and number of employees. With respect to the regulated electricity industries, Tariff Order definitions for customer classes are:

· small - annual energy consumption less than 70MWh;

· medium - annual energy consumption between 70 - 400MWh; and

· large - annual energy consumption greater than 400MWh.

It is important to make this distinction in definitions clear, particularly when assessing the impact of the GST price changes on different small and medium sized businesses.

For example, a small business may have less than 6 staff and a low annual turnover but the nature of that business may necessitate a relatively high consumption of electricity. It could therefore be classed as a medium or large customer for the purpose of electricity charges.

The Office of the Regulator-General has indicated that approximately 85 per cent of Victorian electricity consumers are classified as small consumers. This includes domestic consumers.

5.4 GST Determinations for Electricity and GasAs stated previously, the Regulator-General made a final determination on the GST `pass through' amounts on 3rd July 2000. These amounts were calculated taking into account various cost saving factors, compliance

costs and other GST related impacts. In making these determinations, the Regulator-General stated:

"The Office is satisfied that the pass through amounts in this determination adequately reflect the information supplied to the Office by the regulated businesses and have regard to the objectives of the statutory framework and all the factors relevant to making a determination on this issue." 57

5.4.1 GST Price Impacts on Regulated Electricity

The change in tax determination for electricity transmission, distribution and retailers for the period 1st July to 31st December 2000 is set out in Table 5.1 below:



Table 5.1 GST Price Impacts on Regulated Electricity Prices, July to December 2000 (%)

Transmission Distribution Retail

GPU Powernet 9.90% - -

AGL - 9.75% 9.91%

CitiPower - 9.85% 9.85%

TXU Australia - 9.70% 9.86%

Powercor - 9.82% 9.87%

United Energy - 9.75% 9.90%

The figures above indicate that the GST price increase for electricity will range from 9.85 per cent to 9.91 per cent across the five electricity retail businesses.

The transmission business, GPU PowerNet is subject to Tariff Order price controls until 31st December 2002. GST price impacts beyond 2000 approved by the Regulator-General are: 9.34 per cent for 2001 and 9.33 per cent for 2002.

The Regulator-General explained the difference in percentage increases in a media release dated 5th July 2000:

"Different percentage increases for businesses in the same industry sector (eg retailing or distribution) are largely explained by differences in their GST compliance costs. The percentage increase differences for businesses in different industry sectors are explained by both their different cost structures (and thus different tax savings) and their differing compliance costs."58

In making its determination, the Office also provided an assessment of the GST price impacts on various classes of customer accounts. For the purpose of the Committee's investigations, the impact on small business and medium business accounts is provided in Tables 5.2 and 5.3, respectively, below. The Committee has calculated the net effect of the price changes on businesses after input tax credits are claimed. An explanation of the net gains achieved after input tax credits are received is also provided.

Table 5.2 GST Impacts on Small Business Accounts

July to December 2000

Small Business* AGL Citipower TXU Powercor United Energy

Pre GST bill $823.00 $823.00 $823.00 $823.00 $823.00

Post GST bill $904.56 $904.07 $904.15 $904.23 $904.48



Difference ($) $81.56 $81.07 $81.15 $81.23 $81.48

Difference (%) 9.91% 9.85% 9.86% 9.87% 9.90%

GST input credit (1/11th) 82.23 82.19 82.20 82.20 82.23

Net bill post credit deduction 822.33 821.88 821.95 822.03 822.25

Net $ gain on pre-GST -0.67 -1.12 -1.05 -0.97 -0.75

Net % gain on pre-GST -0.082% -0.136% -0.127% -0.118% -0.091%

(Source: Office of the Regulator-General, Victoria & Economic Development Committee)

*Small business customer consuming 12,000kWh pa on Retail Tariff GD/GR

Table 5.3 GST Impacts on Medium Business Accounts

July to December 2000

Medium Business* AGL Citipower TXU Powercor United Energy

Pre GST bill $8,690.00 $8,690.00 $8,690.00 $8,690.00 $8,690.00

Post GST bill $9,551.18 $9,545.97 $9,546.83 $9,547.70 $9,550.31

Difference ($) $861.18 $855.97 $856.83 $857.70 $860.31

Difference (%) 9.91% 9.85% 9.86% 9.87% 9.90%

GST input credit (1/11th) 868.29 867.82 867.89 867.97 868.21

Net bill post credit deduction $8,682.89 8678.15 $8,678.94 $8,679.73 $8,682.10

Net $ gain on pre-GST -7.11 -11.85 -11.06 -10.27 -7.90

Net % gain on pre-GST -0.082% -0.136% -0.127% -0.118% -0.091%

(Source: Office of the Regulator-General, Victoria & Economic Development Committee)

*Medium business customer consuming 120,000kWh pa on Retail Tariff D

The above tables demonstrate that, after allowing for the deduction of GST input tax credits, business customers of the retail electricity companies can obtain an actual net benefit of between 0.082 per cent and



0.136 per cent (depending upon their supplier).

The net gain arises from the fact that, although the GST rate stands at 10 per cent, the actual increase in retail tariffs are less than the full 10 per cent due to the embedded cost savings that have been realised. However, as business consumers can claim the full 10 per cent as an input credit (by claiming 1/11th of their electricity bill) they benefit by the differential between the 10 per cent GST and the level of their respective suppliers' tariff increase.

For example, in the case of CitiPower customers, this differential amounts to 0.15 per cent, whilst for AGL customers the differential is 0.09 per cent. However, as 1/11th of this differential will have already been claimed through the GST tax credit, only 10/11th of these percentage differentials (0.136 and 0.082 per cent, respectively, in these two examples) accrue as the net benefit.

The above tables further suggest that the difference in GST payable by businesses within different electricity distribution areas will be minimal. Based on medium business customers consuming 120,000 kWk, the GST payable will range from $856 to $861.

During a public hearing on 14th August, the Hon. Theo Theophanous, MLC questioned the Regulator-General on the figures referred to above.:

"Electricity costs more for some companies than for others, and that is magnified even further by the amount of GST paid by those customers. Essentially I want to know the differential cost of the GST for a given amount of electricity....." 59

The Regulator-General took the question on notice and wrote to the Committee on 21st August explaining the relative impact of the GST on consumers in different distribution areas who consume the same quantity of electricity:

"As you will be aware, most small and medium business customers are currently subject to the Maximum Uniform Tariff (MUT) arrangements until 31st December 2000. The MUTs apply to customers consuming 160,000 kWhs or less annually and impose uniform final electricity prices for customers in each tariff class, irrespective of their location in Victoria and their distribution business."60

The Committee notes that in view of the MUT arrangements, the distribution charges for customers consuming the same quantity of electricity will not vary. The GST variations will therefore only result in a relatively small difference in the final accounts.

However, the MUTs do not apply to larger contestable customers and accordingly distribution charges for these customers will vary depending on each distribution area. The difference in GST payable will be compounded the higher the pre-GST distribution charge. The Regulator-General provided the Committee with the illustration in Table 5.4 of the GST impact on large customer accounts:

Table 5.4 Calculation of GST Impact on Total Distribution Charge

Large Customer Accounts (450,000 kWh per annum): July - Dec. 2000

AGL CitiPower TXU United

Energy

Powercor

GST Pass Through % 9.75% 9.85% 9.70% 9.75% 9.82%

Pre GST Charge ($) 12,629 12,800 12,956 10,588 17,534



Post GST Charge ($) 13,860 14,061 14,212 11,620 19,256

Difference ($) 1,231 1,261 1,257 1,032 1,722

(Source: Office of the Regulator-General, Victoria)

In support of the above table, the Regulator-General wrote to the Committee as follows:

"As the MUTs do not apply to larger contestable customers, their distribution charges vary across the distribution businesses, reflecting differences in their cost structures and tariff policies. In response to the Committee's request, the Office has generated an example comparing the impact of the GST on a stylised `large customer' for each of the distribution businesses.

The example shows that the distribution charge for a larger contestable customer depends on both the customer's electricity usage and the customer's distribution business. It also shows that the dollar impact of the GST on large customers varies across the distributors due to (small) differences in their GST pass through percentages and differences in the level and structure of their distribution tariffs."61

As previously mentioned, some small or medium sized businesses that consume large volumes of electricity (over 160,000 kWh per annum) are classified as large customers for the purpose of electricity distribution charges. Based on the information above, these businesses will be faced with differences in post GST charges ranging from $1,032 and $1,722 based on the typical example provide by the Regulator-General.

As a consequence of this price differential, large customers in the Powercor distribution area of western and north western Victoria will be paying a relatively higher amount of GST on electricity supplies than eastern Victoria and metropolitan Melbourne. However, it should be pointed out that only a small percentage of electricity customers fall within the large customer class.

Finding 5.1

The Committee finds that as a result of the introduction of the GST, electricity prices will increase as follows:

(iii) Electricity prices will increase by between 9.85 per cent and 9.91 per cent depending on each electricity distribution area. On average, this would equate to an annual increase of $81 to $82 based on the Maximum Uniform Tariff prices for small business consumers and an increase of $856 to $861 for medium business consumers.

(iv) In the case of large electricity customers, where MUTs do not apply and distribution charges vary, the GST payable on electricity will increase in proportion to the higher distribution charges. Consequently, large customers in the Powercor distribution area of western and north western Victoria will be paying a relatively higher amount of GST on electricity supplies than eastern Victoria and metropolitan Melbourne. The difference for a large customer using 450,000 kWh could be as high as $1,380 per annum.

Finding 5.2

The Committee finds that after receipt of input tax credits, small and medium business consumers could obtain a net benefit of between 0.082 per cent and 0.136 per cent on electricity charges used for business purposes.

5.4.2 GST Price Impacts on Regulated Gas



As stated earlier, the change in tax determination for gas retailers is for the period July 2000 until September 2001 when all customer classes will be in the contestable market. The Regulator-General's GST determinations for gas distributors and retailers announced on 3rd July are set out in Tables 5.5 and 5.6 below.

Table 5.5 GST Price Impacts on Regulated Gas Prices, Gas Retailers

1 July to 31 Dec. 2000 2001

Origin 10.00% 8.18%

Ikon 9.94% 7.83%

TXU 9.86% 7.37%


Table 5.6 GST Price Impacts on Regulated Gas Prices, Gas Distributors

2000 2001 2002

Envestra 9.93% 8.62% 8.54%

TXU Networks (Gas) 9.84% 8.66% 8.75%

Multinet Gas 9.98% 9.14% 8.97%


For the purpose of illustrating the impact upon customer gas accounts, Table 5.5 is most relevant. The determination outcome is that GST price increases will range from 9.86 per cent for TXU customers to 10.00 per cent for Origin customers.

The reduction in the pass through amounts from 2000 to 2001 are due to anticipated on going savings and the effect of the GST induced CPI spike. Ms Forrester, Regulatory Analyst with the Office of the Regulator-General explained:

"....you can see the pass-through amounts decline between 2000 and 2001. That is partly a reflection of the cost savings that continue to flow through the economy as a result of the GST working in and driving down business input costs. However, it also reflects the fact that we have made an estimate of the CPI spike and identified that as a component of their revenue and then factored it in to the GST `pass through'. So we are taking out the spike in their GST `pass through'." 62

In making a GST determination, the Office of the Regulator-General adjusted regulated business' revenues to remove the windfall gain from the GST induced spike in the CPI.

The impact of the GST induced tariff increases for gas are reflected in Tables 5.7 and 5.8 below, compiled using data supplied by the Office of the Regulator-General.



Table 5.7 GST Impacts on Small Business AccountsJuly to December 2000

Small Business* Ikon Origin Energy TXU

Pre GST bill $2,369 $2,369 $2,369

Post GST bill $2,604.48 $2,605.90 $2,602.58

Difference ($) $235.48 $236.90 $233.58

Difference (%) 9.94% 10.00% 9.86%

GST input credit (1/11th) $236.77 $236.9 $236.60

Net bill post credit deduction $2,367.71 $2,369 $2,365.98

Net $ gain on pre-GST $1.29 $0.00 $3.02

Net % gain on pre-GST 0.0545% 0.0% 0.127%

(Source: Office of the Regulator-General, Victoria and Economic Development Committee)

*Small business customer consuming 500GJ pa on Retail Tariff 13

Table 5.8 GST Impacts on Medium Business AccountsJuly to December 2000

Medium Business* Ikon Origin Energy TXU

Pre GST bill $33,728.00 $33,728.00 $33,728.00

Post GST bill $37,080.56 $37,100.80 $37,053.58

Difference ($) $3,352.56 $3,372.80 $3,325.58

Difference (%) 9.94% 10.00% 9.86%

GST input credit (1/11th) $3,370.96 $3,372.80 $3,368.51

Net bill post credit deduction $33,709.60 $33,728.00 $33,685.07

Net $ gain on pre-GST bill $18.40 $0.00 $42.93

Net % gain on pre-GST bill 0.0545% 0.0% 0.127%



(Source: Office of the Regulator-General, Victoria and Economic Development Committee)

*Medium business consuming 10,000GJ pa on Retail Tariff 14

As was the case in section 4.4.1 looking at electricity, the above tables demonstrate that, after allowing for the deduction of GST input credits, Ikon and TXU business customers can obtain an actual net benefit of 0.0545 per cent and 0.127 per cent, respectively. However, as the Origin Energy tariff has been increased by the full 10 per cent, with no immediate embedded cost savings being passed through to consumers, Origin customers will not realise a net benefit over the current year (though this will change in 2001 with the introduction of that years revised tariff structure).

The reason for these net benefits are the same as in the case of the electricity sector. In the case of the gas industry, the differential between the 10 per cent GST and the increased retail tariffs are 0.06 per cent in the case of Ikon and 0.14 per cent in the case of TXU. As previously explained, only 10/11th of these percentage differentials (0.0545 and 0.127 per cent, respectively) appear as the net benefit in Tables 5.7 and 5.8.

Finding 5.3

The Committee finds that as a result of the introduction of the GST gas prices will increase as follows:

(i) Gas prices for small and medium business accounts will increase by between 9.86 per cent and 10.00 per cent depending on each gas distribution area. On average, this would equate to an annual increase of $234 to $237 for small business consumers and an annual increase of $3,326 to $3,373 for medium business consumers.

(ii) After receipt of input tax credits, small and medium business consumers could obtain a net benefit of 0.127 per cent for TXU customers and 0.0545 per cent for Ikon customers for gas consumed for business purposes. Origin Energy customers would not receive a net benefit after input tax credits as the GST induced tariff increase is the full 10 per cent.

5.5 Electricity Price Review 2001-2005In a separate process to the Office of the Regulator-General's GST determination, the Office has recently completed a price review for charges levied by the five Victorian electricity distributors from 1st January 2001. The new price controls will apply for at least five years.

Following extensive consultation and a submission period, the Office released its draft decision in June 2000. A Final Determination was to be made on 21st September 2000.

The Office of the Regulator-General advised that the implementation of the Determination will result in:

· "a real reduction in distribution charges of 12-22 per cent in 2001 and 1 per cent per year thereafter until 2005;

· improved reliability and quality of supply for customers arising from higher performance targets for CBD, urban and rural areas which will be monitored by the Office;

· financial incentives to encourage distributors to improve efficiency and service performance;

· guaranteed payments to customers experiencing poor service reliability; and

· a stable regulatory environment that can be expected to provide distribution revenues that are sufficient for distributors to operate their networks efficiently and profitably, while providing improved service to their customers."63



The reductions in distribution charges for the five distributors are as follows:

· AGL 17.1%

· CitiPower 12.4%

· Powercor 19.6%

· TXU 21.8%

· United Energy 12.9%

The new price controls apply to the distribution component of an electricity bill, which is between 30 and 50 per cent of the total bill. The electricity distributors are required to submit specific tariff proposals in line with the Determination by 1st November 2000. These tariff proposals will determine the level of reductions to be received by customers.

