The Committee has been asked to consult on specified transitional arrangements relating to motor vehicles.
The Government announced in Tax Reform: not a new tax, a new tax system that in order to minimise disruption of the motor vehicle market, input tax credits would be phased in for motor vehicles over a two year period. In the first year of the GST’s operation certain businesses would be denied input tax credits for new motor vehicle purchases. In the second year, half the value of input tax credits would be denied. In the third and subsequent years full input tax credits would be allowed.
The Committee has examined the impact the transitional arrangements as announced are likely to have on the motor vehicle market. The Committee has also considered a number of other options for smoothing the transition. The Committee has sought the assistance from the Secretariat in providing revenue estimates of the alternate measures. Treasury has confirmed that these revenue estimates are consistent with the methodology employed in Tax Reform: not a new tax, a new tax system and are included in the body of the chapter. The Treasury estimates assume that the pattern of motor vehicle purchases are unaffected by price changes. Therefore the revenue estimates contained in this chapter are only indicative as it is expected that price changes would have some effect on the quantity of motor vehicles purchased.
In coming to its conclusions, the Committee has been conscious of the need to analyse the motor vehicle market in a holistic fashion. In particular, the Committee believes that further consideration needs to be given to the interaction of the new and used motor vehicle markets.
The Committee recognises the Government’s policy of removing taxes imposing costs on business. Central to that policy is the removal of WST on goods including motor vehicles. However, the removal of the tax has the potential to distort buying patterns, particularly because of the substantial drop in the real costs to business (currently paying WST) from 1 July 2000.
Based on its terms of reference, it has been necessary for the Committee to take into account the impact of any recommendation on changes to the revenue. In considering the proposed transitional provisions the Committee has looked at a number of options which generate increased revenue and some which cause a loss to the revenue.
Many submissions have been lodged claiming that there will be a substantial drop in sales of motor vehicles to businesses currently paying WST, and to a lesser extent for sales to final consumers, in the lead up to 1 July 2000 and also (for businesses unable to claim input tax credits) in the period to 1 July 2002. By giving advance notice of the changes, the 2 to 3 year phasing in period has really extended to 3 to 5 years.
The Committee has not been able to establish the likely impact on the market and therefore to the motor vehicle manufacturing sector (including the component manufacturers) were there to be a drop in sales as claimed by the submissions.
Submissions from some motor vehicle manufacturers have claimed that a sharp decline in demand in the phasing in period may force some plant closures and temporary job losses. If this were to occur, then the closure of some major manufacturing plants would disrupt production and employment in the component manufacturing and motor vehicle retailing sectors of the industry.
Treasury estimates of revenue impacts of the various options canvassed in this review assume the ongoing sale of vehicles based on continuing trends.
Definition of Motor Vehicles
Each of the options considered below cover motor vehicles. However, the Government has not provided a definition of motor vehicles in the Tax Reform: not a new tax, a new tax system document. The Committee understands that the Government intends that any measures should cover motor cars, station wagons, motor cycles, panel vans, buses, trucks and semi-trailers. These are the major categories of vehicle that are sold in significant volumes and which, because they are used by businesses, will experience the largest price reductions.
The Committee understands that the Government’s intention is that transitional measures will not apply to spare parts and accessories. The Committee accepts that options for phasing of the WST rate or denial of input tax credits should apply to motor vehicles only, not parts or accessories. Although there may be some scope for businesses to purchase de-optioned vehicles during the transition to avoid the effect of the measures, Treasury has advised the Committee that it does not expect that such practices would be widespread, given the inconvenience involved. Moreover, applying the transitional measures to parts and accessories would make the transitional measures complex. It would impose compliance costs on businesses, like specialist parts and accessory retailers, that would otherwise be unaffected.
The impact of tax reform on motor vehicle prices
Tax Reform: not a new tax, a new tax system provides estimates of motor vehicle price reductions of 8.3 per cent. This is the estimate of price reductions for final consumers. This estimate measures the impact on prices after all tax changes are passed on and includes the impact of the indirect tax reforms on the production costs of the motor vehicle industry.
Because business will receive input tax credits for any GST paid on their vehicle purchases they will, after the tax changes are fully implemented, experience larger price reductions than consumers. The estimated average long-run impact on prices to businesses is 16.6 per cent.
The Price Changes
| In the case of non-luxury passenger motor vehicles, a price reduction of a little over 8.3 per cent can be confirmed by a separate calculation. The Commissioner of Taxation has approved a ‘uniform taxable value’ for WST purposes for these vehicles. Under this arrangement, the WST as a percentage of the tax inclusive retail price is 14.6 per cent. The estimated cost reduction for the ‘motor vehicles and parts; other transport equipment’ industry is 3.7 per cent. So the total price reduction arising from WST abolition and industry cost reductions is 17.8 per cent. After GST is applied, the price reduction for consumers would be, on average, around 9 per cent.
