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CGT Small Business Rollover Relief and Retirement Exemption for Land and Buildings Held in A Non-Operating Entity
August 13, 1998
Doorstop interview
August 18, 1998
CGT Small Business Rollover Relief and Retirement Exemption for Land and Buildings Held in A Non-Operating Entity
August 13, 1998
Doorstop interview
August 18, 1998

Tax Reform Package

Transcript No. 48

Hon Peter Costello MP


Hon Peter Moore MP

National Press Club Speech

14 August 1998

1.00 pm


SUBJECTS: Tax reform package

Thank you Ken, thank you members of the press gallery.

It was one year and one day ago that the Government announced that we would undertake

the great task of reforming Australia’s taxation system.

It would have been easy not to undertake that task. Many say it would have been

politically safer. Many say that we could have ignored the great need to create a fairer

and better and open taxation system, but to do that we would have had to pretend that

things were okay. Pretending. Pretending that the tax system was fair when it’s not.

Pretending that it works, when it doesn’t. Pretending that it helps business when it hurts

business and hurts job creation. It would have required us to pretend that income tax

rates were not crushing families when we know they are. It would have required us to

pretend that the tax system will still work in future years when we know it is about to


We could have pretended, but we didn’t. It wouldn’t have been honest. It wouldn’t have

been responsible. It wouldn’t have been fair, and it wouldn’t have been just.

We don’t want to pretend that we don’t need change when it is so clear that we do.

And as many of you have said in the last twenty-one hours or so, the Australian people

now have a dramatic choice. A choice between fixing a system which is broken or those who

want to go on pretending – pretending that nothing’s wrong when it is. Pretending that

families don’t need a new deal when they do. Pretending that the tax system isn’t broken

when it’s crumbling.

There are a lot of pretenders who would have you believe that the easy way is the right

way, but it’s not. The right way is to confront Australia’s taxation system and to do it.

And the plan which the Government laid down yesterday is a plan for a new tax system

for a new century. It’s a plan to come into effect in July of 2000, and when those that

put the Commonwealth income tax and wholesale sales tax in place in the 1930s, when they

put that together, it was a tax system which was right for the time then, but the 1930s

will not be Australia in the next century. It coped with the economic features of the then

Australian economy, but it won’t build an Australian economy for the next seventy years,

and like then, it’s now time for us to re-build again.

This is the biggest tax proposal put forward by a government since the 1930s. It’s a

complete overhaul of indirect tax, a complete overhaul in relation to income tax. It

changes the interaction between the income tax system and family assistance and social

security, it changes dramatically Commonwealth State relations, it overhauls Australia’s

business taxes, and it ensures that our tax system works for our economy and not against


And I want to go through very briefly in all of those areas the changes which the new

tax system, the tax system for the next century, puts forward and the opportunities that

it gives us.

Firstly, in relation to indirect tax. The new tax system will have one broad based

indirect tax, the GST. It will abolish the current wholesale sales tax, the current

wholesale sales tax with its multiple rates of nought and twelve and twenty-two and

thirty-two, forty-one and forty-seven. It will sweep all of those wholesale sales taxes


And, in addition, it will abolish nine other indirect taxes. It will abolish financial

institutions duty, the money you’re charged when you put money into your account. It will

abolish the bank account debits tax, the money you’re charged when you take money out of

your bank account. It will abolish stamp duties on mortgages when people buy homes. It

will abolish stamp duties on shares, it will abolish stamp duties on leases, it will

abolish bed taxes, it will abolish all of those indirect taxes and put in place one broad

based indirect tax, a goods and services tax, and that rate will be ten percent.

People will know in relation to the goods or the services that they buy what the rate

is. It’s a uniform rate. And under a goods and services tax you don’t get tax on tax. This

is very important. Business gets refunded all the tax that is has paid on its inputs, on

its purchases, and then applies ten percent on its sales. The final product there is ten

percent but no other embedded indirect tax.

And so when you see newspapers try and give the way in which prices might change, it is

quite wrong just to abolish the wholesale sales tax and to add ten percent, that’s the

first round effect. But if you are really going to get the change in prices you have to

also take out the hidden embedded costs of the wholesale sales tax, the second round

effect, to get a real price effect.

Now in relation to the new tax system, we’ve put in this tax system, up the back, the

way in which, taking out embedded taxes, not just the wholesale sales tax, but the

wholesale sales tax which is embedded into business purchases, reduces business costs, and

as you can see as a result of that we reduce costs in all industries.

