Fresh Food GST Exemption Information
LiveLighter’s Key Messages
- Removal of the current GST food exemption has the potential to reduce the quality of Australian diets, and increase the already significant burden of diet-related chronic disease.
- The low cost of energy-dense, nutrient poor foods relative to nutrient dense foods plays a major role in the increased energy intake that contributes to overweight and obesity.[i]
- Given that five per cent of Australian adults eat the recommended amount of fruit and vegetables [ii] and 63.4 per cent are classified as overweight or obese,[iii] removal of the GST food exemption is an inappropriate means of increasing government revenue.
- The Federal Government should instead consider implementing an excise tax on sugary drinks, similar to that imposed on alcohol and tobacco, as a means of raising revenue and as a tool in combating overweight and obesity.
- Should the Federal Government wish to make changes to the GST, an increase to the GST rate applying foods that already attract GST is preferable.
The Federal Government’s Re:think Tax White Paper (Re:think) has proposed to remove the current GST food exemption in order to fund reduction of income tax rates.[iv] The changes considered in Re:think have the potential to reduce the quality of Australian diets and increase the already significant burden of chronic disease.
The Australian Dietary Guidelines (ADG) recommend that Australians eat fruit and vegetables every day due the association between these food groups and reduced weight gain and lowered risk of several chronic diseases.[v]Research concerning demand elasticity suggests that an increase in the price of fruit and vegetables of 10 per cent would lead to a five per cent reduction in consumption.[vi]
Any fiscal measure that may decrease consumption of fruit and vegetables is unacceptable. Changes to Australia’s taxation system that will increase the price of core foods are inconsistent with the World Health Assembly recommendations[vii] and are inconsistent with the Federal Government’s own Australian National Diabetes Strategy.[viii]
The Federal Government’s Re:think paper was released in March 2015 and is aimed at developing ‘a better tax system that delivers taxes which are lower, simpler and fairer.’[ix] Re:think marks the commencement of the Federal Government’s formal tax review, which will consider future directions for Australia’s tax system.[x]
The Current GST System
In 1999, the Howard government passed A New Tax System (Goods and Services Tax, GST) Act 1999 (the GST Act), effective from 1 July 2000.[xi] The GST Act facilitated a transition from a complex wholesale sales tax to a ten per cent value added tax on all goods and services in Australia, and on goods imported to Australia, except for those specifically exempt from the tax.[xii] Food, beverages, food ingredients and food additives for human consumption are generally exempt. [xiii]
The food exemption was a crucial to the passage of the legislation as negotiated by the Australian Democrats, who held the balance of power in the Senate.[xiv] In insisting upon the food exemption, the Democrats provided sound reasoning, which has, given the approximately 6.5% rise in overweight and obesity between 1995 and 2015, become increasingly relevant since the passage of the legislation. The Democrats called for the exemption on the basis that taxing food could exacerbate poor nutrition in low income groups.[xv] The Democrats also argued that the food exemption was necessary in that ‘the equity case [for the exemption was] compelling, the economic efficiency case for taxing food [was] neutral and the simplicity argument for taxing food [was] somewhat overstated, and should always be sub-ordinary to the equity and efficiency principles.’[xvi]
Schedule 1 to the GST Act lists foods that attract GST, and Schedule 2 lists drinks that are GST exempt. In an attempt to maximise certainty, the Federal Government has taken care to draft extensive definitions of these foods and drinks, and has developed an online searchable database of foods to assist businesses to minimise administration costs.[xvii]
Schedule 1 and 2 Foods and Drinks
Non-exempt ‘foods are listed in Schedule 1 of the GST Act, and include:
- All foods for consumption on the premises where they are supplied;
- Savoury snacks such as salted seeds or nuts, crisps, confectionary, popcorn;
- Bakery products including cakes, muffins, doughnuts, pastries and pies (but not breads unless they have a sweet filling or coating);
- Ice cream and other frozen snacks; and
- Foods consisting principally of crackers, cones or wafers.
Drinks that are not listed in Schedule 2 and therefore attract GST include carbonated drinks that are not made entirely of fruit or vegetable juices, juice drinks that contain less than 90% fruit or vegetable juice by volume, and ready to drink coffee, tea, chocolate, sports and energy drinks.
Broadening the GST Base – Proposed Changes
Re:think is partially based on the Organisation for Economic Co-operation and Development 2015 ‘Going for Growth’ Report (OECD Report) recommendations for Australia, which are aimed at developing growth strategies that raise the country’s gross domestic product.[xviii]
The OECD Report notes that Australia’s consumption taxes are relatively low, and our income taxes are heavy. Recommendations for reform include reduction of the corporate tax rate alongside raising the currently low GST rate, and/or widening the GST base.[xix]
Re:think expands upon these recommendations and considers whether the GST base should be broadened to encompass all foods, including fresh fruit and vegetables.[xx] Re:think states that the GST is generally efficient, in that it applies at a uniform rate to a broad range of goods and services, but that the exemptions to the GST detract from this, as they significantly increase the complexity of the GST, increase administration and compliance costs and introduce distortions by changing the relative prices of goods and services.[xxi] Re:think further states that GST exemptions are also less efficient because they cannot be means tested, and are available to all households, regardless of their income level.[xxii]
GST and the Australian Dietary Guidelines
While removal of the GST food exemption may be economically sound in that it presents a means of improving tax efficiency and simplicity, Re:think does not explore the issue in terms of health impacts or financial impacts for low-income households.