For luxury vehicles, the price reductions will not be uniform. For vehicles currently priced within a range from around $55,000 to $80,000 the price fall will be greater than the reduction for lower priced vehicles. For vehicles currently priced above $80,000 the price fall will be lower than for vehicles priced under the existing luxury threshold, with the percentage price reduction decreasing for more expensive vehicles. The larger price falls for cars in the $55,000 to $80,000 range will occur because the new luxury threshold will be higher than the old threshold. That is, some vehicles that are subject to the 45 per cent WST rate will not be subject to the LCT. For trucks, the ‘uniform taxable value’ arrangement does not apply. Price reductions can be expected to vary around 8-9 per cent depending on retail margins. |
The benefits of lower vehicle prices
It has been said that reductions in motor vehicle prices will deliver substantial long term benefits. The motor vehicle price reductions that are expected from the indirect tax changes will contribute significantly to the cost of living savings and industry cost reductions that the tax reforms will generate.
Purchasers of motor vehicles, including most businesses, have borne a high share of the WST burden, which has increased proportionately over time. A shift to a more broadly based indirect tax system will
benefit motor vehicle purchasers and the motor vehicle industry. It will also contribute to the levelling of effective tax rates, increasing economic efficiency and Australians’ living standards. The Committee is conscious that any transitional measures in the industry should be viewed against this background: the industry will receive significant long term benefits.
General transitional issues
However, the significant price reduction of motor vehicles raises two related transitional problems:
- the likelihood of a delay of motor vehicle purchases in the period before the indirect tax changes are implemented; and
- losses by owners of vehicles as a result of the price reductions.
To some extent these transitional problems are unavoidable if the benefits of significant price reductions are to be delivered to the community. The purpose of the transitional provisions is to mitigate, not eliminate, these adverse consequences.
Delay of vehicle purchases
The indirect tax changes are likely to have long term beneficial effects on motor vehicle manufacturers/distributors and dealers as lower prices lead to increased purchases. However, in the short term a ‘buyer drought’ may cause difficulties for some businesses.
It is difficult to quantify the impact of deferred purchases as there are a number of factors to consider which may be offsetting. Experience suggests that vehicle manufacturers/distributors and dealers may alter their pricing and marketing strategies to lessen the impact of the deferment of motor vehicle purchases.
The problems are exacerbated by the length of the lead time before the tax changes take effect. Other factors may ameliorate the impact on manufacturers and dealers.
- Manufacturers and dealers are likely to cut their margins in the months preceding the tax changes:
- there is evidence that this occurred at the time the GST was introduced in Canada.
- Income tax cuts that take effect from 2000-01 may be anticipated by consumers during 1999-00 with positive demand effects in the motor vehicle industry.
- A significant proportion of new vehicles, approximately 30 per cent, is purchased by governments, primary producers, public hospitals, non-profit schools and other organisations that are exempt from WST. For this group, the price reductions will be only around 3 per cent.
Notwithstanding the complexity raised by these factors, it is highly likely that there will be some deferral of motor vehicle purchases in the absence of transitional measures. Businesses who currently pay WST are most likely to defer.
The Committee is also aware that any transitional issues may be more acute for the truck market compared to the passenger motor vehicle market primarily due to higher capital costs and longer effective equipment life. No specific distinction has been drawn between the different sectors of the motor vehicle market in the analysis below. However, a potential differential impact should be kept in mind when considering the various options. By way of illustration, taking the expected average price reductions as a guide, a $30,000 car may fall by approximately $2,500 to final consumers and $4,900 to business users currently subject to WST and eligible to full input tax credits of GST. In contrast the effective purchase price of a $200,000 truck may fall by approximately $33,200 (including payment of the input tax credit).
Holding losses
Owners of vehicles will experience losses in value as a result of the tax changes as resale values are depressed in anticipation of new vehicle price reductions. For most consumers this will not be of great concern. The value of their motor vehicles will fall, but so will the purchase price of any new car that they may buy in the future. Provided that they intend to replace their vehicle they should actually be better off following the price reductions. However, businesses holding a substantial stock of motor vehicles as assets will be adversely affected by substantial price reductions.
Substantial price reductions will affect anyone who owns a motor vehicle. Operating lessors are particularly exposed to changes in the price of the assets they lease. Operating lessors bear the risk associated with the decline in value of the goods over the life of an operating lease. An operating lessor will set the rental payments at a level that accounts for the expected loss in value of the leased goods over the life of the lease. An unexpected fall in the value of the goods over the life of the lease will adversely affect the lessor’s return.
The Committee understands that lessors have begun to build into new contracts a higher rental payment schedule in order to shift some of the loss in residual value that will occur to new lessees. Primarily those contracts in force prior to the announcement of the tax changes and which expire after implementation will be affected by an unexpected loss in residual value.
In the case of a finance lease the lessee bears the risk on the residual value of the asset. Therefore, finance lessees will be adversely affected by substantial price reductions. This is a symmetrical concern to that faced by the operating lessors.
New purchasers and finance lessees of motor vehicles can be expected to try to shift residual value losses either backward to manufacturers and finance lessors or (in the case of businesses) forward to customers.
New motor vehicle dealers may bear some of these losses if they are forced to reduce prices. However, they will not lose on stocks of vehicles on hand at the implementation date as these vehicles will not have borne WST due to the specific motor vehicle arrangements.
Options
The Committee has considered nine options for reducing the disruption to the motor vehicle industry during the transition to the new indirect tax arrangements. Each has been assessed in terms of its impact on the various affected groups, its administrative feasibility, and its revenue impact. The Committee has considered the transitional impacts on affected groups in the context of the overall benefits of the Government’s policy to the community. In considering these options the Committee acknowledges that no solution will be acceptable to all interested parties. Some parties have an interest in immediate price reductions, others in keeping prices up to maintain asset values.