Customers in the two rural networks, Powercor and TXU, will receive larger reductions than the metropolitan networks due "mainly because the Office has decided not to allow the two rural distributors a one per cent premium on their cost of capital in the next regulatory period."64

The Office of the Regulator-General, in its Draft Decision, estimated reductions in electricity bills for business customers of up to $5,000. "Since the average household uses approximately 4,000kWh, the average price reductions required by this Draft Decision would result in a reduction in that average householder's electricity bill of between $35 and $65 per annum. Business customers' consumption varies markedly, with larger customers receiving potential reductions of about $5,000." 65

However, the Committee notes that until such time as the new tariff proposals are set, the level of reductions should be viewed as being between 17.1 and 21.8 per cent on distribution charges.

In making this Determination, the Office was required to take into account the impacts of the GST on the distributors. Expenditure benchmarks established by the Office have incorporated GST cost related reductions, such as the removal of indirect taxes, as well as compliance costs as a result of the tax changes.


57 Office of the Regulator-General, letter dated 5th July 2000

58 Office of the Regulator-General, Media Release No.18/2000, 5 July 2000


60 Letter from Office of the Regulator-General, Victoria, 21 August 2000

61 Letter from Office of the Regulator-General, dated 22 August 2000


63 Office of the Regulator-General, Victoria, Electricity Distribution Price Determination 2001-2005, September 2000, p.3

64 Office of the Regulator-General, Victoria, Media Release, 21/9/2000, p.2

65 Office of the Regulator-General, Victoria, 2001 Electricity Distribution Price Review - Draft Decision, May 2000




6.1 Scope of Government Services Examined6.2 GST Exempt Government Fees and Charges6.3 Commonwealth Government Charges6.4 State Government Charges6.5 Local Government Charges

6. Cost of Government Services

6.1 Scope of Government Services ExaminedThe Committee's Terms of Reference required an assessment of the impact of the GST on the cost of government services as they relate to small and medium sized businesses. The Committee has taken

`government services' to incorporate local, state and federal.

There are numerous government services used by the general public, particularly within local government. However, the Committee's Reference does not allow for a wider examination of the GST impact on government services used by the non-business community.

Following the receipt of written submissions and evidence put to the Committee in public hearings, no comment or concern was raised by businesses on the issue of the GST impact on government services other than an isolated discussion on government owned aerodromes.

In view of the lack of evidence received on this aspect of the Reference, the Committee wrote to most State and Federal Government departments and agencies, together with a number of Victorian municipal councils, seeking information on those fees and charges that are subject to the GST from 1st July. This information forms the basis of the evidence presented in this chapter.

6.2 GST Exempt Government Fees and ChargesUnder The New Tax System, government bodies are treated as businesses and GST is payable on most goods and services they supply. However, the A New Tax System (Goods and Services Tax) (Exempt Taxes, Fees and Charges) Determination 2000 made by the Treasurer under section 81-5 of the A New Tax System (Goods and Services Tax) Act 1999 made a large number of government charges exempt from the GST.

The principle underlying the Treasurer's Determination is that fees and charges that are of a compulsory or regulatory nature should not be considered a provision of goods or services. Rather, they represent parameters around which an individual or business is permitted to operate and therefore it was considered unfair to add the GST to such charges.

This Determination was later revoked and a new determination, A New Tax System (Goods and Services Tax)











(Exempt Taxes, Fees and Charges) Determination 2000 (No.2) was released by the Minister for Finance and Administration on 29th June 2000, effectively extending the list of government services to be GST-free.

The Section 81 Determination effectively makes exempt the major government fees and charges used by businesses.

While most fees and charges, such as permits, licences, council rates and charges, are GST exempt, the Committee has received feedback from government departments and agencies as to what remaining services will be subject to the GST and the level of increase payable.

The following section outlines Commonwealth, State and local government charges that will change as a result of the GST.

6.3 Commonwealth Government ChargesBusiness is faced with a wide range of statutory levies, import/export charges and licence, registration, application, inspection and documentation fees under various Commonwealth Acts. Such Acts include:

· Primary Industries (Excise) Levies Act 1999

· Primary Industries (Customs) Charges Act 1999

· Export Inspection (Establishment Registration Charges) Act 1985

· Export Control Act 1982

· Quarantine Act 1908

· Classification (Publications, Films and Computer Games) Regulations

· Occupational Health and Safety Regulations

· Workplace Relations Regulations

· Industrial Chemicals (Notification and Assessment) Act 1989

· Environment Protection and Biodiversity Conservation Act 1999

· Ozone Protection Act 1989

· Therapeutic Goods Act 1989

· Patents Act 1990

· Trade Marks Act 1995

· Civil Aviation (Fees) Regulations

· Australian Maritime Safety Authority Act 1990

· Corporations (Fees) Regulations 1990

Statutory fees and charges are largely exempt from the GST and therefore have no impact on the cost of Commonwealth Government services. However, the Committee wrote to a number of Commonwealth departments and agencies to more fully examine the impact of the GST on non-statutory goods and services.



The following provides a summary of responses received from the Federal Government departments that the Committee contacted.

6.3.1 Department of Agriculture, Fisheries and Forestry

The Department of Agriculture, Fisheries and Forestry Australia (DAFFA) submitted a coordinated response to the Committee's request for information regarding the impact of GST on its goods and services which primarily relate to inspections, quarantine services, research services, conferences, publications, levies and registration fees. The majority of statutory charges such as registration fees for plant breeding rights and charges for quarantine and inspection services are exempt under the Treasurer's Determination.

The DAFFA advised the Committee that it has complied with the Agency Pricing Guidelines as applicable to Commonwealth agencies, ensuring that price reviews reflect cost savings from the removal of the old wholesale sales tax and other embedded indirect taxes as well as the application of the GST. Consequently, prices have not increased by more than 8.5 per cent and, after allowing for input tax credit entitlements, businesses registered for GST now pay lower net prices for the purchase of DAFFA goods and services as a result of tax reform.

The Australian Dairy Corporation (ADC) advised the Committee that the financial impact of the GST is very minimal. Most of the ADC's income is generated from exports and levies which are exempt from the GST. It receives minimal income from "Cowwear" products and some professional services, which have been reviewed for GST purposes.

The Australian Dried Fruits Board (ADFB), which is to be dissolved later this year, provided a similar response. ADFB's outputs are funded by a statutory levy that does not attract the GST.

6.3.2 Department of Communications, Information Technology and the Arts

The Department of Communications, Information Technology and the Arts advised the Committee that its main responsibilities in relation to business were providing standard letter rates and telephone services under separate universal obligations. These services are delivered through Government Business Enterprises (Australia Post and Telstra).

The Arts area of the Department provides grants to business, rather than offering goods or services.

6.3.3 Department of Industry, Science and Resources

Information was sought regarding the impact of the GST on goods and services supplied to business by the following divisions of the Department of Industry, Science and Resources: AusIndustry; Invest Australia; Manufacturing, Engineering and Construction; Sport and Tourism; and IP Australia.

The Committee was advised that these business units are predominantly policy arms, and offer few products or services to business. For example, the Bureau of Tourism Research supply publications to industry on which GST is charged.

IP Australia, the body providing property rights in inventions, trade marks, and designs in Australia, has information regarding the impact of the GST on its services published on its internet site. This information states:

"IP Australia's statutory fees and charges such as examination fees for patents, trade mark and design application and registration fees, renewal fees have all been included in the Treasurer's Determination. As a result, they will not attract GST and their prices will be unaffected by the introduction of the GST.

More good news; IP Australia has reduced the price of its non-statutory goods and services. This means the price of services such as the Business Name Advisory Search Service and IP Australia seminars will remain as they are now. The GST has been incorporated into the price, effectively resulting in a 9% reduction in



price".66

6.3.4 Department of Transport and Regional Services

The only products supplied to business by the Land Transport Division of the Department of Transport and Regional Services to which GST applies are publications. The cost of these products has increased by between 5.5 per cent and 7.0 per cent following the introduction of the GST. GST is not payable on other products supplied by the Land Transport Division including software, videos and BTE consultancy. Given that publications have increased in price by less than 10 per cent to reflect cost savings achieved as a result of the New Tax System, businesses registered for GST now pay lower net prices for these items as a result of the tax reform.

The Australian Maritime Safety Authority (AMSA) is a statutory authority under the Department that provided the Committee with a full list of fees and charges. The Marine Navigation Levy, Regulatory Functions Levy and Protection of the Sea Levy are all exempt from GST under the Treasurer's Determination, as are fees for marine surveying, and marine qualifications and shipping registration.

The AMSA increased its fees for miscellaneous items that are not exempt from the GST, including sale of forms, hire of equipment and training courses, by an average of 8.5 per cent from 1st July 2000. Revenue raised by these items is very small.

6.3.5 Department of Foreign Affairs and Trade

The Committee contacted two statutory authorities, Austrade and the Export Finance and Insurance Corporation, seeking information regarding the impact of the GST on their services.

A written response was received from Austrade outlining pre-July and post-July prices for its goods and services, which are predominantly publications, software packages and seminars. All of these products have GST applied, however, due to the removal of the previous wholesale sales tax, together with some other indirect taxes, Austrade's prices have not increased by the full 10 per cent. Given that businesses purchasing Austrade's services will receive input tax credits in excess of the price rise, the net impact of the GST is positive rather than negative.

6.3.6 Department of Health and Aged Care

The Australia New Zealand Food Authority (ANZFA) is a statutory authority under the Department of Health and Aged Care. Services provided to business include speakers' fees, information mailing service, use of the public register, food standards codes, Nuttab, Australian Market Basket Survey and other publications. ANZFA advised the Committee that all of its services are subject to GST and that prices have increased since implementation of the GST.

The Australian Community Pharmacy Authority is also a statutory authority under the Department. The Authority has advised the Committee that it does not charge for its services.

6.3.7 Attorney-General's Department

The Australian Customs Service is a statutory authority under the Attorney-General's Department. The majority of taxes, fees and charges have been excluded from GST under the Treasurer's Determination, including duties of customs; fuel penalty surcharges; processing charges; goods entry fees; licence fees; application fees; reporting charges; screening charges; and passenger movement charges.

GST is only applied to cost recovery charges, namely location fees, overtime fees and travelling costs and publications. The cost of GST liable supplies increased 8.4 per cent from 1st July 2000.

6.4 State Government ChargesThe Federal Treasurer's Determination makes an extensive number of State taxes, fees and charges exempt from the GST. Some examples relevant to business are detailed below.



Licences

The following licences are GST exempt:

· Licences for professional and trade operators including those required by real estate agents, legal practitioners, motor car traders, auctioneers, pawnbrokers, travel agents, dental technicians/hygienists, operators of radiation equipment, marine pilots, plumbers, passenger ferry operators, taxi/hire car drivers, towers, electrical inspectors, bingo operators and gaming venue operators.

· Licences for breeding establishments, wholesalers of farm produce, commercial fisheries, forest operators, manufacturers/wholesalers/retailers of scheduled poisons, pest control operators, manufacturers/wholesalers of therapeutic goods and those issued under the Dairy Industry Act 1992 and the Meat Industry Act 1993.

· Other licences such as those for boat ramps, jetties, marinas, motor drivers, environmental protection, sale of liquor and BYO permits.

Registration fees

The following registration fees are GST exempt:

· Registration fees as required by health professionals (chiropractors, dental practitioners, medical practitioners, optometrists, osteopaths, physiotherapists, podiatrists, psychologists), pharmacists, supported residential services, children's services centres, architects, building practitioners, plumbers, electrical contractors, recreational vessels, caravan parks, food vehicles, food preparation premises, accommodation, pest control operators, hairdressers/beauty parlours and bee keepers.

· Registration of a business name, changes of particulars of registered business names, lodgement of statements or documents relating to business names and copies of certificates in respect to a business name.

· Registration of a motor vehicle, number plates and annual fees for trade plates.

Other fees and charges

The following fees and charges are GST exempt:

· Operating permits including those for over-dimensional loads, carrying out aerial spraying and minor gaming.

· General permits such as those for child employment, street trading, planning and building and activities that may interfere with roads and facilities.

· Inspections such as those required for food transport vehicles, food preparation premises, accommodation and septic tank installation.

· Other levies such as the electricity supply levy.

The GST has been implemented across Victorian Government activities according to the stated policy position issued by the Department of Treasury and Finance, with the objectives of protecting the State's budgetary position and maintaining the Government's service delivery capacity. All net GST impacts will be fully passed through to the price of all Government goods and services. For the budget funded sector, $100 million per annum of cost savings are not available to be passed on to consumers as the Federal Government discounted its guarantee payments to the States by this estimate of anticipated embedded tax savings.

The Victorian Government is seeking to minimise the costs of GST implementation through a shared



approach to common tasks and issues wherever possible. General government sector agencies will absorb the implementation and compliance costs of GST through resource allocation rather than pass them on to consumers. Government Business Enterprises, however, will pass on reasonable implementation and compliance costs, within ACCC guidelines.

In March 2001, the State Government's Expenditure Review Committee will evaluate the economy wide experience of GST implementation in terms of flow through of embedded cost savings to date, and then reconsider the application of the above pricing policy to the General Government sector.

For prices of Government goods and services linked to the CPI, any 2000/01 CPI related adjustment will be "discounted" to the extent of the once off economy wide GST impacts on the CPI.

6.4.1 Department of Infrastructure

The Department of Infrastructure wrote to the Committee advising that a large proportion of its fees and charges are exempt under the Commonwealth's Division 81 Determination. Non-statutory charges imposed by the Department generally relate to publications, photocopying and hire of facilities and have increased by 10 per cent following the introduction of the GST. Other services subject to GST are inspection of plans for new vessels, survey of existing vessels, wharfage and berth hire.

The GST status of the range of VicRoads fees and charges falls into three categories, exempt charges, regulated charges subject to GST and non-regulated charges subject to GST.

The Federal Treasurer's Determination exempts the majority of regulated fees and charges from the GST. The only fees and charges that are regulated by legislation but not exempt under the Determination are heavy vehicle driver's licence test fees, heavy vehicle driver's log books, supply of certificate of roadworthiness books and issue of dealer certification inspection report books. The cost of these services has increased by 10 per cent.

VicRoads also provides a range of commercial services that are subject to the GST and that have increased by 10 per cent. These include spray sealing and linemarking; project design including road, bridge, traffic and landscaping; survey operations and geographic information services; books and publications; over mass and/or dimension escort services; and heavy load inspections.

The Building Control Commission is responsible for administering Victoria's building regulatory system. Most of its services relate to compulsory levies and are GST-free. However, the Commission undertakes some domestic building inspections and consultancy services and provides information and training services, including conferences, subscriptions and publications which do attract the GST. In these cases, costs to business have risen by 10 per cent since 1st July 2000.

6.4.2 Department of Natural Resources and Environment

Most statutory fees and charges under Acts administered by the Department of Natural Resources and Environment are exempt from GST under the Federal Determination. Services subject to GST generally relate to inspection, certification and supervisory activities and where GST is applicable, the fee has increased by 10 per cent from 1st July 2000.

The Environment Protection Authority (EPA) has received an exemption for all of its statutory fees and charges from the GST. Freedom of information fees, penalty infringement notices, court costs awarded, cleaner production loan repayments and perin fines are also exempt under the Determination.

The EPA produces a number of publications with expected revenue of approximately $40,000. As it has either fully or partially absorbed the GST on some publications, loss of revenue following implementation of GST is expected to be around $1,800. Other miscellaneous revenues that attract GST are sale of data, library subscriptions, photocopy charges (fully absorbed), commission of group assurance and consultancy services.

The EPA, in correspondence to the Committee, advised that its "examination of the introduction of GST does not support the perception of savings in embedded taxes assumed by the Department of Treasury and

Finance to be in the order of $300,000 in the 2000/01 financial year for the Authority".67



Parks Victoria is established to manage Victoria's National, Wilderness, Regional and State Parks, Marine and Coastal Parks and Reserves, Crown Reserves, Key Heritage Properties, Sanctuaries, Gardens, Port Phillip Bay and Western Port and the Yarra, Maribyrnong and Patterson Rivers.

Key business types likely to be accessing Parks Victoria services, such as boat mooring, leases and licencing include marine operators and tourism operators. The majority of fees and charges are statutory and are therefore unchanged by the introduction of the GST. Where goods and services are subject to GST, such as camping and entrance fees, the cost has been increased by the full 10 per cent, in addition to the regular pricing review adjustments. This is because, as for most government organisations that were exempt from the previous wholesale sales tax system, savings from the abolition of that tax are negligible.

