Why the GST-free threshold on imports will stay

Australia has what is called a low value threshold (LVT) of $1,000 for most imports, of which it does not collect GST, customs duty and Government fees and charges or require a full import declaration. The exemption also results in a loss of GST and customs revenue for governments. Retailers, including SMEs, consider this gives foreign online retailers a competitive advantage over them, and will threaten the existence of some businesses.

The Federal Government had asked the Productivity Commission to look at this issue as part of its inquiry into the Australian retail industry. The Commission recently released its draft report and recommended the $1,000 threshold remain, at least for the time being.

For a number of reasons, the Commission considered that the threshold was not the main factor affecting the international competitiveness of Australian retailers.

The Commission noted that the current growth in the volume of parcels entering Australia, which it said appeared to be largely driven by the growth in online shopping from overseas retailers, had placed pressure on the existing facilities of the Australian Customs and Australia Post.

Approximately 55 million international parcels arrive in Australia under the $1,000 threshold. The Commission estimates that with current processes, if the low value threshold was abolished, about $578 million of revenue would be collected and over $2 billion of collection costs would be borne by businesses, consumers and government. These costs are a deadweight loss on the community, the Commission said.

The Productivity Commission said that reducing the threshold to $100 would raise an additional $472 million, but, based on the current customs processing charges, this would cost consumers and businesses approximately $715 million.

Effectively, with extra costs to couriers, etc included, the Commission said it may cost the community over $1 billion to facilitate the collection of $472 million in revenue. It concluded that any reduction to the threshold could not be implemented in the short-term “without very significant cost impacts”.

The Commission said the figures indicate that on even a very simplified cost benefit analysis, lowering the threshold significantly while continuing to use the current processing system “doesn’t stack up”.

In 2009, the Board of Taxation examined the LVT issue and concluded that any lowering of the threshold would likely increase administrative costs for the Government as more goods were brought into the customs system in order to account for GST and duty, and the additional costs were likely to outweigh any benefits.

Moreover, the Board said consumers (and businesses) would have to pay disproportionately high costs including GST, duty and administrative charges to have their goods released from Customs compared to the actual value of the goods, if the threshold were reduced. So, the costs issue is a real one.

The Assistant Treasurer said the Draft Report identified that, if the Government was to abolish the GST exemption on goods purchased from overseas, this would cost the taxpayer $1.6 billion to collect the tax that would raise approximately $500 million. So, for every dollar of tax raised, at this stage with the current technology in place, he said it would cost the taxpayer three times as much to collect GST on items below $1,000.

Shorten said there was “no way you can sell that to the Australian people even though we do support, as a general principle, the general idea of tax neutrality, that the tax should be the same on all items”. He said the idea that taxpayers would spend three times more to collect the tax was “just plain crazy”.

For a number of reasons, the Commission said it was of the view that the exemption from payment of GST and customs duty on goods valued at less than $1,000 is not the main factor affecting the international competitiveness of Australian retailers. Other relevant factors included:

The current large difference between domestic and foreign retail prices for many goods purchased online.
Some consumers shop online offshore because they can’t obtain the goods they require locally.
The cost of freight on individual items is comparatively high.
The willingness of Australian consumers to pay a small premium (some have suggested 20%) for the security of purchasing from an Australian supplier.

Nonetheless, it said GST, as a broad based consumption tax, should in principle apply equally to all transactions. On these grounds, the Commission believes it would be preferable to have no low value threshold and subject all imported goods to the payment of GST and duty. However, this is not going to happen any time soon.

The Draft Report’s recommendations included:

There are strong in-principle grounds for the LVT exemption for GST and duty on imported goods to be lowered significantly, although it noted that, as the threshold is lowered, costs of collection increase significantly. However, it said the Government should not proceed to lower the LVT until it is cost-effective to do so, that is, at a minimum, the tax revenue should exceed the full costs of collecting it.
The Government should establish a taskforce charged with investigating new approaches to the processing of low value imported parcels, particularly those in the international mail stream, with a view to preparing for significant improvements and efficiencies in handling.
Once an improved international parcels process has been designed, the Government should reassess the extent to which the LVT could be lowered while still remaining cost-effective.

The Draft Report also recommended that retail trading hours should be fully deregulated in all states (including on public holidays).

Public hearings on the inquiry are to be held in September 2011, with the final report to go to the Government in November 2011.

So, the status quo remains at the moment. The efficiency issue (collection cost versus revenue gained) seems to be the main (although not only) sticking point. If the Government takes up the suggestion to look at making improvements to the processing of low value imported parcels, the threshold could conceivably be abolished (or at least reduced). How quickly this could all be done, however, is another story!

Terry Hayes is the senior tax writer at Thomson Reuters, a leading Australian provider of tax, accounting and legal information solutions .