The Committee has examined the following options:
- No special transitional measures for motor vehicles.
- Maintaining the WST for motor vehicles.
- Special GST rate to ensure no price change to consumers.
- with full input tax credits for business.
- Special GST rate to ensure no price change to consumers.
- with phased input tax credits for business.
- Three year phase down of sales tax commencing 1 July 1999.
- Two year phase down of sales tax commencing 1 July 2000.
- Phase down of sales tax and then transitional denial of input tax credits.
- Phased denial of input tax credits.
- 150 per cent in 2000-01, 100 per cent in 2001-02, 50 per cent in 2002-03.
- Phased denial of input tax credits
- 100 per cent in 2000-01, 50 per cent in 2001-02.
The options have only considered vehicles currently subject to WST at 22 per cent. No doubt there will be other options variant to those considered, but the Committee believes that the consideration of those canvassed in this report highlight the problems of addressing one group of interests at the expense of others.
1. No special transitional measures for motor vehicles
Revenue Impact
The revenue impact of this option relative to the Government’s proposal is:
1999-00 |
2000-01 |
2001-02 |
2002-03 |
|
- |
-$1350m |
-$950m |
-$150m |
Impact on stakeholders
Business
This option brings forward a major component of the benefits to business from the indirect tax reforms by allowing businesses to claim input tax credits on motor vehicle purchases immediately.
However, without special transitional rules for motor vehicles there is likely to be substantial disruption to motor vehicle related industries. Businesses currently subject to WST and entitled to input tax credits (from 1 July 2000) would have a greater incentive to delay purchases of motor vehicles for a period leading up to the introduction of the GST.
Exempt bodies
In each of these options ‘exempt bodies’ is a generic term for all those persons who currently purchase motor vehicles with a wholesale sales tax exemption. These include certain 4WD vehicles for primary producers and certain motor vehicles used by governments, public hospitals, non-profit schools and public benevolent institutions.
Exempt bodies under this option are treated the same as under the Government’s proposal. Exempt bodies are able to access the current WST exemptions on motor vehicles and will have only a minor incentive to delay purchases of motor vehicles. The current indirect tax system imposes hidden taxes on motor vehicles by taxing the goods used by some of the services used in their manufacture. The tax reforms will remove these hidden taxes on motor vehicles purchased by bodies currently exempt from sales tax.
However, exempt bodies would be disadvantaged by the expected fall in price in the second hand motor vehicle market. Currently exempt bodies may sell their WST exempt motor vehicle after two years or 40,000 kilometres. If the immediate fall in price of new motor vehicles were reflected in the second hand motor vehicle market, then exempt bodies would be worse off due to the lower asset value of the cars they hold at the transition date.
Further, exempt bodies currently benefit from selling motor vehicles into a second hand car market that is priced with reference to the tax-inclusive new car market. Under the WST system no WST is payable on the sale of second hand goods. This has allowed exempt purchasers to turn cars over with little net cost to themselves. The introduction of the GST will place other businesses on the same footing as the exempt purchases. Further, both exempt bodies and other businesses will be liable for GST on sales into the second hand market. These factors will reduce the relative benefit currently enjoyed by exempt bodies. With no specific transitional measures the benefit is eliminated from the introduction of the GST.
A fall in second hand car prices could cause exempt bodies (along with other vehicle lessees) to suffer increased costs on motor vehicle leases they have entered into as a result of:
- higher repayments on the residual value clauses of finance lease contracts; and
- higher lease payments on new operating leases.
Consumers
Under this option consumers are treated the same as under the Government’s proposal. Consumers who are anticipating purchasing a new motor vehicle may delay purchases until 1 July 2000.
As discussed above, consumers who currently own a motor vehicle and who intend to sell without re-purchasing, however, would be worse off by the fall in value of the motor vehicle they own. This would be reflected in the fall in price in the second hand motor vehicle market.
Manufacturers and dealers
Manufacturers and dealers will benefit over the longer term from the general fall in price of motor vehicles.
However, motor vehicle manufacturers and dealers may suffer significant cash flow problems from the slump in new vehicle purchases that is likely to occur in the absence of special transitional rules. The disruption to manufacturers and dealers would be substantial if few motor vehicles are sold for a considerable period prior to the implementation of the GST.
Based on submissions lodged the proportion of sales of motor vehicles to fleet purchases who are currently subject to WST represents about 40 per cent of total sales. These sales are mainly of Australian manufactured vehicles.
Once the transitional phase is over, however, manufacturers and dealers should benefit as the suppressed demand for new vehicles is released and as the long run impact of lower prices is felt.
Lessors
Operating lessors will suffer a fall in the value of their current motor vehicle fleet. Under this option, lessors would suffer a larger loss compared with the Government’s option. This is because granting input tax credits from the implementation date would have a larger depressing effect on used vehicle prices than if input tax credits are phased in.
Finance lessees would also suffer a fall in the value of their current motor vehicle fleet.
Overall Assessment
Overall with no special transition rules, there is likely to be a substantial deferment of business, and to a lesser extent consumer, purchases of new vehicles and a larger fall in the price of second hand vehicles. This is likely to lead to substantial industry disruption.