Revenue generated by the Victorian Meat Authority is limited to licence fees that are exempt from GST.

The Surveyors Board is established to educate, examine, register and licence surveyors and to control the standards of surveying. All fees are statutory and exempt from GST. The only other service provided by the Board is provision of survey practice guidelines which are available on-line and free of charge.

6.4.3 Department of Premier and Cabinet

Arts Victoria wrote to the Committee outlining the activities of the portfolio and the impact of the GST on its fees. Services provided by Arts Victoria are delivered through the Victorian Arts Centre Trust, Museum Victoria, State Library, National Gallery, Public Records Office and Cinemedia and are generally focused on the general public. Services to business are limited to venue and equipment hire, photocopying and publications to which the GST is applicable.

6.4.4 Department of Justice

The activities of Consumer and Business Affairs Victoria are all exempt within the Division 81 Determination, except for the provision of business names information on CD, a little used service which is currently suspended pending review of the privacy issues involved.

6.4.5 Department of State and Regional Development

Small Business Victoria advised the Committee that the majority of its services are free for all Victorians. These include information and referral services, including publications and business issue diagnosis. The only service for which Small Business Victoria charges is the Pre-Business Workshop the cost of which has risen by 10 per cent since implementation of the GST.

Industry Victoria, Regional Development Victoria, Tourism Victoria and Multimedia Victoria are also business units within the Department of State and Regional Development that do not charge for services provided to business or the community. However, Tourism Victoria is developing a tourism information and booking service for industry to which fees and charges will apply, together with the GST.

Sport, Recreation and Racing offers a limited number of services to business. Licences for boxing and martial arts are exempt under Determination 81, as are services relating to racing. The 10 per cent GST has been added to the cost of most publications produced by Sport, Recreation and Racing, although some have actually reduced in price.

All Liquor Licencing Victoria licence, permit and application fees have been exempted by the Determination. These services account for the vast majority of Liquor Licensing Victoria's revenue. A small proportion of revenue is obtained through items such as the sale of annual reports, information bulletins and other publications, file searches, hearings and photocopying.

6.4.6 Statutory Boards

A number of professional boards established under State legislation were contacted, including the Medical Practitioners Board of Victoria, Pathology Services Accreditation Board, Pharmacy Board of Victoria, Building Practitioners Board, Architects Registration Board of Victoria and the Marine Board of Victoria. In most cases,



the operation of these boards is limited to statutory services that are exempt within the Federal Determination, including items such as applications for registration, annual renewals, examination fees, and extracts of registers. State boards have very limited lists of non-statutory charges for items such as publications, photocopying and professional goods which attract the GST.

6.5 Local Government Charges6.5.1 GST Impact on Local Government Services

The Section 81 Determination exempts all permits issued under local laws from the GST. These include those for planning and building and food and health. As administration of council services relevant to commercial enterprise fall substantially under these areas, the GST is not expected to have a significant impact on the cost of local government services to business.

The Committee wrote to eight Victorian councils, seeking a list of fees and charges for their services, including the amount of GST payable. A random sample of every tenth council from an alphabetical list provided by the Municipal Association of Victoria (MAV) was selected. The councils selected were: Baw Baw Shire; Corangamite Shire; Greater Dandenong City; Knox City; Mitchell Shire; Nillumbik Shire; Swan Hill Rural City and Yarra City.

The Committee received the requested information from all councils. In addition, a list of fees and charges for Boroondara City Council was obtained from its website, whilst Warrnambool and Latrobe City Councils provided the Committee with documents containing relevant fees and charges at the public hearings in Warrnambool and Traralgon.

An analysis of the fees schedules of Councils reveals those sampled have implemented the GST in a generally uniform manner. Where GST is applicable, the cost of services has increased by the full 10 per cent in most cases, and in the case of Latrobe City Council, many services have seen a fee increase together with the imposition of the GST, resulting in an overall increase of more than 10 per cent.

Whilst most local government services relevant to businesses are exempt from the GST, there are some council services sought by business which are commercial in nature and that do attract the GST. However, few of these services are likely to constitute major or frequent purchases for business and, therefore, any fee increase due to the GST will have a very minimal impact. Services attracting the GST include:

· planning inquiries;

· copies of planning permits or any local laws;

· publications and training or information seminars;

· fire hazard removal;

· sharps containers;

· liquor licence advice fees;

· hire of town halls, community centres, meeting rooms and equipment;

· theatre rental and exhibition space including rental fees for saleyards and markets;

· tourism and visitor information services; and

· ferry services fees (vehicle, cargo and passenger).

A number of councils own and operate airports or aerodromes which vary considerably in terms of fees and charges applicable. A number, including Birchip, Mallacoota, Corryong, Nhill, Ouyen, Boort, Kerang and



Cohuna Aerodromes and Pyramid Hill Airstrip have no fees and charges at all. Others including Latrobe Regional Airport and Bendigo, Ararat, Echuca, Warrnambool and Mildura Aerodromes charge various fees such as landing fees, passenger levies, site rentals and building leases. Where fees are applicable they have generally increased by 10 per cent since implementation of the GST. Horsham Aerodrome will introduce fees for the first time in October 2000.

6.5.2 Local Government GST Implementation Costs

The Municipal Association of Victoria attended a public hearing in Melbourne on 28th August 2000. The MAV had a significant involvement in the introduction of the GST as the organisation in Victoria given responsibility, by the Commonwealth, of ensuring the GST is correctly implemented throughout local government.

The MAV raised three major issues during the public hearing:

· the impact of the GST on local government, and the flow-through effect it will have on ratepayers, including business;

· interpretation of the Division 81 Determination and confusion over which fees and charges are subject to the GST; and

· the impact of the GST on small businesses in rural communities and its effects on local governments.

The MAV has concerns that there is a significant administrative cost to the local government sector in having to pay and charge GST, and in particular, that there is a disproportionate impact on small rural councils in getting software and taxation expertise, advice and support. Further, as local government was not in the previous sales tax regime, it appears that there is not the same degree of savings that other businesses have been able to identify.

Although the Federal Government funded each council with $2,000 to acquire systems to implement the GST, many of these organisations had no processes in place for dealing with taxation and, therefore, have spent substantially more than that, sometimes in excess of $100,000. The MAV is concerned that these costs could have potential flow-through effects onto either rates or service levels, which will ultimately affect ratepayers and businesses within municipalities.

Following attendance at the public hearing, the MAV provided the Committee with further information from councils on implementation costs associated with the GST and whether any support or training had been provided to community organisations and business. Twenty six councils contributed this information to the MAV, revealing:

· implementation costs varied dependant on the council's size and the nature of systems in place prior to the introduction of the GST;

· the range was from $8,750 (although no staff time was costed into this estimate) to $337,000. Melbourne City Council estimated costs were $723,000;

· smaller rural councils spent between $8,750 and $30,000, whilst metropolitan councils spent between $75,000 and $337,000;

· twenty of the respondent councils spent in excess of $20,000 over 1999/2000 to ensure that they could comply with requirements of the new tax system;

· only fourteen respondent councils had a specific budget in 1999/2000 to implement the GST and only five of those councils reported costs within their budget allocation;

· budget allocations in the current financial year to administer the GST range from $3,000 to $82,000 ($400,000 for Melbourne City Council) and do not appear to have a direct bearing to council size; and



· the majority of councils reported that they had conducted some form of training for community organisations but few reported that they had worked with industry associations to provide training to small business. Many reported that they did not see it as the role of local government to provide support to business on this issue, but rather that it was the role of the ATO and the Commonwealth.

6.5.3 Unresolved GST Issues for Local Government

The second issue raised by the MAV relates to the interpretation of the Federal Treasurer's Determination, with some councils awaiting clarification regarding the GST treatment of some fees and charges. One area in which there remains confusion is over the issue of building permits. This is evident in the inconsistency in which the GST has been specified in the small sample of council fees and charges which was obtained by the Committee.

In the original Federal Treasurer's Determination, building permits were taxable, However, under the revised Determination, the inspection component of building permits has now been made exempt. The confusion arises because councils have structured building permits to include an inspection fee, a building permit levy, a lodgment fee and the council's processing fee, yet only the processing component is taxable.

The GST status of building permits also raises complications under National Competition Policy. Building is a deregulated industry, with private building surveyors issuing permits and councils acting as private certifiers within other municipalities. Building permits issued by private surveyors are taxable, whilst those issued by a council within its own boundaries, are taxable only in relation to the processing component. There is the additional confusion that Division 81 does not actually state that certain government fees and charges are only exempt if provided within its boundaries. This results in the situation where a council operating as a private certifier outside of its municipal boundaries may not be charging the same GST as would be applicable to any other private provider.

The MAV also identifies garbage collection as an area in which there remains confusion and inconsistency. The Determination only specifically exempts municipal rates, garbage service establishment fees and compulsory residential green waste, residential recycling and waste management/reduction levies under the Local Government Act 1989. However, a later ruling post 1st July exempts all compulsory garbage collection from the GST, even where it is collected from commercial or industrial premises, where council charges for that collection appear on a rates notice. This may be perceived as unfair to those businesses that must either use a tip or access other garbage collections from council or a private operator and pay the GST on that service.

The final concern of the MAV is the expectation of local government to assist businesses, particularly those in remote communities. It believes that many councils are struggling to deal with the GST in terms of resources and knowledge, and any expectation of local business regarding support will only add to the burden. It fears that even if only a very small number of small businesses close due to lack of advice or support, that will have a very damaging impact on small rural communities.

Finding 6.1

The Committee finds that the overall impact of the GST on the cost of government services used by business is negligible given that:

· the vast majority of Federal, State and Local Government services used by business are exempt from the GST as a result of the Commonwealth Government's Section 81 Determination; and

· businesses can claim the GST payable on any government services as an input tax credit.

Finding 6.2

The Committee finds that some non-statutory services including inspection services, the cost of publications, photocopying, hire of facilities and information services will increase by between 8 and 10 per cent as a result of the GST depending on the level of savings to be passed on arising out of the tax changes.



Finding 6.3

The Committee finds that compliance costs for local government varied significantly from as low as $8,750 to $337,000 and that these additional costs will have to be budgeted for.

66 http//: www.ipaustralia.gov.au/NEWS/gst.htm

67 Letter from Environment Protection Authority to EDC dated 11/09/00



http://www.ipaustralia.gov.au/NEWS/gst.htm











7.1 Assessing the GST Impact on Business Competitiveness7.2 Non-GST Related Issues Affecting Business Competitiveness7.3 GST Related Issues Affecting Business Competitiveness7.4 Effect of GST on Extent of Business Competitiveness7.5 GST Expectations Surveys

7. Competitiveness of Small and Medium Sized Businesses

7.1 Assessing the GST Impact on Business CompetitivenessChapter 2 of this Report outlined that the stated aim of the GST and The New Tax System is to provide a fairer tax system to all Australians and to help make Australian businesses more competitive. The Commonwealth Government anticipates that the introduction of a GST and the abolition of a range of hidden taxes, together with the wide ranging business tax reforms highlighted in the Ralph Review, will give Australian businesses a competitive advantage internationally.

The Victorian Government, in establishing the Terms of Reference for this Inquiry, clearly viewed the issue of competitiveness as a factor associated with the GST. Accordingly, the Committee was required to `assess the

impact of the GST on the competitiveness of small and medium sized businesses in Victoria, particularly regional Victoria.'

During the Committee's investigations, a broad interpretation was given to the term `competitiveness'. Essentially, the Committee understood `competitiveness' to include:

· international competition;

· competition between Victorian business and similar businesses interstate;

· competition between businesses in regional and rural Victoria and businesses located in Melbourne;

· competition between small, medium and large sized businesses; and

· competition between different industry sectors.

The extent of competition will differ depending on the type of business. For example, a small independent supermarket will not be affected by international or interstate competition but will be affected by larger supermarkets operating in the same locality.

Alternatively, an exporter of rural products will have competitors within Victoria, Australia and overseas. The











GST exemptions on exports will assist the export business in competing with overseas exporters but will assist its competitors within Australia in the same way.

One of the Committee's primary concerns was to examine the extent to which the GST would affect the competition between regional businesses and metropolitan businesses. This issue is examined in section 7.4

Given the relatively short timeframe for completing this Inquiry, there were limitations in assessing the extent of the GST impact on business competitiveness.

Overwhelming evidence put to the Committee indicated that it would be difficult to assess the impact of the GST on competitiveness until at least 6 months had passed since the GST was introduced on 1st July 2000. Some witnesses suggested the real impact of the GST could not be assessed before July 2001.

As indicated elsewhere in this Report, the completion of the first Business Activity Statements due early November 2000 will provide some indications as to how the GST may impact upon business competitiveness. A clearer indication may be made in February 2001 after the second BAS is lodged.

In view of the above limitations, the Committee's investigations and findings regarding the impact of the GST impact on competitiveness are largely based on anecdotal evidence and business expectations.

Throughout this chapter, reference is made to evidence presented to the Committee by small and medium sized businesses in regional Victoria. While the evidence is based on expectations only, it provides an insight as to how businesses perceive the GST and how associated reporting requirements are expected to impact upon their competitiveness. In addition, the Committee has highlighted economic forecasting and modeling

undertaken by various organisations on business GST expectations. These surveys include:

· Yellow Pages Small Business Index

· Dun & Bradstreet Business Expectations Survey

· Econtech

· VECCI

Before analysing the evidence and the business expectation surveys, it is necessary to outline the scope of issues the Committee has considered relevant in terms of ways in which the GST will impact upon business competitiveness. In doing so, the Committee was mindful of a number of other factors that may influence the competitiveness of businesses. These non-GST factors are briefly mentioned below, followed by an analysis of the GST related issues.

Finding 7.1

The Committee finds that the overwhelming evidence indicated it would be difficult to assess the impact of the GST on competitiveness until at least 6 months has passed since the GST's introduction on 1st July 2000.

Finding 7.2

The Committee finds that the completion of the first quarterly Business Activity Statements due on 11th November 2000, will provide some indications as to how the GST may impact upon business competitiveness. A clearer indication may be evident in February 2001 after the second quarterly BAS is submitted.

7.2 Non-GST Related Issues Affecting Business Competitiveness



One of the Committee's major challenges in examining the impact of the GST, was to differentiate between GST related influences and non-GST related influences. In addition to the introduction of the GST, businesses have been faced with a series of tax reforms such as PAYG together with on going economic factors that will affect their business operations and profitability.

Chapter 4 highlighted the range of forces leading to higher fuel prices including the price of crude oil and the recent fall in the value of the Australian dollar. In addition, the Committee notes in Chapter 3 that an examination of GST compliance costs has been complicated by the implementation of other tax reforms.

The extent to which GST related price rises have affected consumer spending is similarly complicated by other factors such as inflation and higher interest rates.

Finding 7.3

The Committee finds that consideration of the impact of the GST on business competitiveness should take into account a number of other influences including:

· movements in the Consumer Price Index;

· increase in interest rates; and

· a fall in the value of the Australian dollar.

7.3 GST Related Issues Affecting Business CompetitivenessThe Committee's Terms of Reference required an assessment of how the GST has impacted upon business competitiveness taking into account specific issues including fuel prices, electricity prices, the cost of government services and, most importantly, GST compliance costs. All of these cost related issues could impact upon the competitiveness of small and medium sized business.

The Committee was of the opinion that the question of competitiveness could only be examined after consideration of the above issues. The following items are considered as being critical to the extent to which the GST will impact on business competitiveness.

7.3.1 GST Impact on Business Costs

Previous chapters have highlighted the extent to which the GST has increased fuel costs and electricity costs. The GST has also added approximately 10 per cent to other business costs such as telephone and postage charges.

It is important to reiterate that business will generally be able to claim back 1/11th of their business costs as an input tax credit. In many instances, where the GST increase has been less than 10 per cent, a business will actually be achieving a net gain after receipt of input tax reimbursements.

