Shifting from pre-paid to periodic GST on the consumption of residential premises

Abstract

Under the theoretical model of GST, a purchaser is entitled to claim input tax credits when a good is purchased. GST is then imposed on the annual value of the good as it depreciates and is used. In jurisdictions with a GST, this is accomplished in practice by the use of what is known as the pre-paid method in which GST is levied on the purchase price of goods on the assumption that this amount equals the present value of all future consumption of the goods and the GST thus equals the present value of all GST that would be imposed on the future consumption. Second-hand sales of goods are not subject to GST. This current GST treatment produces the correct result when applied to most goods, as these are generally consumed immediately or waste over time. However, it does not address the fact that the value of residential premises generally appreciates over the long-term, yielding more consumption. Therefore significant consumption in relation to residential premises is left outside of the GST base.

This article provides the first simulation showing the annual impact of an alternative approach: Imposing GST periodically on an estimate of the consumption of residential premises. It uses a unique combination of independent variables comprised of the appreciation rate, market rental rate, GST rate and present value rate to explain how a homeowner’s tax liability could be calculated. Australian data is used for the purpose of discussion. However, data from other jurisdictions could be inputted into this simulation which could be used as a tool to demonstrate the effect of shifting from pre-paid to periodic GST. Several policy alternatives are discussed regarding the values that could be given to each of the independent variables, and discussion is provided of what would happen if the values of the variables were increased or reduced. Possible ways to collect GST and potential implementation issues are also considered.

Keywords: GST, VAT, imputed rent, residential premises, property, housing

JEL Classification: K34