This option would also have a negative revenue impact compared with the Government’s option.
This option is the only option which removes immediately the different treatments in the WST system whereby certain entities may purchase exempt motor vehicles, while other businesses may not.
2. Maintain WST for motor vehicles
Currently exempt bodies would be able to purchase motor vehicles WST free.
Revenue Impact
The revenue impact of this option relative to the Government’s proposal is:
|
1999-00 |
2000-01 |
2001-02 |
2002-03 |
|
- |
$150m |
$700m |
$1650m |
Impact on stakeholders
Business
By maintaining the current WST regime for motor vehicles past 1 July 2000 this option would reduce the incentive for businesses to delay purchases. Whilst there would be no reduction in direct tax, there would be some indirect effects from the reduction in industry costs associated with tax reform.
Maintaining the WST for motor vehicles would, however remove an important element of the long term benefits to business of indirect tax reform.
The option to maintain the current WST regime on motor vehicles would impose additional costs on many businesses relative to the Government’s proposal. The current indirect tax system imposes arbitrary effective tax rates on business, which would be reproduced if sales tax were to remain on motor vehicles. For example, currently many mining and agricultural businesses may buy certain types of vehicles exempt from sales tax while most motor vehicles used in manufacturing and service businesses are subject to sales tax. However, mining and agricultural businesses also bear the costs of the curre
nt WST system in higher charges provided by service industries. For example, goods purchased in regional Australia would face higher costs because road transport industries would be ineligible for sales tax exemptions on trucks used to transport goods.
Businesses would be deterred from updating to the latest model vehicles according to otherwise sound commercial practice, as there would be a significant incentive to repair their current motor vehicles. Motor vehicle parts would be subject to GST while motor vehicles themselves would be subject to WST. Many businesses would therefore be able to claim input tax credits for repairs and repair parts, but would be charged non-creditable sales tax on any new motor vehicle purchases.
Exempt bodies
Since exempt bodies would be able to access the current WST exemptions on motor vehicles, they would benefit from the slight reduction in price of motor vehicles.
Compared to the Government’s option, exempt bodies would benefit from higher resale values for their motor vehicles. In particular, exempt bodies would not be required to charge tax on their sales of second hand cars for the first time.
Consumers
Consumers wishing to purchase a motor vehicle would face a slight price reduction, but would be significantly worse off relative to the Government’s proposal.
Motor vehicle parts would be subject to GST while motor vehicles would be subject to WST. Consumers would therefore face incentives to repair older vehicles rather than upgrade to new vehicles.
It is likely that second hand vehicle prices would fall slightly in line with the expected industry cost reductions. Resale value of motor vehicles currently owned by consumers would fall marginally.
Manufacturers and dealers
Manufacturers and dealers would be denied the general benefits from the Government’s tax reform package. Unlike other goods and services sold to business, motor vehicles sold to business would not be creditable. This would significantly decrease the attractiveness of motor vehicles as business inputs relative to other inputs. Similarly, under this option relative to the Government’s proposal, consumers would be less likely to increase the demand for motor vehicles.
On the other hand, since there would be little change in the price of motor vehicles relative to today’s, there would be little incentive for consumers to change the timing of their purchases. This option would minimise industry disruption.
Lessors
This option protects the value of motor vehicle fleets by leaving the current tax system unchanged. In the medium term, however, lessors will be worse off compared with the Government’s proposal because:
- There would be an element of double taxation of car leases, which, like other leases, will be subject to GST; and
- lessors would be denied the benefit of motor vehicle price reductions.
Overall Assessment
Overall, this proposal removes the long term benefits of tax reform for all groups as a trade off for relieving the transition impacts on manufacturers, dealers and current vehicle owners.
It has a positive revenue impact compared with the Government’s proposal, but would also have a higher CPI impact.
It also imposes additional compliance and administration costs associated with the parallel operation of the WST and GST.
3. Special GST rate to ensure no price change to consumers with full input tax credits for business
|
Revenue Impact
The revenue impact of this option relative to the Government’s proposal is:
|
1999-00 |
2000-01 |
2001-02 |
2002-03 |
|
- |
- |
$600m |
$1550m |
Impact on stakeholders
Business
This option provides to business the same fall in price of a motor vehicles as under Government’s tax reform package, but immediately, rather than after two years. This is because, even though the rate of GST is almost double the standard rate, business would be eligible for input tax credits immediately. The incentive to delay purchases until the commencement of the GST would therefore be the same as if there were no transitional arrangements (Option [1]).
Some businesses, such as financial service providers, have input taxed activities and have restricted access to input tax credits. Such businesses would therefore be penalised relative to other businesses by the higher GST rate.
There would also be a larger price difference between motor vehicles used for private consumption and those for business consumption. This may increase the incentive for businesses to claim motor vehicles are being used for business purposes when they are actually being used for private purposes. Such evasion possibilities would threaten revenue, increase the costs to the Government of monitoring and enforcement, and possibly increase the costs of compliance.
The direct impact on the value of motor vehicles in the second hand market would be limited since sales into this market by registered businesses would be subject to the special motor vehicle GST rate. A small decrease in the price of second-hand vehicles could be expected as repairs and maintenance would be still subject to the standard 10 per cent rate.