The extent of any net gain after claiming input tax credits will only become apparent after completion of the first BAS returns and when businesses receive reimbursements from the ATO.

The Victorian Employers' Chamber of Commerce and Industry survey (see Appendix 7) conducted during the Committee's Inquiry, asked businesses to indicate what impact the GST has had on a range of business costs since 1st July 2000. The survey also asked businesses to indicate what the expected impact will be over the next 12 months.

Unfortunately, in view of the Committee's reporting timeframe and the timing of the survey, it was not possible for VECCI to collect and analyse any meaningful data on the impact of the GST on business costs,

both current and future.

Finding 7.4



The Committee finds that business competitiveness should not be affected where input tax credits can be claimed, however, this will depend on the size and type of business and its location.

7.3.2 Compliance Costs

The most likely GST related impediment to business competitiveness, particularly for small business, is the extent of GST compliance costs. This is discussed in detail in Chapter 3.

The Committee has been unable to obtain firm evidence on the impact of GST compliance costs on competitiveness due to the limited reporting timeframe for the Inquiry. Indeed, the Committee had some

difficulty in measuring the actual level of compliance costs.

However, evidence presented to the Committee suggests that comparatively higher compliance costs for small businesses could result in them being less competitive than larger businesses. An example of this evidence is provided below.

Mr Paul Drum, Senior Tax Consultant, CPA Australia:

"....we know that internationally there is a higher cost to small businesses, so arguably you could say that in the interim small and medium businesses are losers from a competitive point of view compared to large businesses because they have to absorb costs that represent a greater part of their expenditure, comparatively speaking." 68

Mr Brendan Smith, Partner, Smith O'Shannessy Accountants, Benalla:

"As to how that reflects on their competitiveness, it is one thing to say that a whole new layer of compliance is a burden on the whole of Australia. But looking inside that, proportionally speaking, that burden of compliance falls much more heavily on small business than on big business. Therefore, often when small and medium enterprises are competing against bigger enterprises they are already in a weaker position due to lack of economies of scale and lack of market penetration and all those sorts of on-the-ground marketing and selling issues. When you also add on to that the layer of compliance, that will impact far more heavily pro rata on smaller business than on bigger business.." 69

Mr Steven Bates, Secretary, CPA Australia, Bendigo:

"There has certainly been an increase in the compliance costs to small businesses...... The problem is that many small businesses are not making a huge profit anyway. They do not have the benefits of a big business. An increase in the compliance costs will reduce their prices and competitiveness." 70

Finding 7.5

The Committee finds that the comparative level of GST compliance costs for small business compared to large business, may result in some small businesses becoming less competitive than larger businesses in similar industry sectors.

7.3.3 Business Closures

Related to compliance costs is the extent to which GST implementation and compliance has contributed to the closure, or failure, of small and medium sized businesses. This issue received a fair degree of media attention in the lead up to 1st July 2000 with reports of small businesses, often in regional Australia, having to close their doors because of the GST.

The Committee pursued this issue throughout its regional public hearings in an attempt to ascertain the extent to which the GST has lead to business closures.



Some typical responses received in public hearings are provided below.

Mr Graham Nickless, Executive Officer, Economic Development, Delatite Shire Council:

"Some small businesses have closed; in some cases that has been attributed to the implications of the GST, although my personal view, endorsed by other information I have received, is it is probable that other issues brought those closures to a head. I don't know that the GST was the primary reason, but it has been used by some businesses to bring forward an inevitable decision." 71

Mr Chris Buckingham, President, Moe Development Group:

"In terms of businesses with shopfronts or a physical presence on the street, I would estimate it would be between 120 and 150 in the Newborough-Moe area. Of those, six to eight will have closed directly as a result of the introduction of the GST. When I say that, I do not mean that the businesses were doing great guns and the GST came along and knocked them over, but it was the straw that broke the camel's back." 72

Mr Dennis Scott, Scotty's IGA Supermarket, Benalla:

"I think four businesses decided not to continue because of the complexities they were facing. They were not willing to go into a new regime because it creates another impost on your time. They did not want to become computer literate. If you are running a business and working 50 hours a week and earning $400 a week - which some do, they are making only a small wage - you will not put in another $15 000 computer. Therefore, those operators decided the option was an easier alternative. Perhaps they were going to do it anyway, but that is what happened." 73

Ms Kim D'Arma, GST Sign Post Officer, North Eastern Victoria Area Consultative Committee:

"I know of one that closed in Shepparton and although I do not know the facts, from anecdotal evidence it worked well in not showing its income and doing business in more dubious ways; the proprietors were afraid that the GST would force them to legitimise themselves. They thought they would get out." 74


"It is incorrect to say that the GST would be the sole reason for a business going bankrupt. Some people will take that decision or that way out, but for many others it will mean they will bat on, and they will spend more time and money complying. Their relative competitiveness will therefore suffer and in the long term, three or five years from now, when that further diminution in their relative competitiveness bites in, the scene may be clouded with other issues that may arise. It is an observation that is difficult to quantify, but it is probably correct to say it takes a little edge off their ability to do well in the long term." 75

Mr Brian Gould, Economic Development Manager, City of Greater Bendigo:

"I guess you hear stories rather than anything else. I happen to know of one case where a person was close to retirement age and made the choice of going out of the business rather than selling it. The owner decided to stop. Because of the type of shop it was we were able to pick up comments such as, `They obviously closed because of GST', when it was not the reason. I think the time it closed down coinciding with the introduction of the GST tended to blur it.

Personally, I have not had any evidence that a number of businesses have closed



down." 76

Mr Rod Burns, RSM Bird Cameron, Bendigo:

"From an accountant's point of view, I would like to think that GST would not be the sole reason a business would close. They are obviously not managing very well for a start if that situation arises. The GST may have some impact on pushing them towards that line if they are heading that way. I do not think the GST would be the factor that would make a business go broke." 77

Mr Steven Bates, Secretary, CPA Australia, Bendigo:

"Many of my clients have expressed an interest in selling out. They have said that they will not get the return any more so it is not worth running the business and putting in the hours - they may as well sell. I have not had any close down but certainly some businesses in town, such as milk bars, have shut up shop. They did not sell; they have just gone. They were obviously not competitive in the greater environment. There have certainly been a lot of inquiries about selling." 78

Mr Tim Piper, Executive Director, Australian Retailers Association Victoria:

"We have not heard of anybody who has closed their business as a result. There were some we were told about who closed leading up to the GST but I think there were many reasons, including the GST but not just the GST, that might have

caused that to occur." 79

Mr Chris Pretty, Chairman, Action Benalla:

"Although it (GST) was not the sole reason for businesses closing - five closed their doors in Benalla on the Friday night, never to reopen - those people were of varying ages but made the decision in the lead-up to the changeover that the establishment costs, the implementation and compliance costs, the age that they were, and the profitability of their business were such that they had made their decision not to sell but to close. Five businesses closed their doors on that day." 80


"There are three businesses in the region that I know have closed their doors. The GST has been the catalyst but not the reason. One of the businesses was, let us say, working outside the guidelines of the taxation system. The GST would have highlighted that. The woman was also a 73-year-old and decided it was time to pull the pin. With another business, it brought the inevitable forward. It was a very small business in a small regional area. I doubt that it has been profitable for a number of years and the compliance cost was not warranting the business. The other one fell into the same boat. The person was looking at retirement in 18 months and decided it was not worth the hassle of re-pricing and compliance with the GST. I do not believe any businesses in the region have been or will be forced to close because of the GST." 81

The above views are consistent and clearly illustrate that the introduction of the GST has been only one of a number of factors leading to the closure of a business. Evidence put to the Committee suggests many businesses that have closed at the time of the GST



commencement would probably have closed within a short period of time regardless of the GST. It could be argued that the GST has therefore accelerated the closure of some businesses.

Contrary to media reports, the Committee was unable to find any evidence of a business closing entirely as a result of GST compliance and implementation. There was also a lack of evidence to suggest the rate of business closures has increased as a result of the GST.

Finding 7.6

The Committee finds that while the GST can be seen as a contributing factor in accelerating the closure of some small businesses, there is little evidence to indicate that businesses have closed solely as a result of GST compliance and implementation.

Finding 7.7

The Committee has been unable to determine the extent to which the GST has lead to businesses closing given there are a number of other factors, both economic and personal, that have contributed to business closures leading up to the 1st July 2000.

Finding 7.8

The Committee finds that businesses that were cash based, marginal or unprepared to change business practices prior to the introduction of the GST were more likely to close partly as a result of GST implementation and compliance than were more profitable businesses.

7.3.4 BAS Returns and Cash Flows

It has been well documented throughout this Report that the first quarterly Business Activity Statement will be a major test for small and medium sized businesses. The extent to which the GST will impact on business competitiveness will depend on the outcome of the first two quarterly BAS returns.

The Committee has identified the following key areas relating to the BAS returns that may affect business competitiveness:

· Preparation of a quarterly, and in some cases monthly, Business Activity Statement will require additional time and resources of business people. The Committee notes that many small businesses will be relying on their accountants to a greater degree and will consequently be paying more in accounting fees.

· Businesses that are not fully prepared for the first BAS instalments will suffer as a consequence. As businesses collect the GST payable on goods and services, they will need to set aside this money to be returned to the ATO every three months. Businesses facing cash flow problems may end up spending the GST money before it is due to be returned.

· Businesses may receive a cash flow benefit from holding the GST money for three months. The better business will attempt to earn interest on this money through appropriate investments.



· The Committee found that some businesses, particularly in the retail sector, were absorbing the initial GST increases in their existing prices. These businesses have made a decision not to increase prices in order to maintain a competitive edge or because they considered price changes too difficult to administer. Businesses that have chosen not to initially increase prices will still be required to return the GST amounts to the ATO and this will therefore affect their profit margins.

Examples of these issues are illustrated in the following evidence presented to the Committee:


"A couple of businesses I have dealt with were always on a tight cash flow before the GST and they will always work on a week-to-week cash flow - paying the bills, seeing how much money is in the bank and keeping it going. They are the ones, especially the ones on quarterly statements, who when they have to lodge that form in November will realise that they may have had $150 000 in sales, and received all the GST, but they have been working their cash flow pretty tight for the period and suddenly have to find their GST. They are the ones who will find it tough." 82

Mr Steven Bates, Secretary CPA Australia, Bendigo:

"Our big question is what the tax office approach will be. If people get into trouble and have spent their GST come November and they have to send off their three or five grand and they do not have it, how flexible will the Tax Office be? Will it let them work it off? The problem is they will have another quarter already ticking that falls due in January, and if they are behind in the first three months they will probably be behind in the second, and before they know it they will owe 10 grand. There is probably no hope. It depends what the attitude of the Tax Office is, whether it will let them try to pay it off or just kill them. If it kills them, we will know earlier; if it lets them go, we will not. It could be another six months from 1 July next year before we know." 83


"I have some information from retail clients where, as a one-off measure at least in July, they have absorbed some of that in that they have been either unable or have had insufficient time to adjust the prices of all their retail items, notwithstanding that they will have to rip one-eleventh off their gross proceeds from the sale of those items at the end of September. I have clients who have recognised that it is still a free marketplace and have chosen not to fully re-adjust the prices of their retail products so as to cut their own margins and use the opportunity to improve their competitiveness, but also at the cost of lowering their profits." 84


"People are maybe not fully absorbing but only partly absorbing the



GST because they feel prices are such that they do not want to increase them any more at the moment. I think a lot of people will see the impact of that when they start reporting on it. They will see a lot of the income they have collected is a result of the GST. There is a bit of that going on." 85


"One question that several people have asked me to raise is whether I see people having a problem with cash flow coming up in November. I think the cash-flow problem will certainly arise, but I do not believe it will be because of the GST. I think the cash flow will arise because small businesses have cash-flow problems and they are just using GST collections to try to relieve some of the problems. The majority of small businesses in this region are reporting cash, so the majority of them have collected the GST long before they have had to pay it out. Again, if I can go back to the financial management, that is the problem, not the GST." 86

Finding 7.9

The Committee finds that the competitiveness of small and medium sized businesses could be affected as a result of GST reporting requirements if:




· a business decided to absorb the initial GST price increases in its existing prices (this could be seen as a positive or negative effect on competitiveness).

The Committee will continue to monitor the competitiveness of small and medium sized businesses as the full impact of ongoing compliance costs is felt and report accordingly in its second Report due by 30 April 2001.

7.3.5 GST Free Exports

One of the major benefits of the GST is that from 1st July 2000 most exports have become GST free. At the same time, the Commonwealth Government has removed a range of embedded taxes including wholesale sales tax, financial institutions duty, debits tax and some stamp duties that previously existed on exported goods and services.

The Federal Government estimates that the new tax system will reduce the cost of producing goods and services for export by $4.5 billion. Exporters will also be able to claim input tax credits on the supplies needed to produce exported goods and services.

Once again, the Committee's investigations were too early to determine the impact of the



GST on export opportunities, however, anecdotal evidence supported the Government's claims that the GST will lead to greater competitiveness of Australian exporters.

Mr Clay Manners, Treasurer, Victorian Farmers' Federation:

"There is no doubt the introduction of the new tax system will improve the competitiveness of Australian farmers. We compete with North America, where fuel costs are traditionally much lower and the new system has brought us more into line. The removal of excise on diesel has reduced tax about $10 a tonne for grain. It is hard to say that we have achieved a sale because of the GST, but with our export markets it will make us more competitive to a significant degree. It will have a significant effect on our international competitiveness." 87

The Committee noted in Chapter 4 that the higher than expected diesel prices, caused by factors other than the GST, has reduced the anticipated benefits of the diesel fuel grants.

Some evidence put to the Committee suggests that some export businesses needed additional financial structures to assist their cash flow requirements to meet GST payments which are later reclaimable. Mr Alex Egan, Finance Manager, Midfield Meats International in Warrnambool commented as follows:

Mr EGAN -Essentially we produce an exempt product.

Mr THEOPHANOUS - So you are not in the same position where you have to find a big block of money that has to be passed over as a tax very shortly.

Mr EGAN - We had to increase our overdraft by $1.5 million to fund our cash flow. We have to pay the agents within seven days - that is, the people we buy livestock from.

Mr McQUILTEN - That is with 10 per cent GST on their product?

Mr EGAN - Yes, 99.9 per cent does have 10 per cent GST on it. So we have to pay the GST in there before we get it back; there is approximately an eight-week turnaround.88

Finding 7. 10

The Committee has been unable to obtain firm evidence of the GST impact on exports due to the limited reporting deadline. However, business expectations indicate that the competitiveness of Australian export businesses should be enhanced as a result of the abolishment of a range of embedded taxes and the GST exemption on exported goods and services.

Finding 7.11

The Committee finds that some export businesses required additional financial structures to assist their cash flow requirements to meet GST payments, which are only later reclaimable.



7.3.6 Upgraded Computers and Business Systems

The Committee received a wide range of views on the subject of GST compliance costs (see Chapter 3). Most businesses considered GST compliance a burden financially and

administratively, despite accepting the new tax system. However, there was a commonly held view that the upgrading of computers and business systems should improve businesses

in the long term.

Most businesses acknowledged that the GST had forced them to upgrade business systems and practices that will lead to greater knowledge of the business and improved productivity. In theory, improved businesses should lead to enhanced competitiveness.

Some of the following evidence illustrates is point.

Mr Paul Drum, Senior Tax Consultant, CPA Australia:

"The outcome of implementation of VATs or GSTs around the world has been that businesses in general have become better businesses and more efficient. They obtain - by force, if you like - a greater understanding of their own businesses and their cash in and cash out and become better businesses in the long-term. We think that is an indirect trade-off. If that is a consequence of the implementation of the GST, that is a great thing." 89

Mr Geoff Crick, Treasurer, Victorian Farmers' Federation:

"I am sure more farmers now have computers than was the case 12 months ago. That will generate benefits for agriculture. The GST has been an important factor in motivating them, but that will not be the only benefit." 90

Mr Stephen Dyt, Partner, W.J. Dyt & Co. Accountants, Traralgon:

"I believe that one of the bonuses of the GST system and the change in that is that people will be focusing much more regularly on the performance of their business. .... It will force people to address issues much earlier in the cycle of the problem...