The National Health and Medical Research Council’s Australian Dietary Guidelines were developed, based on scientific evidence, to provide guidance to the Australian public on healthy food choices to achieve and maintain a healthy weight and reduce risk of chronic diseases.[xxiii] The ADG note that in the past few decades, socio-environmental factors, including increased availability and marketing, and the low cost of energy dense, nutrient poor foods relative to nutrient dense food has been a major contributor to overweight and obesity. The ADG further state that healthy weight initiatives must achieve a balance between individual and societal responsibility.[xxiv]
Current levels of consumption
The Australian Bureau of Statistics National Health Survey (NHS) states that in 2014-15, 49.8% of Australians aged 18 years and over met the guidelines for the ADG recommended daily servings of fruit (2 or more serves), while 7.0% met the guidelines for serves of vegetables (5-6 or more serves for men depending on age, and 5 or more for women).[xxv] Only 5.1% of adults met both guidelines.[xxvi] 68.1 per cent of children aged 2-18 met the guidelines for recommended daily serves of fruit, and 5.4 per cent met the guidelines for serves of vegetables.[xxvii] Similar to the intake of adults, only 5.1 per cent of children met both guidelines.[xxviii]
Impact of removing the food exemption
Obesity is largely the result of an obesogenic environment maintained by companies with a vested interest in providing processed, energy dense, nutrient poor food as cheaply as possible, and of an increasingly sedentary lifestyle.[xxxi]
To promote the frequent intake of fruits and vegetables foods, and in turn reduce negative health outcomes and cost to the health system, a supportive food environment is required to ensure that fresh, nutrient dense foods are available, affordable and of adequate quality. Imposing a ten per cent tax on core foods is highly likely to result both in further decline in fruit and vegetable consumption and increased consumption of processed foods.
Studies of the impact of taxation on specific foods and drinks have found that, generally, non-trivial price interventions of 10 per cent or more have an impact on individual behaviour, and, while having a small impact on individual behaviour, could have a large impact at the population level when applied broadly.[xxxii] A comprehensive review of studies of consumer demand published in the United States between 1938 and 2007 has reported that, on average, a 10 per cent increase in the price of fruit and vegetables would reduce consumption by 5.8 per cent.[xxxiii]
Similarly, Australian modelling based on estimates of price elasticity of demand for fruits and vegetables in the United States, has estimated that the removal of the GST food exemption would result in a decline of 4.9 per cent in fruit consumption and 4.8 per cent for vegetable consumption.[xxxiv]
Using the Assessing Cost-Effectiveness in Prevention model, it was further estimated that this reduction in fruit and vegetable consumption could cost about 100 000 healthy life-years over the lifetime of the 2003 Australian adult population due to an additional 90 000 cases of ischaemic heart disease, stroke and cancer.[xxxv] These estimates relate purely to the impact of removal of the exemption for fresh fruit and vegetables, and it is clear that consumption of other core foods, such as wholegrains, low fat dairy and fresh lean meat, would also be negatively affected by the proposed changes to the GST base.
It is also important to consider the sizeable health costs associated with overweight and obesity. In 2005, the total direct costs of overweight and obesity were $21 billion, and it is estimated that health costs associated with a 10 per cent increase in the cost of fruit and vegetables may be up to $1.8 billion.[xxxvi]
Re:think notes that ‘some stakeholders support the retention of (food) exemptions on the basis that these goods are ‘basic’ necessities’, arguing that the burden of applying GST to them would fall disproportionately on lower-income households.[xxxvii]
Ideal fiscal policies are simple (to administer and comply with), equitable, efficient and practicable. Vertical equity demands that those with greater ability to pay tax should pay more, and those with less ability to pay should pay less.[xxxviii] In this respect, the proposed removal of the GST exemption for fresh fruit and vegetables and other core foods violates vertical equality, is regressive and has the capacity to generate undesirable social welfare outcomes.