Exempt bodies
Exempt bodies would have a minor incentive to delay purchase of motor vehicles since the GST would remove many hidden taxes in the current indirect tax system. The price reduction would be small given the price would fall by only the cost reductions in the motor vehicle industry.
This proposal imposes GST on the sale of second hand motor vehicles by exempt bodies. This would tax such transactions for the first time.
The special 19.5 per cent GST rate for motor vehicles maintain the value of the current stock of motor vehicles.
Consumers
This option denies benefits from the Government’s tax reform package to consumers who are new car buyers.
Consumers who currently own motor vehicles would roughly maintain their resale values.
Manufacturers and dealers
This option maintains the thrust of the Government’s tax reform package by eliminating the cascading WST. However, in the longer term, manufacturers and dealers will be denied the benefits from the growth in demand from lower prices to consumers. Demand from business, however, is likely to increase significantly.
Since this proposal would significantly decrease the cost of motor vehicles to business, motor vehicle manufacturers and dealers would still suffer from a temporary slump in demand under this option in the lead up to 1 July 2000. The continued purchases by exempt bodies and consumers would not be sufficient to completely offset the demand drought by business purchasers during this time.
Second hand motor vehicle dealers would be subject to 19.5 per cent GST on the value of their margin (w
here selling cars purchased from unregistered persons). Private consumers selling their motor vehicles second hand would not be subject to this GST (although they could not receive input tax credits). However, any adverse effect on the competitiveness of registered motor vehicle traders, would be exacerbated by the higher GST. One submission noted evidence from Canada and New Zealand that registered second hand dealers can be disadvantaged by practices involving used car sales in the unregistered sector.
Lessors
Lessors would benefit from the maintenance of the value of motor vehicles in the second hand motor vehicle market.
They would, however, suffer from the sharp swings in demand from their business customers. Business would be aware that after 1 July 2000 there would be significant reductions in the price charged by leasing companies on leases over new vehicles and would delay signing leases until this date.
Overall Assessment
Overall, this option delivers the benefits to business associated with replacement of the WST by the GST, while denying the benefits of motor vehicle price reductions to consumers. Input taxed businesses are also more harshly treated than under the Government’s proposal.
There is still a transitional problem for manufacturers and dealers, although the problem of losses on vehicle holdings is lessened.
The revenue impact is positive relative to the Government’s proposal. The impact on the CPI is also greater.
4. Special GST rate to ensure no price change to consumers - with phased input tax credits for business
|
Revenue Impact
The revenue impact of this option relative to the Government’s proposal is:
|
1999-00 |
2000-01 |
2001-02 |
2002-03 |
|
- |
$2700m |
$2900m |
$1850m |
Impact on stakeholders
Business
This option mirrors the Government’s proposal in delaying the ability of business to claim input tax credits. However, this option is harsher to business in two ways:
- business pays a higher rate of tax as long as input tax credits are denied; and
- the fall in price of motor vehicles occurs in two stages instead of three.
This option would impose significant additional on-going costs on those firms that are unable to claim input tax credits, such as financial service providers.
Exempt bodies
Exempt bodies able to access the current WST exemptions on motor vehicles would have a minor incentive to delay purchase of motor vehicles since the GST would remove hidden taxes in the current indirect tax system. The price reduction would be relatively small given the price would fall by only the cost reductions in the motor vehicle industry.
The Government proposes to impose GST on the sale of second hand motor vehicles by exempt bodies. This would tax such transactions for the first time.
The special 19.5 per cent GST rate for motor vehicles would assist the current stock of motor vehicles to maintain their value.
Consumers
As with the previous option, this option denies benefits from the Government’s tax reform package to consumers who are new car buyers.
Consumers who currently own motor vehicles would benefit from maintenance of their resale values.
Manufacturers and dealers
This option maintains the thrust of the Government’s tax reform package by eliminating the cascading WST but imposes a higher GST rate on the motor vehicles.
In the longer term, manufacturers and dealers will be denied the benefits from the growth in demand from lower prices to consumers. Demand from business, however, will increase significantly.
Since this proposal would significantly decrease the cost of motor vehicles to business, motor vehicle manufacturers and dealers would still suffer from a temporary slump in demand under this option, although this would be moderated by the phasing in of input tax credits. The continued purchases by exempt bodies and consumers is unlikely to be sufficient to completely offset the slump in business demand during the transition.
Second hand motor vehicle dealers would be subject to 19.5 per cent GST on the value of their margin. Private consumers selling their motor vehicles second hand would not be subject to this GST (although they could not receive input tax credits). However, any adverse effect on the competitiveness of registered motor vehicle traders, would be exacerbated by the higher GST. One submission noted evidence from Canada and New Zealand that registered second hand dealers can be disadvantaged by practices involving used car sales in the unregistered sector.
Lessors
Lessors would benefit from the maintenance of value of motor vehicles in the second hand motor vehicle market.
In the medium term, lessors will benefit from lower prices for motor vehicles purchased for leases.
Overall Assessment
Overall, this option delivers the benefits to business associated with replacement of the WST by the GST, while denying the benefits of motor vehicle price reductions to consumers. Input taxed businesses are also more harshly treated than under the Government’s proposal.
The transitional problem for manufacturers and dealers is addressed through a phasing in of input tax credits.