The other benefit it will have is more up to date, more relevant and more useful information on which businesses can make decisions.

I think there will be some short-term costs, but I think there will be some long-term gains from people running better businesses because they have better information." 91


"That is a valid point, and perhaps the GST might have prodded some of those businesses that may benefit from an IT advantage into taking that step. The reward for that will not only be their ability to comply but also the ongoing benefits to the business. I have been to hear a few New Zealand accountants speak, going back to early 1999, and in their view although the imposition of GST over there caused some very



small businesses to founder - no doubt about that - those that survived were forced to lift their game in many respects and as a result may have become better business managers. That does not necessarily justify the imposition of the tax but it certainly indicates that the by-product was a positive one and I can certainly see that will happen for some businesses in Australia as well." 92


"As to competitiveness within the region I would say that maybe a Horsham business would have an advantage over a Hopetoun business. The Hopetoun business would have a slight disadvantage because of the tyranny of distance, but in regard to the GST, I would like to think that most businesses will be better off or more competitive because they will have a better understanding of the finances of their business and be better business managers because of that. So if you are asking me whether people are better managers and more competitive under the GST system, I would like to think the answer is yes." 93

Finding 7.12

The Committee finds that there has been a positive side to GST compliance in that many businesses have upgraded computers and business systems which may lead to better business practices and improved productivity.

7.4 Effect of GST on Extent of Business CompetitivenessEarlier in this chapter, the Committee noted that there are different forms of competitiveness between businesses depending on the type of business activity.

Throughout its public hearings, the Committee attempted to obtain evidence on the extent to which the GST will impact upon competitiveness in the following ways:

· Australian export businesses competing with overseas exporters;

· businesses in regional and rural Victoria compared to businesses located in Melbourne; and

· small business compared to large business.

The following evidence was provided on this question.

Mr Ken Claughton, Manager Indirect Tax, Pitcher Partners:

"With competitiveness of Australian business with overseas business I would have thought that Australian business has become more competitive with imports. Maybe we are not there yet but we are getting there. A lot of the in-built costs that were in the previous sales tax system and which are captured within the prices of goods and services will disappear, and Australian goods and services should become more competitive with overseas goods and services as these costs disappear. Competitiveness between one business and another



should be equal. The competitiveness between a manufacturer of widgets in one place and a manufacturer of widgets in another should not alter, because both of them have the same savings." 94


Mr THEOPHANOUS - Overall is it your view that the GST has had a negative or positive effect on business in this area?

Mr SMITH - It is in my view a negative effect on competitiveness, given that they are competing generally against larger business in whatever field they are or competing against metropolitan-based businesses if you are talking about metropolitan versus regional Victoria.95

Mr Bill Jeffrey, Proprietor, Golden City Mitre10, Bendigo:

The CHAIRMAN - So you are competing with the big ones and others of similar size. Are you of the belief that as a result of GST you are more or less competitive?

Mr JEFFREY - My belief would be that there has been no change, because we are basically on the same footing. I do not think the GST has changed competitiveness in that regard. It is probably too early to tell, because we do not know what the effects will be on cost structures down the track. It will probably take 6 to 12 months to find out what the effects are on that.96


The CHAIRMAN .....do you believe the competition between businesses will change in any way as a result of GST?

Mr BURNS - Not really. Those who have been very good managers and very switched on with their businesses will identify the impact a lot quicker and be able to build that into their pricing and profit levels and identify their cash-flow issues. If they are very good managers they will probably benefit from the impact a lot earlier than those who are not, so they may get a bit of a competitive edge for a start. Over a period I would not see it having a big impact on the way they compete with each other.97

Mr Greg Porter, General Manager, Australian Retailers Association Victoria:

"The shift is probably not so much in the competitiveness between sectors and segments of the industry, but within segments and parts of the industry. We have noticed the enormous pressure that has been placed on retailers at the end of the supply chain to keep prices down; unfortunately, a lot of that is not flowing through to them as real coat savings. The Australian Competition and Consumer Commission has applied pressure - and rightly so - on the retail segment to maintain and pass on any tax savings, yet the costs coming through are often 10 per cent or higher in some cases. The changeovers and associated



factors are actually pushing the costs higher and squeezing margins. Ultimately that has to have an effect on the relative competitiveness of different segments of the industry, so that is certainly a concern." 98

Finding 7.13

The Committee finds that there was no clear evidence to suggest Victorian businesses will be any more or less competitive than similar businesses interstate as a result of the introduction of the GST.

7.5 GST Expectations SurveysOver the past 6 months, a number of business organisations have conducted surveys of

various industries and businesses on the impact of the GST in the short to long term after 1st July. The majority of these surveys are based on business expectations and the economic outlook. The Committee believes the results of these surveys add to the evidence it has

obtained first hand from small to medium sized businesses.

7.5.1 Victorian Employers Chamber of Commerce and Industry (VECCI)

The VECCI survey on the impact of the GST has been referred to elsewhere in this Report and is attached at Appendix 7.

The survey was carried out over a two week period, from 10th to 24th July 2000, sampling 750 businesses throughout Victoria.

As part of the survey, businesses were asked to indicate how they believed the GST had affected the competitiveness of their business.

The survey results revealed that in the first few weeks after the introduction of the GST:

· 18 per cent of small businesses and 3 per cent of medium businesses believed the GST had increased their competitiveness;

· 16 per cent of small businesses and 5 per cent of medium businesses believed the GST had reduced their competitiveness; and

· 66 per cent of small businesses and 92 per cent of medium businesses believed the GST had a neutral affect on their competitiveness.

Clearly, the timing of the Committee's Inquiry and VECCI's survey limited the ability of businesses to respond to the question of competitiveness in a meaningful way based on actual business experience. Nevertheless, the results indicate that in the early weeks of the GST, businesses perceived the GST as having a neutral effect on competitiveness.

7.5.2 Econtech Study

Econtech, an economic modelling and forecasting firm, undertook a comprehensive survey of business sectors in the lead up to 1st July. Econtech has forecast the effect of the GST on

production, prices and employment for businesses in 17 industry sectors.



The results indicate most business sectors, particularly transport, manufacturing and mining, will significantly benefit from the GST.

The transport sector should benefit greatly from the GST due to cuts in excise rates for diesel fuel and petrol; higher demand for transport to carry the increased manufacturing production as reflected in the expected rise in GDP; and cheaper trucks flowing from the replacement of sales tax at 22 per cent with the 10 per cent GST.

The manufacturing sector will also benefit significantly due to the abolition of wholesale sales tax. This should lead to reduced prices and stimulate local demand and production.

Econtech also believes the agricultural and fishing sectors will benefit due to an increased demand for fresh food which is GST free.

On the downside, Econtech estimates that the GST could lead to a 1 per cent loss of sales and 2 per cent loss of employment in the restaurant, cafes and accommodation sector.

7.5.3 Yellow Pages Small Business Index - August 2000

The Yellow Pages Small Business Index is a quarterly survey of small business activity, expectations and confidence. It focuses specifically on businesses employing 19 people or fewer and comprises at least 1,200 small businesses Australia wide, including 200 in Victoria.

The August 2000 survey results included an examination of small business proprietor attitudes to the GST and the initial impact the GST has had on their business. As a starting point, the survey reveals that 62 per cent of small businesses were in favour of the GST compared to 28 per cent against. Those in favour had increased by 8 per cent from May to August and those against had decreased from 36 to 28 per cent. This would indicate a growing level of support for the GST.

Despite the fact that the majority of businesses supported the GST, at least half of those surveyed indicated they still had some concerns including admininistrative burden, lack of understanding and the BAS instalments.

The survey summarises the impact of the GST on businesses as follows:

"In terms of sales value, the majority (60%) expected no real change and the proportion which expected an increase was more or less offset by the proportion expecting a decrease.

Most (72%) expected an increase in their compliance costs, and 30% expected a substantial increase.

About a third expected to see a drop in the amount of funds available for investment in their businesses. Finally, more (29%) expected to see their profits fall than rise (12%)."99

7.5.4 Dun & BradStreet Business Expectations Survey

Business consulting firm, Dun & Bradstreet, release a monthly business expectations survey of approximately 1000 businesses across Australia representing major industry sectors in manufacturing, wholesaling and retailing. The September 2000 survey relates to the 3 months May to July and analyses expected movements in quarterly sales, profits, orders,



selling prices, inventories, employees and capital investment. Of particular relevance to the Committee's Inquiry are the results of supplementary questions on the GST.

In summary, the survey revealed:

· business confidence has risen across all indices for the first time in seven months;

· almost 70 per cent of business executives claimed to have "fully prepared" all the information needed to lodge their first BAS, however, 10 per cent said they had not made any preparations;

· 37 per cent of executives believed the GST would have a negative effect on sales in the short term, however, only 10 per cent expected a negative effect in the long term;

· 36 per cent expected sales to increase, a rise of 6 per cent from the previous survey, however, the number of firms showing actual increases in sales fell three points to 37 per cent; and

· other expectations for profits, employment, capital investment and inventories all rose by between three and six points from the previous survey.

Finding 7.14

The Committee finds that the results of various business expectations surveys are mixed in terms of the impact of the GST on business competitiveness. The Committee notes that the timing of the surveys, and the fact that they are largely based on expectations, would indicate further empirical studies are required to accurately assess the GST's impact on business competitiveness.


















83 Minutes of Evidence, 9/8/ 00, p.164





88 Minutes of Evidence, 18/9/00, pp. 355-356











99 Yellow Pages Small Business Index, August 2000, p.13











BibliographyAustralian Competition & Consumer Commission, Price Exploitation and The New Tax System - A Compliance Guide for Small Business, ACCC, May 2000

Australian Taxation Office, Guide to GST, Commonwealth of Australia, November 1999

Australian Taxation Office, Diesel Fuel Rebate Scheme - Information for Claimants, Commonwealth of Australia, 1999

Australian Taxation Office, Fuel Sales Grants Scheme - Guide to Registering, Commonwealth of Australia, May 2000

Australian Taxation Office / The New Tax System Advisory Board, The New Tax System - Information Guide

Dun & Bradstreet Australia, Business Expectations Survey September 2000, http: www.dnb.com.au/news/besSep2000.htm

Econtech, The Effects of The New Tax System (NTS) on Petrol Prices Under Different Excise Reductions, Econtech, June 2000

Office of the Regulator-General, Victoria, Electricity Final Approach, Change in Tax Determination, Response to the Goods and Services Tax, Office of the Regulator-General, Victoria, July 2000

Office of the Regulator-General, Victoria, Gas Final Approach, Change in Tax Determination, Response to the Goods and Services Tax, Office of the Regulator-General, Victoria, July 2000

Office of the Regulator-General, Victoria, 2001 Electricity Distribution Price Review, Final Decision, Office of the Regulator-General, Victoria, September 2000

Pope, Dr Jeff; Factors Affecting the Compliance Costs of the Goods and Services Tax in Australia, paper presented at ATAX Compliance Cost Symposium, Sydney, 26-27 April 2000

Royal Automobile Club of Victoria, Royal Auto Vol. 68 Nos 5-8, RACV Ltd., June -September 2000

Yellow Pages, Small Business Index - August 2000, Telstra Corporation Limited










http://www.dnb.com.au/news/besSep2000.htm




Extracts from the ProceedingsThe Minutes of the Proceedings of the Committee show the following Divisions which took place during consideration of the Draft Report.

A summary of the Proceedings follows.

Thursday, 19th October 2000

Chapter 1, page 5

Moved Theophanous, that the following section be added to the conclusion of section 1.5:

"The Committee recognises that significant new issues will emerge as a result of the amended Terms of Reference, and that some Members of the Committee have expressed the view that this report should be reconsidered and tabled at a later date to reflect those new issues."

The Committee divided on the motion. The result of the Division was

Ayes:3

Hon. T.C. Theophanous, M.L.C.

Hon. K. Darveniza, M.L.C.

Hon. J.M. McQuilten, M.L.C.

Noes:3

Hon. N.B. Lucas, M.L.C. (Chairman)

Hon. A. Coote, M.L.C.

Hon. G.R. Craige, M.L.C

And so it was resolved in the negative on the Chairman's casting vote

Chapter 2, page 26

Moved Theophanous, that the following be added to the second paragraph on page 26, before section 3.2:

"It is the Committee's intention to examine and report on relevant findings from this survey as they apply to the Terms of Reference 1-7, dated 10th October 2000, in the next report to Parliament on the GST."












Ayes:3




Noes:3



Hon. G.R. Craige, M.L.C.

And so it was resolved in the negative on the Chairman's casting vote.

Monday, 23rd October 2000

Chapter 5, page 92

Moved Theophanous, that a part (iii) be added to Finding 5.1 on page 92 as follows:

"Based on the Regulator-General's findings for large consumers in a deregulated environment, the differentials in GST payments for small and medium sized customers are also likely to increase when price regulation ceases."

The Committee divided on the motion. The result of the division was

Ayes:2



Noes:4



Hon. R.A. Best, M.L.C.


And so it was resolved in the negative.

Chapter 7, page 133

Moved Theophanous, that an additional finding be added after the second finding on page 133 as follows:

"The Committee found that it is probable that the GST has contributed to business closures leading up to 1st July 2000."




Ayes:2



Noes:4






Chapter 7, page 141

Moved Theophanous, that the words `and improved productivity' be deleted from the last line of the finding on page 141


Ayes:2



Noes:4






Thursday, 26th October 2000

Chapter 4, page 66

Moved Theophanous that a recommendation be added to p. 66 as follows:

"That the Committee continue to monitor LPG prices and report the results of its findings in Report No. 2."




Ayes:3




Noes:4






Chapter 4, page 77

Moved Theophanous, that the following recommendation be added to page 77:

"That the Economic Development Committee continue to monitor petrol prices and report the results of its finding in Report No. 2."


Ayes:3




Noes:4


















Appendix 1Functions of the Economic Development Committee

The Economic Development Committee is an all-party Investigatory Committee of the Parliament of Victoria. It was originally established in 1992 under section 4EC of the Parliamentary Committees Act 1968 as a Joint Investigatory Committee.

In the 54th Parliament, the Committee was reformed under section 37 of the Parliamentary Committees Act as a Select Committee of the Legislative Council.

The Committee consists of seven Members of Parliament, all of whom are drawn from the Legislative Council. The Committee carries out investigations and reports to Parliament on matters associated with economic development or industrial affairs.

Section 38 of the Parliamentary Committees Act 1968 prescribes the Committee's functions as follows:

The functions of the Economic Development Committee are to inquire into, consider and report to the Parliament on any proposal, matter or thing connected with economic development or industrial affairs, if the Committee is required so to do by or under this Act.


http://www.parliament.vic.gov.au/edevc/inquiries/GST/Report%20One-10.htm [16/05/2002 9:18:15]



















Appendix 2ECONOMIC DEVELOPMENT COMMITTEE

INQUIRY INTO THE IMPACT OF THE GOODS AND SERVICES TAX ON THE COMPETITIVENESS OF SMALL AND MEDIUM SIZED BUSINESSES IN VICTORIA

INTERIM REPORT

On 29th February 2000, the Victorian Premier issued the Economic Development Committee with a Terms of Reference to inquire into the Impact of the Goods and Services Tax on the Competitiveness of Small and Medium Sized Businesses, with a particular reference to regional Victoria.

In carrying out this Inquiry, the Committee was required to examine the impact of the GST on LPG and petrol prices, electricity prices, compliance costs and the cost of Government services.

The Committee was required to report to Parliament by the first day of the Spring 2000 Parliamentary Session.

The Committee was mindful that such a limited reporting date would allow only a cursory review of the impact of the GST on the Victorian economy. In particular, only limited evidence would be available on the impact of the GST on prices since 1st July. Furthermore, the Committee's Report would be required to be tabled prior to the first installment of the Business Activity Statements in early November.

Despite these limitations, the Committee commenced the Inquiry with the aim of tabling a Report in early September which is historically the time when the Spring Session of Parliament commences.