It’s not right that some newspapers have done just to take off wholesale sales taxes

and add ten percent. Now I saw one newspaper do that this morning. Not a bad model in

relation to the newspaper, but quite wrong. Quite wrong, just to take off wholesale sales

tax and add ten percent, because in relation to clothing and food all those inbuilt costs,

the costs of the transport, the costs of the wholesale sales tax on the machinery, the

cost of the wholesale sales tax on their computers and their furnishing, which is all

built in, is also taken off.

And, as you will see in relation to the price effects that we put in this document, the

New Tax System, in relation to clothing we reduce costs in relation to the clothing

industry, the embedded costs, of 2.9%. We reduce the embedded costs in relation to fruit

and vegetables by four percent, so that when you reduce those input costs and apply a GST

you don’t get a ten percent price effect at all, you get significantly less.

The second thing about the tax plan, the new tax plan for Australia that we put forward

yesterday, is that it allowed us to deal with Australia’s income taxes. We now have a

situation in this country where your average wage earner is paying forty-three cents in

every additional dollar that they earn. That means if the average wage earner wants a

promotion, or the average wage earner wants to earn some overtime, it’s forty-three cents

plus a Medicare levy, out of every extra dollar that they earn. And your average wage

earner is being pushed into higher and higher brackets because the tax take from indirect

tax is shrinking.

And I’ll make this prediction. Because the indirect tax base is shrinking, the tax take

in proportion to the economy shrinks year by year, the tax mix changes year by year, and

if you are to preserve it you are either going to broaden the base or increase the rates.

The Labor Party will increase the rates if they are elected. There is nothing surer.

Just as after the 1993 election they campaigned against GST and then increased wholesale

sales tax rates, they would do it again if they were elected. They have to to maintain an

indirect tax base. And just as the tax take from indirect tax keeps declining so too the

reliance of the tax system on income taxes keeps expanding.

Under this plan, average earners will face a top marginal income tax rate of thirty

percent, and will not pay a higher marginal tax bracket until fifty thousand, more than

fifty thousand dollars.

Your average earner, through the whole of their life, through their promotion, from

their starting point to their ending point need never pay more than thirty percent as

their top marginal income tax rate. That’s good, because it gives them incentive. That’s

good for the economy because people have incentives to work, and that’s good for families

and wage earners.

Lower income tax rates mean that you take home more of your pay. The tax is levied at

the consumption point rather than the earnings point. You have choice. For the average

income earner a great choice which the new tax system can give them.

And in relation to the cameos that we put forward and will be appearing in homes around

Australia over the next week or so, when we factor in the changes to show how people will

be better off, it’s how they’ll be better off after price increases from GST. The average

family will be forty to fifty dollars better off after paying the price in relation to

GST, which we expect to move prices by 1.9%.

The third thing that we do in the new tax system is we don’t just change the tax

system, but we change its interplay with the social security system. You see, not only are

people paying very high income tax rates on average earnings at the moment, but we are

shading out benefits which means that people can actually lose eighty and ninety cents in

tax and benefits for each additional dollar that they earn.

If you happen to be between twenty-seven thousand mark, every time you actually earn an

additional dollar you lose more than a dollar. Money is taken away from you at a higher

rate than you are earning through tax and social security.

In fact if you happen to be earning about twenty-seven thousand in Australia today and

the boss offers you a pay increase, don’t take it. You will have a lower take home salary

by taking a promotion, by earning more.

It can’t be right, can it, to be clawing back from people in tax and social security

benefits more than they earn. It can’t be right, can it, to have people at twenty and

twenty-five and thirty-thousand who by earning more have eighty and ninety cents taken out

in lost social security and in lost taxes?

That can’t be a good system. It’s not a system to encourage work, and we want to

encourage work, we want to encourage incentives and we want to make sure that people get

reward for effort. So we’ve changed the interplay between the income tax system and the

social security system, and particularly for families.

Families that are raising children, we think, need additional assistance, and not only

do they get income tax cuts but for those families that are raising children there are

additional benefits – a hundred and forty dollars per child, three hundred and fifty

dollars in addition for the single income family, the taper rates are changed, they know

they can get ahead.

So many people will say to you in Australia today I work so hard and I can never get

ahead. And they’re right. The new tax system will allow them to get ahead and get the

reward for their efforts.

A fourth thing that the new tax system does is it radically changes Commonwealth and

State revenue arrangements. The GST introduced in July of 2000 at a rate of ten percent,

will be used totally, totally, for state government and state government services. All of

the revenue from GST, less a small collection fee, will go to the state governments. That

means that money will go to state government services – schools, hospitals, roads,

whatever the state governments do.

From the state governments’ point of view this is the best financial deal they’ve had

since uniform taxation came in as a temporary measure during the second world war. It

means they have a growth tax. As the economy grows, as the goods and services in the

economy grows, and they have a ten percent share of it, their income grows, and in fact

over the first decade they will be about twenty-four billion dollars cumulatively and

collectively better off than if their grants are just indexed for inflation. It’s a growth

share of the economy.