The problem of losses on vehicle holdings is lessened.
The revenue impact is positive relative to the Government’s proposal, but the impact on the CPI is also greater.
5. Three year phase down of sales tax starting before implementation of GST
|
Revenue Impact
The revenue impact of this option relative to the Government’s proposal is:
|
1999-00 |
2000-01 |
2001-02 |
2002-03 |
2003-04 |
|
-$450m |
$165 |
$2050m |
$100m |
- |
Impact on stakeholders
Business
This option would delay the full benefits to business from the Government’s tax reform package. The Government’s proposal allows for half the input tax credit to be claimed from 1 July 2001 the second year of the GST implementation. This option, however, has a WST rate of 15 per cent in 2001, approximately double the burden on business compared to the Government’s proposal.
The incentive for business to defer purchases is also greater under this option than under the Government’s proposal. Under this option, on 1 July 2002 the WST of 15 per cent is completely removed and the GST of 10 per cent is fully implemented. Since business would be eligible for input tax credits, this represents a significant fall to business in the price of motor vehicles. As a result, there would be significant transitional issues around 1 July 2002.
Exempt bodies
Exempt bodies would benefit from the small cost reduction in motor vehicles as motor vehicle industry costs fall.
Exempt bodies would also benefit to the extent that slowly decreasing the price of motor vehicles, and ‘double taxing’ second hand sales, slows the fall in the value of second hand motor vehicles.
However, the fall in second hand car prices could nevertheless cause exempt bodies to suffer increased costs on motor vehicle leases they have entered into as a result of:
- higher repayments on the residual value clauses of finance lease contracts; and
- higher lease payments on new operating leases.
Consumers
This option delays the full benefit of the Government’s tax reform package to consumers wishing to purchase new motor vehicles, while bringing forward by one year a small part of the eventual price reduction.
Consumers, like exempt bodies, would also benefit to the extent that slowly decreasing the price of motor vehicles, and ‘double taxing’ second hand sales, slows the fall in the value of second hand motor vehicles.
Manufacturers and dealers
This option delays the full demand effect of the Government’s tax reform package on the motor vehicle market. Manufacturers and dealers would also still suffer from market disruption, particularly as business buyers anticipate the removal of the 15 per cent WST and introduction of the GST at 1 July 2002. This transitional disruption would be mitigated by the more even purchases of consumers.
Maintaining two separate indirect tax systems would increase the compliance costs to manufacturers and many dealers.
Lessors
This option would cause further disadvantage to lessors holding current operating leases with businesses and exempt bodies. Since the initial WST rate cut brings forward the fall in price of motor vehicles to 1 July 1999, contracts not affected by the Government’s proposal will be affected by this proposal.
Lessors would also suffer losses to the extent that they cannot pass on the expected decrease in the residual value of motor vehicles onto customers in any new contracts.
Overall Assessment
Overall, this option smooths demand from consumers. However, the option worsens the incentives for business to defer purchases. As a result it does not address the key transitional issue which is the sharp fall in price to businesses entitled to input tax credits.
Significant additional revenue is raised under this option.
6. Two year phase down of WST commencing 1 July 2000
|
Revenue impact
The revenue impact of this option relative to the Government’s proposal is:
|
1999-00 |
2000-01 |
2001-02 |
2002-03 |
|
- |
$1150m |
$600m |
- |
Impact on stakeholders
Business
This option delivers to business around half of the price reduction for motor vehicles from 1 July 2000 by allowing claims on the full input tax credit, while maintaining a lower rate of non-creditable WST. This ‘penalty’ rate of WST is slowly phased out so that the WST ceases on 1 July 2002. This option approximates in its effect the Government’s proposed transitional denial of input tax credits (with no WST). The incentive for business to defer purchases is therefore similar to the deferral incentives under the Government’s proposal.
Input taxed businesses would be relatively more harshly treated during the transition because they would not be entitled to credits for either the WST or GST.
Exempt bodies
Exempt bodies would benefit from the small cost reduction in motor vehicles as motor vehicle industry costs fall.
Exempt bodies would also benefit to the extent that the penalty rate of WST on consumer and business purchases, and ‘double taxing’ second hand sales, slows the eventual fall in the value of second hand motor vehicles. This would maintain resale values of their existing vehicle holdings and reduce potential residual losses suffered by exempt bodies holding motor vehicle leasing contracts.
Consumers
This option delays the full benefits to consumers of cheaper motor vehicles envisaged in the Government’s tax reform package by two years. This option slowly reduces the price of new motor vehicles to consumers by effectively charging a declining penalty rate of WST over and above the GST rate of 10 per cent. This option would also be expected to slow the eventual decline in second hand motor vehicle prices.
Manufacturers and dealers
This option is similar to the Government’s proposal in its impact on manufacturers, except for the delayed increase in consumer demand caused by the penalty rate of WST. The Government’s proposal gives consumers the full tax benefit immediately while staggering the benefit to business over two years as input tax credit become creditable. However, this option staggers the full benefit to consumers as well as business.
Maintaining two separate indirect tax systems would increase the compliance costs to manufacturers and many dealers.
Lessors
Relative to the Government’s proposal, this option would delay slightly the impact on the value of second hand motor vehicles. To such an extent, this may ameliorate any losses lessors may suffer from holding operating leases over the transitional period.