In view of the earlier than anticipated commencement to the Spring Session, and the fact that Parliament will not be sitting for most of September, the Committee has resolved to table an interim report to meet its reporting obligation to table by the first sitting day of the 2000 Spring Session.

The Committee's Final Report will now be tabled in October 2000.

For the purpose of this interim report, a brief overview of the Committee's activities to date is provided.

The Committee advertised its Terms of Reference in the major daily newspapers in March and wrote to a number of key organisations and individuals seeking written submissions. To date, only 7 written submissions have been received.

In view of the lack of written submissions, the Committee was required to proactively gather evidence through a series of public hearings in Melbourne and regional Victoria (Traralgon, Bendigo and Benalla). Further regional hearings are scheduled to take place in Western and North Western Victoria in early September.











The Committee initially received a number of in-camera briefings from relevant organisations as a means of informing Members of key issues relating to the GST.

The Committee will deliberate on its findings and consider a draft report during September. As previously mentioned, the Final Report will be tabled in the Legislative Council during October 2000.

29th August 2000













Appendix 3Parliamentary Committees Act 1968

VARIATION OF THE TERMS OF REFERENCE AND REPORTING DATE OF THE ECONOMIC DEVELOPMENT COMMITTEE IN RELATION TO THE IMPACT OF THE GOODS AND SERVICES TAX IN VICTORIA

Order in Council

The Governor in Council, under s 39 of the Parliamentary Committees Act 1968 varies the Order in Council dated 29 February 2000 by which matters relating to the impact of the Goods and Services Tax in Victoria were referred to the Economic Development Committee, as follows-

(1) in paragraph a), delete all words after item IV, and insert the following items:

V. the adequacy of the compliance assistance package and ongoing support provided by the Commonwealth government for the new tax system;

VI. the impact on small and medium sized businesses of the new tax system's reporting requirements including the impact of providing the first two Business Activity Statement returns and associated tax payments; and

VII. the cost of Government services.

(2) delete paragraph b), and insert:

b) Report by 30 April 2001.

Dated: 10 October 2000

Responsible Minister:

Steve Bracks

Premier

HELEN DOYLE

Clerk of the Executive Council












Appendix 4List of Written Submissions Received

Submission Number

Name of Individual/Organisation Date Received

1. Ms Nicole Feely

Chief Executive Officer

Victorian Employers' Chamber of Commerce & Industry

29 May 2000

2. Dr John Tamblyn

Regulator-General

Office of the Regulator-General, Victoria

21 June 2000

3. Mr David Hanna

Acting Secretary

Department of State and Regional Development, Victoria

21 July 2000

4. Mr Ken Badenoch

Manager

Hotel, Motel and Accommodation Association

26 July 2000











5. Mr Tim Piper

Executive Director

Australian Retailers Association - Victoria

27 July 2000

6. Mr Brian Welch

Executive Director

Master Builders Association of Victoria

31 July 2000

7. Ms Leanne Hardwicke

Director, Public Policy and Representation

The Institution of Engineers, Australia

31 July 2000

8. Mr Robin Cumming

Chief Financial Officer

Export Finance and Insurance Corporation

20 September 2000

9. Ms Nicole Feely

Chief Executive Officer

Victorian Employers' Chamber of Commerce & Industry

27 September 2000













Appendix 5List of Public Hearings

26th July 2000 (Melbourne)

· Mr Rob Bastian, Council of Small Business Organisations Australia

· Mr Clay Manners, Policy Director & Mr Geoff Crick, Treasurer, Victorian Farmers' Federation

27th July 2000 (Melbourne)

· Mr Tim Piper, Executive Director; Mr Greg Porter, General Manager; and Ms Vicki MacQueen, Marketing Officer, Australian Retailers Association Victoria

· Mr Ian Maloney, General Manager, Elgas Pty Ltd

· Dr David Cousins, Commissioner & Mr Kevin Bain, Industry Analyst, Australian Competition and Consumer Commission

3rd August 2000 (Traralgon)

· Cr Tony Hanning, Mayor & Ms Penny Holloway, Chief Executive Officer, Latrobe City Council

· Mr Chris Buckingham, President, Moe Development Group

· Mr Doug Womersley, Gippsland Regional Manager, Victorian Employers' Chamber of Commerce and Industry

· Mr Peter Beasley, Chairman, Latrobe Regional Chamber of Commerce and Industry

· Mr Des Grigg, Director, G.J. Grigg Accountants

· Mr Stephen Dyt, Partner, W.J. Dyt & Co. Accountants

· Ms Dianne Blackwood, Director, Blackwood Engineering











9th August 2000 (Bendigo)

· Mr Brian Gould, Economic Development Manager & Ms Lilly Miszewski, Business Liaison Manager, City of Greater Bendigo

· Mr Kristian Wenckowski, Proprietor, Colliers Golden Key Bootery

· Mr Rod Burns, Manager, RSM Bird Cameron, Bendigo

· Mr Jim Mason, Secretary, Bendigo Regional Chamber of Commerce

· Mr Bill Jeffrey, Manager, Golden City Mitre 10

· Mr Max Bickford, Farmer

· Mr Steven Bates, Secretary, CPA Australia - Bendigo Branch

· Mr Neil Shearer, Director/Manager, Tidy Pact Pty Ltd

14th August 2000 (Melbourne)

· Dr John Tamblyn, Regulator-General; Ms Kathleen Forrester, Regulatory Analyst & Mr Greg Wilson, Director Price Reviews, Office of the Regulator-General Victoria

· Mr David Cumming, Manager Government Affairs, Royal Automobile Club of Victoria

17th August 2000 (Benalla)

· Cr Ken Whan, Mayor; Mr Robert Dobrzynski, Chief Executive Officer; Mr Graham Nickless, Executive Officer Economic Development and Mr Robert Williams, Retail Enterprise Growth Facilitator, Delatite Shire Council

· Mr Don Maling, Proprietor, Edible Deli, Benalla

· Mr Chris Pretty, Chairman, Action Benalla

· Mr Dennis Scott, Scotty's IGA Supermarket, Benalla

· Ms Kim D'Arma, GST Sign Post Officer, North Eastern Victoria Area Consultative Committee

· Mr Frank Stephens, Director, Rosecity Traveland and Rosecity Lotto, Benalla

· Mr Brendan Smith, Partner, Smith O'Shannesy Accountants, Benalla

21st August 2000 (Melbourne)

· Mr Peter Burn, Assistant Director, Business Council of Australia



· Mr Paul Drum, Senior Tax Consultant & Mr David Boydell, Tax Consultant, CPA Australia; & Mr Ken Claughton, Manager Indirect Tax, Pitcher Partners

· Mr Jim Starkey, Former Executive Director; Mr Bryan Nye, Executive Director; and Mr Tony Cudmore, Assistant Director, Australian Institute of Petroleum

28th August 2000 (Melbourne)

· Mr Brian Welch, Executive Director & Mr Craig Madden, Research Officer, Master Builders Association of Victoria

· Mr Rob Spence, Chief Executive Officer & Ms Sarah Hunt, Senior Policy Adviser, Municipal Association of Victoria

· Mr Ken Mathers, Vice President Policy & Mr James Nicholl, Member, The Institution of Engineers Australia.

18th September 2000 (Warrnambool)

· Cr. David Atkinson, Mayor; Mr Lindsay Merritt, Chief Executive Officer; Mr David Keenan, Director Economic Development & Mr Vaughan Williams, Accountant, Warrnambool City Council

· Mr Gwyn Jones, Integrated Agri-culture Pty Ltd

· Mr James Purcell, Manager Economic Development, Moyne Shire Council

· Mr Michael Gunn, Coffey Hunt & Co. Accountants, Warrnambool

· Mrs Yvonne Bartlett, Owner/Proprietor, BAM Stone Pty Ltd, Port Fairy

· Mr Miles Coverdale, Westvic Group Training

· Ms Janet Clark, Accountant, Warrnambool Co-operative Society

· Mr Michael Boyd, Sinclair Wilson Accountants

· Mr Alex Egan, Finance Manager, Midfield Meats International, Warrnambool

· Mr Erin O'Brien, Mr Mitch Preston & Mr Darren Harris, Warrnambool Business Action

19th September 2000 (Horsham)

· Cr Bernard Gross, Mayor; Mr Kerryn Shade, Chief Executive Officer and Cr G. Crooke, Horsham Rural City Council

· Ms Jo Bourke, Project Manager, Wimmera Development Organisation

· Ms Angela Feery-Richards, Priority Works Services

· Mr Chris Foster, Green Taylor Accountants, Horsham



· Mr Gil Fryatt, Secretary, Victorian Farmers' Federation, Wimmera District

· Mr Rob Gersch, Proprietor, Zero Inn Motel/Restaurant, Nhill

· Mr Roy Henwood, Manager, Wimmera Business Centre

· Ms M. Pollock, Secretary, Horsham Traders Group













IntroductionFuel Excise IndexationRegional Victorian Petrol Prices before the NTSRegional Victorian Petrol Prices after the NTSInterpretation of Attachment

Attachment A - Detailed NTS EffectsIntroductionA.1. NTS Effects on Yarra Valley Petrol PricesA.2. NTS Effects on Albury-Wodonga Petrol PricesA.3. NTS Effects on South Gippsland Petrol PricesA.4. NTS Effects on Shepparton Petrol PricesA.5. NTS Effects on Sale Petrol PricesA.6. NTS Effects on La Trobe Valley Petrol PricesA.7. NTS Effects on Echuca Petrol PricesA.8. NTS Effects on Geelong Petrol PricesA.9. NTS Effects on Warrnambool Petrol PricesA.10. NTS Effects on Ballarat Petrol PricesA.11. NTS Effects on Woodend Petrol PricesA.12. NTS Effects on Bendigo Petrol PricesA.13. NTS Effects on Swan Hill Petrol PricesA.14. NTS Effects on Mildura Petrol Prices

Appendix 6THE EFFECTS OF THE NEW TAX SYSTEM (NTS) ON REGIONAL

VICTORIAN PETROL PRICES

This report for the Economic Development Committee

was prepared by Econtech Pty Ltd

6 September 2000

This work has been produced for the Economic Development Committee according to strict instructions. Econtech makes no representations to, and accepts no liability for, reliance on this work by any person or organisation other than the Economic Development Committee. Any person, other than the Economic Development Committee who uses this work does so at their own risk and agrees to indemnify Econtech for any loss or damage arising from such use.

Econtech

P.O. Box 4129

KINGSTON ACT 2604

Phone: (02) 6295-0527

Fax: (02) 6295-8513











E-mail: [email protected]

IntroductionUnder the New Tax System (NTS) it was stated that "at the time of the introduction of the GST, the government will reduce excises on petrol and diesel so the pump prices of these commodities for consumers need not rise" (p. 86). On 22 June 2000 the Government announced that the petrol and diesel fuel excise cuts would be 6.7 cents per litre.

In bringing in the New Tax System, the Commonwealth Government also introduced the Fuel Sales Grants Scheme to complement the overall cut in fuel excise across Australia. The scheme is designed so that, taken with the excise cut, the price of petrol and diesel need not rise as a result of the GST. Fuel retailers are required to pass on to consumers the full benefits of the Fuel Sales Grants Scheme. All of regional Victoria is eligible for a 1 cent per litre grant.

The analysis was conducted using Econtech's Murphy Model 600 Plus (MM600+), a long-term computable general equilibrium (CGE) model of the Australian economy. MM600+ not only provides estimates of long-term savings in the oil industry, but also gives estimates of savings for the introduction year of the NTS, the 2000/01 financial year. This is important because savings are generally lower in 2000/01 than in the long-term.

The cost savings in the oil industry vary from town to town. This is the result different wholesale, retail and transport margins for each town. Transport margins depend on the closeness of the town to the petrol refinery, with Geelong having the lowest transport margins of all regional Victoria.

Fuel Excise IndexationThe fuel excise rate was automatically adjusted on 1 August 2000 for the March and June quarter inflation estimates. The adjustment added 0.64 cents per litre to the price of petrol and 0.7 cents per litre with GST, based on cumulative inflation of 1.7 per cent for the March and June quarters. This increase is not the result of the NTS and hence it has been excluded from the calculations.

The NTS will add to the pump price in February 2001. These second round price effects are the result of the fuel excise rate being automatically adjusted for the movement in the CPI (September and December quarter inflation estimates), which itself will be inflated by the NTS. The second round price effects are included in the calculations.

Regional Victorian Petrol Prices before the NTSThis section outlines the average petrol price of 14 regional Victorian sites in the month leading up to the introduction of the NTS. The regional sites include the Yarra Valley, Albury-Wodonga, South Gippsland, Shepparton, Sale, La Trobe Valley, Echuca, Geelong, Warrnambool, Ballarat, Woodend, Bendigo, Swan Hill and Mildura.

The average June price of petrol for the 14 regional Victorian sites was 90.9 cents per litre. Of these sites, the lowest monthly average price of 85.0 cents per litre was recorded in Geelong, while Mildura had the highest average June price of 95.6 cents per litre. The average metropolitan Melbourne petrol price for the corresponding period was 84.6 cents per litre.

Taking Geelong as an example, the RACV reported that the average June pump price of petrol was 85.0 cents per litre. The petrol excise, which was set at 43.7 cents per litre in June 2000 accounts for over half of this price. Of the remaining 41.3 cents per litre, the majority is accounted for by the crude oil component.

In estimating the crude oil component of the June Geelong pump price of petrol, a small delay has been allowed for the pass through of changes in world oil prices to local pump prices. Specifically, we have used the average price for West Texas Intermediate Crude in the four weeks to mid June of US$30.25 per barrel. Using an average exchange rate for the same period of $0.5832 gives an average cost of crude oil of A$51.84 per barrel. Converting this to cents per litre (using 159 litres/barrel) gives an average crude oil cost of 32.6 cents per litre.

Only the remaining 8.7 cents per litre represents costs in the local oil industry. These are allocated between refining, wholesale, transport and retail margins using the RACV/Shell Fuel Watch information published in the July edition of the RoyalAuto.


mailto:[email protected]


Regional Victorian Petrol Prices after the NTSThis section outlines the movement in petrol prices discussed above in reaction to the NTS. The calculations only include the NTS effects on each cost component of petrol. Table 1.1 below outlines the effect of the NTS on each country Victorian site. Please refer to Attachment A for a more detailed examination of the NTS effects for each regional site.

Table 1.1

NTS Effects on Regional Victorian Petrol Prices

Strike Price 2000/01 NTS Effect

2000/01 Consumer

Price

Long-Term NTS Effect

Long-Term Consumer

Price

Yarra Valley 86.8 -0.2 86.6 -0.7 86.1

Albury-Wodonga 89.9 0.1 90.0 -0.6 89.3

South Gippsland 90.4 0.1 90.5 -0.5 89.9

Shepparton 91.3 0.2 91.5 -0.5 90.8

Sale 93.7 0.4 94.1 -0.4 93.3

La Trobe Valley 94.6 0.5 95.1 -0.3 94.3

Echuca 94.9 0.5 95.4 -0.3 94.6

Geelong 85.0 -0.3 84.7 -0.8 84.2

Warrnambool 86.0 -0.2 85.8 -0.8 85.2

Ballarat 88.6 0.0 88.6 -0.6 88.0

Woodend 91.3 0.2 91.5 -0.5 90.8

Bendigo 89.6 0.1 89.7 -0.6 89.0

Swan Hill 94.5 0.5 95.0 -0.3 94.2

Mildura 95.6 0.5 96.1 -0.3 95.3

Average 90.9 0.2 91.1 -0.5 90.4

Table 1.1 shows that under the excise cut of 6.7 cents per litre and combined with the Fuel Sales Grant Scheme announced by the government, the average price of petrol at the 14 regional sites is expected to increase by 0.2 cents per litre to 91.1 cents per litre as a result of the NTS.

Of the 14 regional sites, the NTS added the most cents per litre to the price of petrol in Mildura, with a price



increase of 0.5 cents per litre to 96.1 cents per litre. The price of petrol in Geelong fell the most as a result of NTS factors, with an estimated price fall of 0.3 cents per litre to 84.7 cents per litre.

