Closing tax loopholes: let's start at home

Sometimes the most obvious solution to a problem can be right in front of your eyes.

The new Federal Government is, rightly, wrangling with how to protect and promote vital industries such as manufacturing and agriculture, one of the nation's largest employment sectors is only now beginning to blossom after four years in the doldrums.

The retail sector in Australia employs in excess of 1.2 million people, compared with just over 1 million people in construction, 922,000 in manufacturing, and 307,000 in agriculture and related sectors.

However, potential growth in retail is being choked by an extraordinary tax arrangement that gives a trade advantage to overseas-based retailers, at the expense of Australian businesses and local jobs.

And with Treasurer Joe Hockey looking to close international tax loopholes in his quest for additional revenue, again, the most obvious solution may not be overseas at all, but right in front of the government's eyes.

When the GST legislation was drafted in 1999 by the Howard Government, online shopping was possible but it was not the mainstream phenomenon that it is today. Due to the low volume of on-line sales, the then Government decided to exempt all international sales worth $1000 or less from the new tax.

However, now that online shopping has become a huge and growing phenomenon, this Low Value Import Threshold (LVT) is an ever-increasing source of lost revenue for the Federal and State Governments.

Researched conducted by Ernst and Young, and commissioned by the National Retail Association, shows that lost GST revenue to the states will exceed $1 billion next financial year as a result of the LVT loophole.

The next report estimated the loophole will cost up to 33,400 local retail jobs – most likely the jobs of lower paid or vulnerable workers such as young people, single parents and senior workers returning to the workforce.

As retail profits decline and these jobs disappear, so too do many more millions in income and company taxes.

Having placed international tax loopholes firmly in his sights, Treasurer Joe Hockey should task his Commission of Audit with examining the revenue being lost now and in the future through the LVT.

At $1 billion in GST next year alone, this is not only one of the biggest and most obvious problems that should be considered in the context of government revenues and repairing government budgets, but it's also one of the easiest to fix.

It requires no torturous bilateral or multilateral negotiations. Closing this loophole is as simple as doing away with the unfair exemption for overseas purchases.

This could not reasonably be argued to breach the government's pre-election undertakings in relation to the GST. The government said it would vary neither the rate nor the base of the tax. This change would not affect the rate, and it would only catch goods and services currently included in the tax base if sold domestically.

The plain fact is that the GST was always supposed to apply to these types of consumer products. It's time that it was applied fairly across the board.

Australia is not alone in grappling with this loophole in its tax regime. Most comparable nations around the world have already taken the action needed to close similar loopholes that once existed in their tax regimes.

And in response, the major global on-line retail corporations – which represent the vast bulk of on-line sales into Australia – have put in place systems to collect and remit the appropriate amount of tax to each individual government.

It would be no major imposition to ask them to comply with the same requirements Australian businesses face, in return for the privilege of selling into the domestic market.

This is not about erecting some non-tariff barrier to advantage Australian businesses. Quite the opposite – it's about creating an even playing field to ensure the Australian tax system works to encourage local businesses, rather than punishing them.

To take no action on this issue will place local businesses increasingly at a disadvantage. Already some larger retailers have publically canvassed the option of moving their on-line operations off shore, to take advantage of the tax exemption.

This not only flies in the face of the Treasurer's efforts to close international loopholes, but it also runs counter to the basic desire of Australian business people to contribute to our local economy.

Going on-line offshore is not something most retailers would have considered – yet. But it may become increasingly appealing to them as time goes on.

After all, the most obvious solution to a problem is often right in front of your eyes.