And that means that in the future, if state governments want to abolish further state

taxes it won’t be a question of coming up to Canberra and asking for more money. They have

a growth revenue. The choice is theirs. Better services, lower taxes. It won’t be a case

of saying only the Commonwealth government with its growth income base can attend to state

taxes, it will be a question of the states assuming responsibility in relation to that.

This also gives us the opportunity to do two extra things.

One, if the GST revenue goes to the states, the states must unanimously request any

increase, if any. And the mechanism that we’ve put in place is that any one state premier

or chief minister could veto any proposed increase in the rate.

Now if you figure that in Australia we have an election going on practically at any

time of the year, with six states, two territories and one federal government all on three

or four cycles, that means on average you are having an election every five or six months

somewhere in Australia – there’s one on in Tasmania at the moment, there’s a by-election I

know in Melbourne, anyone of those state premiers of chief ministers in the midst of a

campaign who no doubt wanted to make themselves popular could veto the national request,

the unanimously required request for a tax increase, and even if it is unanimous, it still

has to go through the House of Representatives and the Senate, and that’s why the Prime

Minister can say, and I think I can say with certainty, I don’t think you are going to see

that rate increase.

The second point I make is from the Commonwealth’s point of view. The Commonwealth has

no motivation to increase that rate. Why would it? The revenue goes to the states. The

Commonwealth has no motivation to increase that rate if the revenue goes to the states.

What this allows us to do is to abolish the annual begging bowl trip to Canberra. The

states no longer have to come up to Canberra and ask for grants. Those grants are

abolished. The states have a guaranteed share of the goods and services output of


And let me point out to you those who want to keep the wholesale sales tax, Labor’s

tax, the wholesale sales tax, Labor will fight in the next election for the wholesale

sales tax. We make that clear. In the next election, Labor is fighting for the wholesale

sales tax. That is the tax they want. What mechanism is there to stop that going up? Not

only is it a hidden, complex, on different rates, requires no agreements from premiers or

chief ministers but it has a history. That was the tax they increased after the 1993

election, the last time they opposed tax reform. As sure as night follows day, I can

promise you one thing, if they were successful it would end the same. The income tax cuts

disappear and the wholesale sales tax rates go up.

I say to the Australian public, they took you in once before. Do not let them do it to

you again.

The next thing that the new tax system does is it changes business taxes. A radical

re-ordering of business taxes in a couple of ways. First of all we’re going to introduce

entity taxation so that trusts and companies will be taxed in the entity at the company

tax rate, and when they pay out franked dividend if there’s a person who has a lower tax

rate than the franked dividend of thirty-six percent, they are going to be given back the

excess tax.

If you happen to be a pensioner, let’s say, at the moment, who’s got a Telstra share,

and Telstra pays you a dividend, franked at thirty-six percent and your tax rate is only

twenty, you effectively lose that sixteen cents that’s been paid on your dividend. It’s of

no use to you, you weren’t liable for it, but it’s been taken out in the entity. Under our

system, of entity taxation, and reimbursing or refunding excess franking credits, you’ll

be able to claim the money back. If your tax rate was twenty percent and the dividend is

fully franked you come in and you get sixteen cents on the dividend back. Fantastic for

the self funded retiree, fantastic for the pensioner, fantastic for anybody in fact who’s

got a lower tax rate than thirty-six percent and is receiving dividends.

An entity taxation system allows us to reintroduce, to introduce, I should say, that

system which has never been done before.

The second thing we say in relation to business taxes, that implementing a mechanism

like that will allow us to simplify business taxation. We no longer need under a system

like that with all of those complicated rules in relation to dividends treating. We no

longer need all of those complicated rules in relation to trading of franking credits. If

you simplify the underlying concepts you can do away with hundreds of pages of the current

complex business taxation system.

And we can go further. We can go further in relation to company taxes and I think we

should be aiming by improving the company tax base for a company tax rate closer to thirty

percent than thirty-six percent down the track.

This is a new tax system which deals with indirect tax, with income tax, with the

interaction between tax and social security, with commonwealth state relations and with

business taxes.

I just want to mention two final things before taking your questions.

It’s also a health package.

The new tax system starts in July 2000. But on 1 January of next year, 1 January 1999,

in advance of the new tax system, the Government will be introducing a thirty percent

rebate on the cost of private health insurance. That means if you take out a private

health insurance of say eighteen hundred dollars, you’ll get six hundred dollars back. If

you want to claim it through the tax system you’ll claim it as a tax refund. If you don’t

pay tax, you can go and claim the money. If you take out a health insurance premium for

two thousand four hundred, you’ll get a thirty percent rebate, a third of two thousand

four hundred. If it’s twenty-one hundred you’ll get seven hundred back, and three eights

of twenty four, if it’s twenty-four hundred, you’ll get eight hundred back.

