National Reform Summit: Coalition can change the GST rate

As Joe Hockey looks at options on personal tax cuts as part of economic reform discussions this week, and as the debate about raising the GST to enable true tax reform reignites, one of the fundamental questions is whether the federal government can raise the GST rate (or change the base) without the unanimous agreement of the states and territories.

The answer is yes. But like all good things in the world of tax, getting to that result is rather complicated.

Those with long memories may recall the Intergovernmental Agreement on the Reform of Commonwealth-State Financial Relations.

That agreement, between the commonwealth and the states, came into effect in April 1999 and its purpose was to reform the ­financial relationship between the different levels of government to facilitate a stronger and more productive federal system for the new millennium.

Sound familiar?

The agreement contained the principles to be applied to what became known as “A New Tax System”, including the abolition of the wholesale sales tax and certain state taxes, the introduction of the GST and the distribution of GST revenue.

The agreement also stated that any proposal to vary the 10 per cent rate of GST or the GST base would require the unanimous support of the state governments.

The requirement for unanimous agreement in relation to any change to the rate or base of the GST has been enshrined in law within the A New Tax System (Managing the GST Rate and Base) Act 1999.

The GST Act itself also ­contains a direct reference to the ­principles that became the ­intergovernmental agreement and an acknowledgment that the GST rate and base will be maintained in accordance with the provisions of the intergovernmental agreement.

So what does that all mean?

Essentially, it means that Victorian Treasurer Tim Pallas is correct when he says that Victoria could veto a proposal to increase the GST rate.

Based on the law presently in force, Victoria or any other state has that power ­because of the requirement on the commonwealth to gain the ­unanimous consent of the states before making any change. But that doesn’t mean the law can’t be changed. The law that enshrines the principles contained in the intergovernmental agreement is commonwealth legislation.

Subject to any constitutional issues, the federal government could theoretically, at least, amend or repeal the legislation that requires the unanimous consent of the states to any change to the rate or base of the GST.

On one view, the decision to take a GST rise to the next election is an opportunity to seek a mandate for such a rise from the voters and, if that mandate is received, to try to push through the legislative changes to achieve the desired results, with or without all of the states’ consent.

That, of course, just leaves the need to get the legislation through the Senate, which is another issue altogether.

Without the states’ unanimous agreement, any change to the rate or base of the GST is a difficult but not impossible task.

Many stars need to align between now and the federal election late next year for any change to occur.

This provides some context to the issues our political leaders have been grappling with in ­recent times at the Council of Australian Governments meetings and what the future may have in store.