Overall assessment
Overall, this option has a similar effect on motor vehicle prices to businesses during the transition as the Government’s proposal. However, the benefits to consumers and input taxed businesses are delayed. The option raises sig
nificantly higher revenue.
7. Phase down of sales tax and then transitional denial of input tax credits
|
Revenue impact
The revenue impact of this option relative to the Government’s proposal is:
|
1999-00 |
2000-01 |
2001-02 |
2002-03 |
|
-$600m |
-$50m |
- |
- |
Impact on stakeholders
Business
This option brings forward some of the benefits envisaged for businesses under the tax reform package by reducing the WST rate on motor vehicles from 22 per cent to 17 per cent from 1 July 1999.
Exempt bodies
Exempt bodies will be slightly worse off than under the Government’s proposal to the extent that this option causes exempt bodies to suffer earlier losses in the value of their existing motor vehicle holdings. The value of their motor vehicles being sold into the second hand motor vehicle market would be relatively lower during 1999-00.
Exempt bodies would also lose to the extent that they hold finance leases over motor vehicles.
Consumers
Consumers benefit from the lower price of motor vehicles being introduced one year earlier than envisaged under the Government’s tax reform package.
Current holders of motor vehicles may be disadvantaged by an earlier fall in value of motor vehicles sold in the second hand market.
Manufacturers and dealers
Manufacturer and dealers would benefit from a smoothing of purchases of motor vehicles caused by the additional, earlier step down in the WST rate to 17 per cent on 1 July 1999. However, if the policy was pre-announced, manufacturers and dealers would suffer falls in sales prior to 1 July 1999. If the policy was imposed overnight, some consumers would be disadvantaged.
Lessors
This option would result in larger reductions in asset values for lessors holding current operating leases. Since the initial WST rate cut brings forward some of the fall in price of motor vehicles to 1 July 1999, previously unaffected lease contracts will become affected. A significantly higher proportion of lessors asset portfolios will be subject to reduced residual values. This means that such lessors will suffer a fall in value on even more of their motor vehicles held under contracts written before the announcement of the GST.
Overall assessment
This option differs only slightly from the Government’s tax reform package. By lowering the sales tax on motor vehicles before the introduction of the GST it further smooths the transition. The step down in the WST rate for motor vehicles is consistent with the Government’s treatment of other goods currently subject to the 32 per cent rate of sales tax, such as videos and televisions.
Operating lessors would be slightly more affected by the earlier price reductions. Manufacturers and dealers may benefit from an earlier boost to sales from the step down in the WST rate.
There would be a significant revenue cost relative to the Government’s proposal.
8. Phased denial of input tax credit s 150 per cent in 2000-01, 100 per cent in 2001-02, 50 per cent in 2002-03
|
Revenue impact
The revenue impact of this option relative to the Government’s proposal is:
|
1999-00 |
2000-01 |
2001-02 |
2002-03 |
|
- |
$700m |
$550m |
$900m |
Impact on stakeholders
Business
This option phases in the price reductions for businesses over a longer period than the Government’s proposal. The prices of motor vehicles bought by businesses fall only marginally in the first year of the GST implementation. In the following years, the price falls to business are then the same as outlined in the Government’s tax package, but delayed by one year.
The additional compliance costs associated with input tax credit denial will extend for another year compared with the Government’s proposal.
Exempt bodies
Exempt bodies would benefit from the small cost reduction in motor vehicles as motor vehicle industry costs fall.
Since business would be denied a higher rate of input tax credits, and over a longer period of time, the impact of business sales on the second hand market will be delayed slightly relative to the Government’s proposal.
This benefits exempt bodies by maintaining their resale values and by ameliorating any potential residual losses suffered by exempt bodies holding motor vehicle leasing contracts.
Consumers
Consumers receive the same benefit in lower priced new motor vehicles from this option as they do under the Government’s proposal.
The value of motor vehicles currently held by consumers may be better maintained under this option. This is because the impact of business sales into the second hand market is likely to be delayed slightly relative to the Government’s option.
Manufacturers and dealers
This option would delay the delivery of lower prices to businesses by an additional year and therefore delay the increase in demand from business purchases.
This option may more effectively smooth purchases of motor vehicles, however, since some businesses would find it too costly to delay purchases of new motor vehicles over the extended phase-in timetable.
Lessors
This option, relative to the Government’s proposal, would deny input tax credits to lessors for a longer period of time, which would hold up the value of second hand cars for a longer period of
time.
It would, however, allow lessors to sell ex-lease motor vehicles second hand for a short time at a marginally higher price than under the Government’s proposal.
Overall Assessment
This option differs from the Government’s tax reform package by extending the length of transitional denial of input tax credits and increasing the rate of denial to 150 per cent in the first year.
It further smooths the demand deferral by business purchasers, but in doing so delays the benefits of cheaper vehicles to businesses and the benefits of higher business demand to manufacturers and dealers.
Consumers and lessors are largely unaffected relative to the Government’s proposal, except for slightly improved expected resale values of their vehicle holdings.
The Government benefits from substantially higher revenue.
9. Phased denial of input tax credits 100 per cent in 2000-01, 50 per cent in 2001-02.
|
Impact on stakeholders
Business
This option phases in reductions in motor vehicle prices to business from 1 July 2000 when the GST is introduced until 1 July 2002 when full input tax credits are claimed.