The difference is the result of a lesser GST effect on the petrol price for Geelong compared to Mildura. The GST on petrol in Geelong is calculated on a lower base price than the GST on petrol in Mildura. Thus the 10 per cent GST added 7.7 cents per litre to the Geelong price compared to 8.7 cents per litre for Mildura. While the GST increase varies from town to town, the same excise reduction is applied to petrol prices of all Victorian country towns.

Interpretation of AttachmentThe following attachment contains the movement of petrol prices for each regional site shown in Table 1.1 above to the NTS effects. The chart and table in this section for Mildura serve as an interpretation tool for the accompanying attachment.

Chart 1.1 shows the NTS effects on the price of petrol in Mildura under the 6.7 cents per litre fuel excise cut. The chart shows the movement of petrol prices from 2000/01 to the long-term, relative to the June 2000 strike (base) price.

Table 1.2 outlines the 2000/01 and long-term NTS effects on each cost component of the Mildura petrol price.

Chart 1.1

NTS Effects on Mildura Petrol Prices (cents/litre)

As shown in Chart 1.1 above, the NTS initially added 0.5 cents per litre to the price of petrol in Mildura. The increase in price to 96.1 cents per litre is the result of the 10 per cent GST outweighing the petrol cost savings and reduction in fuel excise. As explained above and shown in Table 1.2 below, the GST added 8.7 cents per litre to price of petrol in Mildura whereas the fall in petrol excise and petrol supply cost savings only total 8.2 cents per litre.

The further rise in price from 96.1 cents per litre to 96.9 cents per litre is the result of the contribution of the NTS to automatic adjustment of excise rates for the movement in the CPI. This second round NTS effect adds 3.2 per cent to excise rates in 2000/01. This adjustment reduces the effective excise cut from the original 6.7 cents per litre to 5.6 cents per litre.

The gradual fall in petrol prices from mid-2001 reflects the diminishing contribution of the NTS to the CPI, and increased petrol supply cost savings.

The NTS effect on the CPI is reduced as long-term capital cost savings flow through. While initially the NTS adds 3.2 per cent to the CPI and, through automatic indexation, to excise rates, this reduces to 1.4 per cent in the long-term. This rebuilds the petrol excise cut due to the NTS from 5.6 cents to 6.0 cents per litre.



Furthermore, petrol supply cost savings will increase from 0.5 cents per litre in 2000/01 to 1.9 cents per litre in the long-term. The main contributor to the increase in savings is the fall in the cost of crude oil resulting from NTS effects. Econtech's MM600+ model estimates that the NTS will add 3.3 per cent to the value of the Australian dollar in the long-term, which reduces the price of crude oil when, expressed in Australian dollars. This equates to a 1.0 cent per litre fall in the local price of crude oil, as shown in Table 1.2 below.

Table 1.2NTS Effects on each Cost Component of Mildura Petrol Prices

Before 2000/01 2000/01 Long-term Long-term

2000/01 (c/l) Change (c/l) Change (%) Change (c/l) Change (%)

Crude Oil 32.6 -0.2 -0.6% -1.0 -3.2%

Refining Margin 4.3 0.0 -1.0% -0.3 -5.9%

Wholesale Margin 3.3 -0.1 -1.6% -0.1 -4.2%

Transport Margin 2.6 -0.1 -4.6% -0.2 -7.1%

Retail Margin 9.1 -0.1 -1.4% -0.3 -3.4%

Fuel Sales Grant 0.0 -1.0 na -1.0 na

Net Excise 43.7 -6.7 -15.2% -6.0 -13.7%

GST 0.0 8.7 na 8.7 na

Consumer Price 95.6 0.5 0.6% -0.3 -0.3%

Attachment A - Detailed NTS Effects

IntroductionThis attachment contains details of the NTS effects on each country Victorian petrol site. The NTS effects on the price of petrol in 14 regional sites were calculated using the average June 2000 price as the strike price.

Charts A.1 to A.14 show the NTS effects on the petrol prices of 14 different regional Victorian on the movement of petrol prices from 2000/01 to the long-term, relative to the June 2000 strike (base) price.

This takes into account the following:

_ the introduction of GST of 10 per cent;

_ the associated cut in petrol excise of 6.7 cents per litre;

_ the Fuel Sales Grants Scheme subsidy in regional Victoria of 1.0 cents per litre;

_ the likely time path of cost savings in petrol supply as a result of the NTS; and



_ the time path of the second round effect of the NTS on petrol excise rates via automatic CPI indexation.

Tables A.1 to A.14 outline the 2000/01 and long-term NTS effects on each cost component of the petrol price of each regional site, taking account of all of the above factors.

A.1. NTS Effects on Yarra Valley Petrol PricesChart A.1

NTS Effects on Yarra Valley Petrol Prices (cents/litre)

Table A.1

NTS Effects on each Cost Component of Yarra Valley Petrol Prices



Crude Oil 32.6 -0.2 -0.6% -1.0 -3.2%

Refining Margin 4.3 0.0 -1.0% -0.3 -5.9%

Wholesale Margin 0.1 0.0 -1.6% 0.0 -4.2%


Retail Margin 4.5 -0.1 -1.4% -0.2 -3.4%

Fuel Sales Grant 0.0 -1.0 -4.6% -1.0 na

Net Excise 43.7 -6.7 -15.2% -6.0 -13.7%

GST 0.0 7.9 na 7.8 na



Consumer Price 86.8 -0.2 -0.2% -0.7 -0.9%

A.2. NTS Effects on Albury-Wodonga Petrol PricesChart A.2

NTS Effects on Albury-Wodonga Petrol Prices (cents/litre)

Table A.2

NTS Effects on each Cost Component of Albury-Wodonga Petrol Prices



Crude Oil 32.6 -0.2 -0.6% -1.0 -3.2%

Refining Margin 4.3 0.0 -1.0% -0.3 -5.9%

Wholesale Margin 2.9 0.0 -1.6% -0.1 -4.2%


Retail Margin 4.8 -0.1 -1.4% -0.2 -3.4%


Net Excise 43.7 -6.7 -15.2% -6.0 -13.7%



GST 0.0 8.2 na 8.1 na

Consumer Price 89.9 0.1 0.1% -0.6 -0.6%

A.3. NTS Effects on South Gippsland Petrol PricesChart A.3

NTS Effects on South Gippsland Petrol Prices (cents/litre)

Table A.3

NTS Effects on each Cost Component of South Gippsland Petrol Prices



Crude Oil 32.6 -0.2 -0.6% -1.0 -3.2%

Refining Margin 4.3 0.0 -1.0% -0.3 -5.9%



Retail Margin 6.5 -0.1 -1.4% -0.2 -3.4%


Net Excise 43.7 -6.7 -15.2% -6.0 -13.7%



GST 0.0 8.2 na 8.2 na

Consumer Price 90.4 0.1 0.1% -0.5 -0.6%

A.4. NTS Effects on Shepparton Petrol PricesChart A.4

NTS Effects on Shepparton Petrol Prices (cents/litre)

Table A.4

NTS Effects on each Cost Component of Shepparton Petrol Prices



Crude Oil 32.6 -0.2 -0.6% -1.0 -3.2%

Refining Margin 4.3 0.0 -1.0% -0.3 -5.9%



Retail Margin 6.6 -0.1 -1.4% -0.2 -3.4%




Net Excise 43.7 -6.7 -15.2% -6.0 -13.7%

GST 0.0 8.3 na 8.3 na

Consumer Price 91.3 0.2 0.2% -0.5 -0.5%

A.5. NTS Effects on Sale Petrol PricesChart A.5

NTS Effects on Sale Petrol Prices (cents/litre)

Table A.5

NTS Effects on each Cost Component of Sale Petrol Prices



Crude Oil 32.6 -0.2 -0.6% -1.0 -3.2%

Refining Margin 4.3 0.0 -1.0% -0.3 -5.9%



Retail Margin 7.3 -0.1 -1.4% -0.2 -3.4%




Net Excise 43.7 -6.7 -15.2% -6.0 -13.7%

GST 0.0 8.6 na 8.5 na

Consumer Price 93.7 0.4 0.4% -0.4 -0.4%

A.6. NTS Effects on La Trobe Valley Petrol PricesChart A.6

NTS Effects on La Trobe Valley Petrol Prices (cents/litre)

Table A.6

NTS Effects on each Cost Component of La Trobe Valley Petrol Prices



Crude Oil 32.6 -0.2 -0.6% -1.0 -3.2%

Refining Margin 4.3 0.0 -1.0% -0.3 -5.9%





Retail Margin 7.8 -0.1 -1.4% -0.3 -3.4%


Net Excise 43.7 -6.7 -15.2% -6.0 -13.7%

GST 0.0 8.6 na 8.6 na

Consumer Price 94.6 0.5 0.5% -0.3 -0.3%

A.7. NTS Effects on Echuca Petrol PricesChart A.7

NTS Effects on Echuca Petrol Prices (cents/litre)

Table A.7

NTS Effects on each Cost Component of Echuca Petrol Prices



Crude Oil 32.6 -0.2 -0.6% -1.0 -3.2%

Refining Margin 4.3 0.0 -1.0% -0.3 -5.9%





Retail Margin 8.0 -0.1 -1.4% -0.3 -3.4%


Net Excise 43.7 -6.7 -15.2% -6.0 -13.7%

GST 0.0 8.7 na 8.6 na

Consumer Price 94.9 0.5 0.5% -0.3 -0.3%

A.8. NTS Effects on Geelong Petrol PricesChart A.8

NTS Effects on Geelong Petrol Prices (cents/litre)

Table A.8

NTS Effects on each Cost Component of Geelong Petrol Prices



Crude Oil 30.0 -0.2 -0.6% -1.0 -3.2%

Refining Margin 6.1 -0.1 -1.0% -0.4 -5.9%



Wholesale Margin -2.1 0.0 -1.6% 0.1 -4.2%

Transport Margin 0.5 0.0 -4.6% 0.0 -7.1%

Retail Margin 4.3 -0.1 -1.4% -0.1 -3.4%


Net Excise 43.7 -6.7 -15.2% -6.0 -13.7%

GST 0.0 7.5 na 7.4 na

Consumer Price 82.5 -0.5 -0.6% -1.0 -1.2%

A.9. NTS Effects on Warrnambool Petrol PricesChart A.9

NTS Effects on Warrnambool Petrol Prices (cents/litre)

Table A.9

NTS Effects on each Cost Component of Warrnambool Petrol Prices



Crude Oil 30.0 -0.2 -0.6% -1.0 -3.2%



Refining Margin 6.1 -0.1 -1.0% -0.4 -5.9%



Retail Margin 4.3 -0.1 -1.4% -0.1 -3.4%


Net Excise 43.7 -6.7 -15.2% -6.0 -13.7%

GST 0.0 7.5 na 7.5 na

Consumer Price 83.0 -0.5 -0.6% -1.0 -1.2%

A.10. NTS Effects on Ballarat Petrol PricesChart A.10

NTS Effects on Ballarat Petrol Prices (cents/litre)

Table A.10

NTS Effects on each Cost Component of Ballarat Petrol Prices





Crude Oil 30.0 -0.2 -0.6% -1.0 -3.2%

Refining Margin 6.1 -0.1 -1.0% -0.4 -5.9%


Transport Margin 0.8 0.0 -4.6% -0.1 -7.1%

Retail Margin 4.3 -0.1 -1.4% -0.1 -3.4%


Net Excise 43.7 -6.7 -15.2% -6.0 -13.7%

GST 0.0 7.6 na 7.5 na

Consumer Price 83.5 -0.4 -0.5% -1.0 -1.2%

A.11. NTS Effects on Woodend Petrol PricesChart A.11

NTS Effects on Woodend Petrol Prices (cents/litre)

Table A.11

NTS Effects on each Cost Component of Woodend Petrol Prices





Crude Oil 30.0 -0.2 -0.6% -1.0 -3.2%

Refining Margin 6.1 -0.1 -1.0% -0.4 -5.9%



Retail Margin 5.9 -0.1 -1.4% -0.2 -3.4%


Net Excise 43.7 -6.7 -15.2% -6.0 -13.7%

GST 0.0 8.0 na 8.0 na

Consumer Price 88.5 0.0 0.0% -0.7 -0.8%

A.12. NTS Effects on Bendigo Petrol PricesChart A.12

NTS Effects on Bendigo Petrol Prices (cents/litre)

Table A.12

NTS Effects on each Cost Component of Bendigo Petrol Prices





Crude Oil 30.0 -0.2 -0.6% -1.0 -3.2%

Refining Margin 6.1 -0.1 -1.0% -0.4 -5.9%



Retail Margin 5.9 -0.1 -1.4% -0.2 -3.4%


Net Excise 43.7 -6.7 -15.2% -6.0 -13.7%

GST 0.0 8.2 na 8.1 na

Consumer Price 89.7 0.1 0.1% -0.6 -0.7%

A.13. NTS Effects on Swan Hill Petrol PricesChart A.13

NTS Effects on Swan Hill Petrol Prices (cents/litre)

Table A.13



NTS Effects on each Cost Component of Swan Hill Petrol Prices



Crude Oil 30.0 -0.2 -0.6% -1.0 -3.2%

Refining Margin 6.1 -0.1 -1.0% -0.4 -5.9%



Retail Margin 7.0 -0.1 -1.4% -0.2 -3.4%


Net Excise 43.7 -6.7 -15.2% -6.0 -13.7%

GST 0.0 8.4 na 8.3 na

Consumer Price 92.1 0.2 0.3% -0.5 -0.6%

A.14. NTS Effects on Mildura Petrol PricesChart A.14

NTS Effects on Mildura Petrol Prices (cents/litre)



Table A.14

NTS Effects on each Cost Component of Mildura Petrol Prices



Crude Oil 30.0 -0.2 -0.6% -1.0 -3.2%

Refining Margin 6.1 -0.1 -1.0% -0.4 -5.9%



Retail Margin 7.5 -0.1 -1.4% -0.3 -3.4%


Net Excise 43.7 -6.7 -15.2% -6.0 -13.7%

GST 0.0 8.5 na 8.4 na

Consumer Price 93.2 0.3 0.4% -0.5 -0.5%













Appendix 7

VECCI SURVEY

IMPACT OF THE GST ON VICTORIAN BUSINESS

- September 2000 -

1 BACKGROUND 2142 SURVEY METHODOLOGY 2143 PROFILE OF SURVEY RESPONDENTS 214

Figure 1: Survey Respondents by Industry 214

4 MAIN RESULTS 215

4.1 Current Impact of the GST on Business Costs 2154.2 Expected Impact of the GST on Business Costs Over the Next Twelve Months 216

5 GST COMPLIANCE COSTS 216

Table 1 - GST Compliance Burden by Business Size 216Table 2 - GST Compliance Burden by Industry 217Table 3 - GST Compliance Burden - Estimated Dollar and Time Costs by Business Size 217Table 4 - GST Compliance Burden - Estimated Dollar and Time Costs by Industry 218











6 IMPACT OF THE GST ON BUSINESS COMPETITIVENESS 219

Table 5 - Business Competitiveness and the GST, by Business Size 219Table 6 - Business Competitiveness and the GST, by Industry 219

7 IMPACT OF THE GST ON BUSINESS MANAGEMENT 220

Table 7 - Impact of GST on Business Management 220Table 8 - Impact of the GST on Business Management 220Table 9 - Impact of the GST on Business Management 221Table 10 - Impact of the GST on Business Management 221

8 CONCLUSION 222

BackgroundIn July 2000, VECCI undertook a special survey of members as part of our input to the Victorian Parliament Economic Development Committee Inquiry into the Impact of the Goods and Service Tax (GST) on Victorian Business.

The Survey was undertaken to ascertain 1) the initial impact of the GST on business performance over the first few weeks of its implementation and 2) the expected impact of the GST on business costs and competitiveness over the next twelve months.

As the survey was undertaken between 10 July - 24 July 2000, soon after the implementation of the GST on 1 July 2000, the results represent only an initial "snapshot " of the reaction of business to the GST. Any further interpretation of the results should therefore be viewed with caution.

