GST proposals risk double tax on new-home buyers

A 10 per cent tax to financial services could raise billions of extra dollars but it would be complex and risk double taxing new-home buyers, experts say.

Former KPMG tax partner Michael Evans suggested a "supplementary" tax on margin-based financial services in a paper commissioned by the South Australian government earlier this year.

The change would mean the margin of profit earned by banks on services such as home loans would be taxed at 10 per cent, which is the current rate of the goods and services tax.

"In the case of deposit-taking and lending, the taxable margin is the difference between the interest paid and the interest earned over a period," Mr Evans said.

"For foreign exchange transactions and derivative trading, it would be the difference between sales and purchases over a period."

PwC tax partner Paul Abbey said while the idea seemed politically palatable on the surface, designing a compensation package for low-income earners affected by the change, would be very difficult. ​

"Nobody in the world has done this and the danger is that Australia ends up spending a lot of time designing and modifying the model," he said.

HARD TO IMPLEMENT

"If you lined up the options for reform and said which should we be going with, this one would be the hardest to implement and most difficult to compensate for," he said.

Heath, education, financial services, and fresh food were excluded from the GST when it was introduced in 2000.

The government is due to release a tax green paper before the end of the year and there has been much speculation it will propose changes to either the rate or base of the GST.

The Australian Financial Review reported on Tuesday the GST would not be extended to health and education, leaving financial services and fresh food as the two areas most vulnerable to a broadening of the tax base.

Federal Treasury estimates that under-taxation of financial services at $4.7 billion in 2015-16, although these figures are widely acknowledged as being rubbery.

South Australian Premier Jay Weatherill asked Mr Evans, now a senior fellow at the University of Melbourne, to examine options for extending the GST to financial services.

SHARE WORTH $332M

The study found South Australia's share of the extra revenue generated would be $332 million.

"At its simplest, the proposal will operate as a tax on a banks' net interest margin," said Mr Evans' report, which formed the basis of a speech in September by Mr Weatherill at the Financial Review's Tax Summit, co-sponsored by KPMG.

"For the four major banks, the net interest margin for the 2014-15 financial year was between 2 per cent and 2.2 per cent."

​EY indirect tax leader Brad Miller said it was an "interesting idea" but could mean double taxation for home buyers.

"Take the example of a young family that needs to borrow to buy a newly built home," he said.

"They could end up paying GST on the interest on the loan, as well as on the purchase of the property."

BDO's lead GST partner, Andre Spnovic, said the Mr Evans was a well respected academic and the idea was worth considering further.

"At the moment we seem to always be having a conversation about the rate of the GST, but what Jay Weather ill is saying is we need to be having a broader conversation.

"Whether there is an appetite for the level of detail contained in this paper is another question."