That’s designed to encourage people to take out private health insurance.

From an economic point of view it’s good for the government because that will reduce

demand on the public hospital system from those particularly older Australians, it’s a

direct financial benefit, and it’s something that older Australians will be factoring in

as they think about the way in which the new tax system will work.

I do want to mention just briefly however, some of the benefits that are in the new tax

system for older Australians.

The first thing for older Australians is that there is a four percent increase in

pensions, indeed in all pensions, but in this context in the aged pension, in July 2000 in

advance of the new tax system. That means before prices rise the age pension will increase

by four percent. We think that the effect of the tax changes will be 1.9%, so we’ve built

in a four percent increase in the aged pension in advance to make sure that pensioners are

better under the new tax system.

And what’s more, we guarantee to maintain the pension, 1.5% in advance of movements of

the consumer price index. If the consumer price index moved five percent, we’ll move the

pension 6.5. If it moved six, we’d move it 7.5. A guaranteed real increase of 1.5% for

aged pensioners.

The second thing we say in relation to older Australians who will be affected by a 1.9%

price increase, is that we will make available up to one thousand dollars for people that

are relying on their savings to compensate them for a 1.9% increase in the consumer price

index to ensure that if a price increase affects the value of your savings, you are

properly wealth compensated with a one thousand dollar bonus.

I make this point. Nobody’s ever done that before. When the CPI moves, and it moved

after Dawkins wholesale sales tax increases in 1994, or the when the CPI moved as it did

in the eighties, eight percent, nobody ever paid compensation to retirees in respect of

their savings, nobody every paid compensation in respect of their savings. The government

will be paying one thousand dollars to compensate people who rely on savings for a 1.9%

effect on their prices.

Thirdly, for aged Australians, there will be a two hundred and fifty dollar increase in

the tax rebate which applies to pensioners and qualifying self funded retirees. Two

hundred and fifty dollars off their tax liability so that in respect of their private

income they will not have to pay tax, two hundred and fifty dollars worth of taxes that

they would currently have to pay.

Fourthly, in respect of aged Australians the taper rate which takes you out of pension

as you earn more, currently at fifty cents, meaning you lose fifty cents of pension for

every dollar you earn, will be cut to forty percent, so that people will be able to earn

more without having loss of pension.

Fifthly, for pensioners and aged Australians who take out private health insurance,

there will be a thirty percent rebate off the cost of their premium.

Sixthly, for pensioners and older Australians who have dividends there will be

refundable imputation credits, a consequence of our new business taxation measure.

Next, there will be the abolition of provisional tax for those self funded retirees

that are in the provisional tax system.

Health will be GST free, meaning health costs should fall. No GST on delivering health

services and those delivering it get back all the taxes they pay on their inputs, on their

cars, on their computers, on their furnishings. All of the taxes that they pay on their

inputs. Things that are GST free in fact should become cheaper. GST free health, nursing

homes, nursing services, charitable activities and banking services will only be input


This is a new tax system for a new century.

We could pretend that if we do nothing with the taxation system, the easy option, that

things will go on as they are. They won’t. To do nothing will be to let things


I’d say to aged Australians who rely on the pension, or those that rely on social

security, if we don’t have a broad base for our tax system we won’t be able to fund

generous social services in this country in the future.

You will have all the arguments you like about what people should get by way of

benefits, but if you don’t have a robust, decent growing tax base, you won’t be able to

fund it. Those people who will say to pensioners we’ll maintain your pension, but rely on

a narrowing goods base for our indirect tax system. They are trying to sell you two

incompatible outcomes – a diminishing tax base with a constant or expanding expenditure


I welcome the fact that those in the Australian Council of Social Service seem to

recognise that point and have made that point. Those that genuinely represent those

reliant on social services will support a broadening of the tax base, and that’s what this

package is about.

I welcome the fact that not all the political parties in the Senate came to tax reform

with closed minds. I would have welcomed the fact if the Labor Party had said in a spirit

of bipartisanship, we will build a new tax system, which if we, Labor, were elected, we

would take advantage of, that we will build a new tax system for the next century for

whoever takes government. That would have been decent and responsible but they closed

their mind before the proposals were developed.

But that will not stop us. It will not stop us because Australia has to move on. We

have to move on if we are going to build a decent, fair and open Australia. We have to

move on with a decent, fair and open taxation system.

We have to move on and show the nation-building spirit in relation to this issue, in

relation to this century, in relation to this tax system.

We need a new tax system for a new century.

Thanks very much.