Survey MethodologyThe Survey was carried out over a two-week period from 10 July - 24 July 2000. A survey questionnaire was mailed out to a stratified sample of 750 businesses throughout Victoria and formed the main data collection method. To encourage responses, a reply-paid envelope was included in the mailout. Target respondents were drawn from small, medium and large-sized establishments which constitute VECCI's membership.

In all, a total of 130 responses were received, representing a response rate of 17 per cent.

Profile of Survey RespondentsFigure 1 provides a breakdown of respondents by industry.



Figure 1: Survey Respondents by Industry

As can be seen by Figure 1, survey responses were derived from a wide range of industries with the highest concentration of respondents coming from the retail/wholesale sector, with 23% of total responses, and the education/health industry, which also accounted for 23% of total responses. The response rate of businesses in the mining and government administration sectors were too low to provide a valid interpretation of survey data. Accordingly, these industries have been omitted from the industry-specific analysis of survey results.

The overwhelming majority of survey respondents (54%) were small-sized businesses with fewer than 20 employees. Medium-sized firms with 20-99 employees made up 30% of respondents and large-sized firms with 100 or more employees made up 16% of respondents.



In all, 63% of respondents were located in the metropolitan area and 37% in the non-metropolitan area.

Main Results1.1 Current Impact of the GST on Business Costs

Surveyed businesses were asked to indicate what impact the GST has had on a range of business costs since its introduction on 1 July 2000. However, as the survey was undertaken in mid-July, it was clear from the high non-response rate to this section of the questionnaire that many in business were not in a position to accurately report on the actual impact of the GST on the business costs in question.

Given this difficulty, it was not possible to collect and analyse any meaningful data on the individual business cost areas under review.

VECCI hopes to conduct a more effective survey about the effect of the GST on business input costs at a later stage.

4.2 Expected Impact of the GST on Business Costs Over the Next Twelve Months

Surveyed businesses were also asked to indicate what impact - if any - they considered the operation of the GST would have on a range of business costs over the next twelve months.

However, as the survey was undertaken in mid-July, it was clear from the high non-response rate to this section of the questionnaire that many in business were not in a position to accurately report on the projected impact of the GST on business costs.

Given this difficulty, it was also not possible to collect and analyse any meaningful data on the individual business cost areas under review.

GST Compliance CostsSurveyed businesses were asked to indicate the compliance burden their businesses had experienced in meeting GST obligations in the lead up to 1 July 2000. The results to this question are summarised as follows:

Table 1 - GST Compliance Burden by Business Size



Business Size

Proportion of Respondents Reporting (%)

Significant Burden Moderate Burden Negligible Burden

Small

(0-19 employees)46 33 20

Medium

(20-99 employees)37 58 5

Large

(100+ employees)32 59 9

TOTAL

(All Businesses)41 45 14

A compliance burden associated with the transition to the GST was evident across all categories of business size, with 41% of all respondents rating it as a significant burden and 45% a moderate burden. In terms of GST compliance requirements being considered a "significant burden", this rating was ranked highest among small businesses (46%) and lowest among large businesses (32%). Only 1% of respondents indicated that they experienced no compliance burden in preparing their business for the GST.

Table 2 - GST Compliance Burden by Industry

Industry Proportion of Respondents %

Significant

Burden

Moderate Burden

Negligible Burden

Manufacturing 50 36 14

Building/Construction 33 33 33

Transport/Storage 67 33 0

Retail/Wholesale 37 46 17



Finance/Property/Business Services 39 46 15

Education/Health and Community Services 37 60 3

Entertainment/Recreation/

Restaurants/Personal Services0 50 33

Other 55 27 18

A significant compliance burden associated with the transition to the GST was reported by a sizeable number of respondents in the transport/storage and manufacturing sectors, where it was rated a "significant burden" by 67% and 50% of respondents respectively.

Surveyed businesses were also asked to provide an estimate of the overall time and dollar costs their business has incurred in the twelve months to 1 July 2000 in order to meet their GST administration requirements.

Table 3 - GST Compliance Burden - Estimated Dollar and Time Costs by Business Size

Business Size

Average

Compliance

Cost

($)

Average

Compliance

Cost

(Hours)

Small

(0-19 employees)6,814 142

Medium

(20-99 employees)19,305 342

Large

(100+ employees)56,075 806

TOTAL

(All Businesses)19,286 311

Table 7 shows that surveyed businesses (small, medium and large) spent on average $19,286 and dedicated 311 working hours to meet their GST obligations in the twelve month lead-up to the implementation of the GST. The median figures were $5,000 and 100 hours.

This is much higher than predicted in previous VECCI surveys and compares with estimated total averages of $3,800 and 82 working hours recorded in the Special Questions on GST Compliance Costs included in the



September Quarter 1999 VECCI Business Trends and Prospects Survey.

_ The average per annum compliance cost for small business was $6,814 and 142 hours; $19,305 and 342 hours for medium-sized businesses and $56,075 and 806 hours for large businesses.

Table 4 - GST Compliance Burden - Estimated Dollar and Time Costs by Industry

Industry

Average Compliance Cost

($)

Average Compliance Cost

(Hours)

Manufacturing 6,154 177

Building/Construction 7,100 294

Transport/Storage 12,275 193

Retail/Wholesale 17,881 371

Finance/Property/Business Services 10,066 186

Education/Health and Community Services 14,215 350

Entertainment/Recreation/Restaurants/Personal Services 1,960 58

The average dollar cost compliance burden of the transition to GST was highest for the following sectors: retail/wholesale trade ($17,881), education, health and community services ($14,215), and transport and storage ($12,275). The average cost compliance burden associated with the transition to the GST was comparatively lower for the following sectors: entertainment, recreation, restaurants and personal services ($1,960) and manufacturing ($6,154).

Impact of the GST on Business Competitiveness

Surveyed firms were asked to indicate how they believe the GST had affected the competitiveness of their business in its initial period of operation. The results to this question are outlined as follows.

Table 5 - Business Competitiveness and the GST, by Business Size

Business Size Increased Competitiveness No Change Reduced

Competitiveness

Small

(0-19 employees)18 66 16



Medium

(20-99 employees)3 92 5

Large

(100+ employees)0 100 0

TOTAL

(All Businesses)10 80 10

The responses of surveyed firms suggest that in two week period in July when they were surveyed, the GST overall was perceived as having had a neutral effect on business competitiveness. If anything, small business owners viewed the GST as having increased firm competitiveness slightly, while medium-sized businesses considered the GST as having reduced firm competitiveness slightly. Large businesses perceive the initial introduction of the GST as having had a neutral effect on enterprise competitiveness.

Table 6 - Business Competitiveness and the GST, by Industry

Industry Increased Competitiveness No Change Reduced

Competitiveness

Manufacturing 14 79 7

Building/Construction 0 100 0

Transport/Storage 0 83 17

Retail/Wholesale 14 75 11

Finance/Property/Business Services 8 92 0

Education/Health and Community Services 0 90 10

Entertainment/Recreation/Restaurants/

Personal Services33 67 0

Other 18 59 23

Those industries that envisaged an increase in competitiveness arising from the implementation of the GST, included: entertainment, recreation and personal services (33%), manufacturing (14%), retail/wholesale (14%) and finance, property and business services (8%).

Those industries perceiving a reduction in competitiveness included: transport and storage (17%), retail/wholesale (11%) and education, health and community services (10%).



Impact of the GST on Business ManagementSurveyed businesses were asked to indicate whether the initial impact of the GST and associated tax reforms had made their business easier to manage.

Table 7 - Impact of GST on Business Management

"My Business Is Easier To Manage", by Business Size

Business Size

Proportion of Respondents (%)

Strongly Agree Agree

Neither Agree nor Disagree

DisagreeStrongly

Disagree

Small

(0-19 employees)3 7 29 28 32

Medium

(20-99 employees)0 11 42 39 8

Large

(100+ employees)0 9 27 41 23

TOTAL

(All Businesses)2 9 33 34 23

As can be seen by Table 11, when surveyed in mid-July, businesses indicated that they considered the initial implementation of the GST had not made their business easier to manage. Most of the balance of respondents perceived a neutral effect. Small business felt this most keenly with 32% of respondents strongly disagreeing with the notion that the GST and associated tax reforms have made their businesses easier to manage.

Table 8 - Impact of the GST on Business Management

"My Business Is Easier To Manage", by Industry

Industry Strongly Agree Agree


DisagreeStrongly

Disagree

Manufacturing 7 14 36 29 14



Building/Construction 0 33 33 33 0

Retail/Wholesale 0 21 31 24 24

Transport/Storage 0 0 20 80 0

Finance/Property/Business Services 0 0 39 46 15

Education/Health and

Community Services0 0 23 37 40


Restaurants/Personal Services0 0 33 50 17

Other 5 5 45 27 18

On a sectoral basis, most surveyed businesses believe the initial implementation of the GST has not made their business easier to manage. The balance of respondents largely perceived a neutral effect.

Surveyed businesses were asked whether they believe the GST will eventually make their business easier to manage over time. The results are shown as follows:


"My Business Will Be Easier To Manage Over Time", by Business Size

Business Size

Proportion of Respondents (%)

Strongly Agree Agree


DisagreeStrongly

Disagree

Small

(0-19 employees)12 56 16 10 6

Medium

(20-99 employees)3 74 13 8 3



Large

(100+ employees)14 73 9 4 0

TOTAL

(All Businesses)9 64 14 9 4

Surveyed businesses (especially those in the medium-to-large category) overwhelmingly consider the GST will make their business easier to manage as time goes on.

71% of all surveyed businesses "agreed" or "strongly agreed" with this notion, as did 87% of large businesses, 77% of medium-sized businesses and 68% of small businesses.


"My Business Will Be Easier to Manage Over Time", by Industry

Industry Strongly Agree Agree

Neither Agree

nor Disagree

DisagreeStrongly

Disagree

Manufacturing 21 71 0 7 0

Building/Construction 17 67 0 16 0

Transport/Storage 0 67 33 0 0

Retail/Wholesale 13 53 27 0 7

Finance/Property/Business Services 0 77 8 15 0

Education/Health and

Community Services0 70 13 17 0


Restaurants/Personal Services0 83 17 0 0

Other 19 52 9 10 10

Most surveyed industries overwhelmingly consider the operation of the GST will make their business easier to manage over time.

92% of surveyed manufacturing businesses "agreed" or "strongly agreed" with this notion, as did 84% of building and construction businesses, 83% of entertainment/recreation/restaurants and personal services businesses, 77%



of finance and property services businesses, and 70% of education/health and community services businesses.

ConclusionIn short, this survey provides mixed results as to the initial impact of GST.

Respondents generally perceived business costs as having initially risen or stayed the same as a result of the introduction of the GST on 1 July 2000 (most surveys were filled in during mid-July).

However, clear conclusions as to the likely longer-term effects of the impact of the GST on business costs cannot be drawn from the results of the survey.

Across all sectors and firm sizes, the average compliance burden per business in meeting their GST obligations over the past year was, in terms of dollars, $19,286, and in terms of time, 311 hours, although the median costs were, in terms of dollars, $5,000, and in terms of time, 100 hours, notably lower. The average cost for small businesses was $6,814 and 142 hours, for medium-sized businesses $19,305 and 342 hours and for large businesses $56,075 and 806 hours.

However, at the time of the survey, most businesses did not believe that the GST had either increased or reduced competitiveness. 10% saw the GST as "increasing competitiveness", 10% as "reducing competitiveness" and 80% as "no change". This trend was roughly approximated across all business sizes and types.

While most businesses reported that the initial introduction of the GST had not made their businesses easier to manage, they overwhelmingly perceive that the GST would assist in making their businesses easier to manage as time goes on.











http://www.parliament.vic.gov.au/edevc/inquiries/GST/Report%20One-17.htm


Minority ReportIn response to the Economic Development Committee's Report No.1 into the Impact of the Goods and Services Tax on Small and Medium Sized Businesses in Victoria.

by

Hon. Theo Theophanous, M.L.C

Pursuant to Section 4N (4) of the Parliamentary Committees Act 1968

Minority Report

This minority report details some of the concerns of Government members of the Economic Development Committee. The decision to submit it came after considerable deliberation and in the hope that it will add to a strengthening of the Committee system.

The Economic Development Committee is the first exclusively Upper House Investigatory committee established by the Parliament. It is important to note that the Opposition controls the Committee as there are three Government and four Opposition members on the Committee and the Chair is a member of the Opposition.

It is also important to note that following considerable debate and many modifications to initial proposals the Committee agreed to include in its report a number of key findings which arose out of the evidence. In summary these included the following. That: -

The "perceived negative effect on profitability of GST compliance costs may have contributed to the closure of some businesses" and that "the extent of 'black market' transactions involving consumers is likely to increase".

"On average" GST compliance costs were approximately $6,000 for small businesses and $19,000 for medium businesses, and that as a result "the Commonwealth Governments $200 voucher assistance package for GST implementation was totally inadequate." Moreover, "all businesses will incur ongoing compliance costs" and these "may affect some businesses competitiveness or profitability"

The "impact of the GST on petrol prices has been higher than expected" and "some regional locations are paying higher amounts of GST on petrol as a result of higher base prices." This was also true for LPG and meant that "some regional Victorian locations will pay a higher amount of GST [on LPG] than metropolitan motorists". Significantly, "Victoria will be hardest hit by the GST LPG price rise in view of the fact that approximately half of Australia's LPG-converted vehicles are registered in the State."

There were significant increases in electricity prices of "between 9.85 per cent and 9.91 per cent depending on each









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http://www.parliament.vic.gov.au/edevc/inquiries/GST/Report%20One-17.htm

electricity distribution area" while in the contestable market "the [GST] difference for a large customer using 450,000 kWh could be as high as $1,380 per annum." (Differentials are also likely to occur for medium and small customers when price regulation ceases but despite evidence the Opposition was not prepared to concede this point.)

"Gas prices for small and medium business accounts will increase by between 9.86 per cent to 10.00 percent" and "on average this would equate to an annual increase of $234 to $237 for small business [and] $3,326 to $3,373 for medium business"

Generally, it can be said that the Committee found that the impact of the GST was more severe on small businesses and on rural Victoria across a whole range of indicators. Given these findings it is desirable that many of these indicators should continue to be monitored and investigated.

However, despite the fact that the Governor in Council on the 10th October 2000 added two new terms of reference and extended the reporting time on the existing terms of reference until the 30th April 2001, the Committee Chair refused to entertain further enquiry and report on existing terms of reference. The result of such further enquiry could be published in the Committee's Number 2 report which is due by 30th April 2001 if the Opposition members would allow it. Failure to do so represents a breach of the spirit, if not the letter, of the Governor in Council's request.

Given that the Committee found evidence of considerable hardship for small businesses and in rural Victoria as a result of the introduction of the Howard Government's GST, and given the Victorian Opposition's control of the Committee, this decision may be understandable but it is not justifiable. In fact, the Committee Chair not only insisted on no further enquiry into existing terms of reference, he did so despite a Committee finding that "the overwhelming evidence indicated it would be difficult to assess the impact of the GST on competitiveness until at least 6 months has passed since the GST was introduced on 1st July 2000."

The Committee Chair also set impossible deadlines including one working day for the preparation of any minority report and on one occasion attempted to have two chapters adopted by the Committee in the 5 minutes before Government members arrived. If this Committee, which is the first Upper House Investigatory Committee, is to add much needed credibility to the Upper House, it cannot operate as an arm of the Opposition in the Upper House.

The Committee has made some important findings, some of which have been listed above, and it is a pity that it did not welcome the opportunity for further enquiry which would have added both to our understanding of the impact of the GST on business competitiveness and to the Committee's credibility.

If one reads the extracts from proceedings at the end of the report it is evident that the Committee did in fact divide on some of these important issues. It is unfortunate that it refused to consider continuing to monitor LPG and petrol prices and report on these in its Number 2 report to be published by 30th April 2001.

Finally, given the very difficult timelines for preparation of this minority report set by the Chair, it was not possible to examine the many issues raised or to consult adequately with other members of the Committee. I believe, however, that this minority report reflects the views of all the Government members on the Committee.

Theo Theophanous



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