By phasing in the ability to claim the full input tax credit over two years, the Government’s proposal seeks to limit potential disruption to business activity caused by the steep fall in the price of motor vehicles, while not delaying excessively the benefits to businesses of lower vehicle prices. The phasing in of input tax credits will allow a more even distribution of business purchases of motor vehicles over the two year input tax credit phase in period. For many businesses, the costs of delaying new vehicle purchases until full input tax credits are available will outweigh the savings.
This option may, however, provide an incentive for some purchasers to delay purchases for longer than if there were no transitional measures. That is some business that would wait for the GST to be introduced (1 July 2000) if there were no measures, will under this option wait for the half of input tax credits (1 July 2001) or for full input tax credits (1 July 2002).
Exempt bodies
Exempt bodies benefit from 1 July 2000 by the cost reduction in motor vehicles as motor vehicle industry costs fall.
The Government’s proposal mitigates the fall in value of motor vehicles in the second hand market by delaying the period in which businesses are eligible for the full price reduction in motor vehicles. This benefits exempt bodies by:
- ameliorating any potential residual losses suffered by exempt bodies holding motor vehicle leasing contracts; and,
- maintaining resale values of existing vehicle holdings.
Consumers
Consumers receive the full price reduction on new motor from 1 July 2000.
The Government’s transitional denial of input tax credits to business will help maintain some of the value to consumers of their current motor vehicle holdings.
Because used vehicles will be subject to GST, the Government’s proposal will lead to some degree of ‘double taxing’ of business motor vehicles bought before 1 July 2002. The burden of this tax is likely to fall partly on the selling businesses and partly on consumers of second hand vehicles.
Manufacturers and dealers
The Government’s proposal delays by two years the full price reductions to business, thereby ameliorating the demand drought that would occur without transitional measures, but at the cost of some potential deferral of demand over the longer transition period.
The fall in the price of motor vehicles to consumers will be immediate. The industry will therefore feel the full benefit of increased consumer demand from 1 July 2000, but will experience a reduction in demand from consumers during 1999-00 as purchases are deferred.
Once the transitional arrangements are removed on 1 July 2002 the large reductions in indirect taxes levied on motor vehicles will significantly benefit the motor vehicle industry.
Lessors
The Government’s proposal delays to lessors, like other businesses using motor vehicles as inputs, the full price reduction in motor vehicles for two years.
The Government’s proposal mitigates the fall in value of motor vehicles in the second hand market by delaying the period in which businesses are eligible for the full price reduction in motor vehicles. This benefits lessors running operating leases contracted before the expected fall in price of second hand motor vehicles became known by reducing losses on residual values.
Overall assessment
Overall this option targets the greatest source of potential disruption to the motor vehicle industry; that is, the large reduction in vehicle prices to business. It spreads the price reductions over time to prevent a sharp slump in demand in 1999-00.
It delivers price reductions to consumers immediately, while giving vehicle lessors sufficient advance notice to restructure most contracts expiring after implementation date.
Second hand vehicles
The tax treatment of second hand vehicles will affect the magnitude of losses on resale values. The Government stated in ANTS that ‘…the general principle will be that GST applies to all goods and all services performed after the implementation date’. Accordingly, the Committee presumes that used vehicles will be subject to GST when sold by a registered business after 1 July 2000. This will result in a cascade of tax where a motor vehicle has borne WST or has been denied a GST input credit and is subsequently sold to an unregistered person.
Most of the options presented above are analysed assuming that GST applies to sales of second hand goods. The Committee accepts sales of motor vehicles that were originally purchased with WST, being sold with GST. The Committee recognises this as one of the consequences of changing between two systems. However, once the GST is operational, the Committee believes that it is not appropriate to apply full GST to the sale of a good where the original purchaser was denied an input tax credit. Accordingly, the Committee recommends that the Government consider options to limit the extent of GST liability on the sale of a good where the purchaser was denied an input tax credit.
Recommendation
The Committee has considered a range of options to mitigate the transitional effects on the motor vehicle industry. The Committee believes that any transitional arrangements should be considered in the context of the substantial long term benefits to the motor vehicle industry in Australia.
The Committee acknowledges the claims being made by the industry that there will be significant disruption as a result of the Government’s proposed transitional arrangements. The Committee does not believe it is in a position to fully assess the precise validity of these claims. Indeed the Committee believes that the nature of the available data is such that it may be impossible to form definitive conclusions about the precise impact on various sectors of the motor vehicle industry. The Committee is also aware that industry participants have already begun to plan purchas
es and generally modify their behaviour in response to the Government’s announced policy. Against this context, the Committee believes that, on the basis of the information available to it, that the Government’s announced policy is not an unreasonable response to the difficult issues faced by the motor vehicle industry in the transition period. However, the Committee believes that the Government should satisfy itself that any adverse sectoral impacts to the motor vehicle industry are not likely to occur to the extent suggested.
Finally, the possibility of allowing a deferred input tax credit in respect of purchases of motor vehicles post 1 July 2000 would help to clawback the reduction in business costs effective from that time. It would also allow businesses the time to adjust to the overall impact of price reductions of motor vehicles on a tax-exclusive basis.