Price changes to basic foods are likely to have the greatest impact on low-income households, who spend the greatest proportion of their income on all categories of food.[xxxix] In 2009-10, low income households spent 15% ($17) of their weekly income on fruit and vegetables, while high income households spend $38, or ten per cent of their income.[xl]
Another issue that was raised prior to the introduction of the GST, and continues to be debated today, is whether the effects of removal of the GST food exemption could be offset by financial support to assist low-income households to buy fresh fruit and vegetables (i.e. food stamps).[xli] Such an initiative may arguably generate a significant administrative burden, would be sensitive to changes in government policies and priorities and may not be accessible to all families, especially those who are time poor.[xlii]
Global and National Landscape
The World Health Assembly (WHA) has called upon governments to implement policy interventions that will address rising rates of obesity.[xliii] Such measures include ‘economic tools that are justified by evidence, and may include taxes and subsidies that create incentives for behaviours associated with improved health outcomes, improve the affordability and encourage the consumption of healthier products and discourage the consumption of less healthy products.’[xliv]
In November 2015, the Federal Health Department released the Australian National Diabetes Strategy 2016-2020 (the Diabetes Strategy), which is aimed at identifying the most effective and appropriate interventions to reduce the impact of diabetes in the community, and lead the way in diabetes prevention.[xlv] Goal 1 considers strategies to prevent people from developing type 2 diabetes. The Diabetes Strategy states that a potential area for action is reducing modifiable risk factors through ‘increasing the availability of and demand for healthier food or reducing the availability of unhealthy food.’ The evidence clearly establishes that removal of the ‘basic’ food GST exemption would result in a reduction of the availability and demand for healthier foods, and in this respect would be inconsistent with the Federal Government’s own health priorities.
Based on the above outlined evidence, we are of the view that the GST structure and rate should remain unchanged.
However, if reform to the taxation system is to occur, the Federal Government should first consider the revenue raising potential of an excise tax on sugary drinks or other unhealthy foods, as have been implemented in Mexico and Denmark. A sugary drinks tax has the benefit of both raising revenue and assisting to improve health outcomes and is consistent with World Health Organisation recommendations.[xlvi] See LiveLighter’s position paper concerning a sugary drinks tax for more information.
Should the Federal Government wish to make changes to the GST, an increase to the rate is preferable to removal of the GST food exemption.
LiveLighter is a public health education campaign which encourages West Australians to lead healthier lives by changing what they eat and drink, and being more active. Delivered by the Heart Foundation and Cancer Council WA, the LiveLighter campaign is funded by the West Australian State Government. For more information visit www.livelighter.com.au
[i] National Health and Medical Research Council, Eat for Health – Australian Dietary Guidelines, Canberra (2013), p. 22.
[ii] Australian Bureau of Statistics, National Health Survey 2014-15: First Results, Canberra (2015), Report No. 4364.0.55.001, p. 36.
[iii] Ibid, p. 25.
[iv] Commonwealth of Australia Department of Treasury, Re:think – Tax Discussion Paper, Canberra (2015).
[v] NHMRC, p. 37 and 40.
[vi] J Veerman and L Cobiac Removing the GST exemption for fresh fruits and vegetables could cost lives. (2013) 199(8) Med J Aust, 534-535.
[vii] World Health Organisation, Global Action Plan for the Prevention and Control of Noncommunicable Diseases 2013-2020, Geneva (2013), p. 32.
[viii] Commonwealth of Australia Department of Health, Australian National Diabetes Strategy 2016-2020, Canberra (2015), p. 10.
[ix] Re:think, p. 3.
[x] Ibid, p. 1.
[xi] A New Tax System (Goods and Services Tax, GST) Act 1999, s. 1.2.
[xii] Re:think, p. 131.
[xiii] A New Tax System (Goods and Services Tax, GST) Act 1999, Chapter 3, ss. 38.1 – 38.6.
[xiv] Parliament of Australia, Senate Select Committee on a New Tax System - Main Report, Canberra (1999), http://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Former_Committees/gst/main/index, p. 14.
[xvi] Parliament of Australia , Senate Select Committee on A New Tax System: Supplementary Report, Senator Andrew Murray, tabled 30 April 1999, Canberra (1999) www.aph.gov.au/senate/committeee/gst/report1/, p.18
[xvii] Commonwealth of Australia – Australian Taxation Office, GST Food Search – Detailed List, https://expertsystems.ato.gov.au/scripts/net/SearchableFoodList/scSearchableFoodList.aspx?PID=68&ms=Businesses. 1
[xviii] Organisation for Economic Co-operation and Development, Economic Policy Reforms 2015: Going For Growth – Executive Summary, Istanbul (2015), p. 11.
[xix] Organisation for Economic Co-operation and Development, Economic Policy Reforms 2015: Going For Growth –Country Notes, Istanbul (2015), p. 139.
[xx] Re:think, p. 133.
[xxi] Ibid, p. 138.
[xxii] Ibid, p. 136.
[xxiii] NHMRC, p. 2.
[xxiv] Ibid, p. 15.
[xxv] Australian Bureau of Statistics, National Health Survey 2014-15: First Results, Canberra (2015), Report No. 4364.0.55.001, p. 36
[xxvi] Ibid, p. 36.
[xxvii] Ibid, p. 40.
[xxviii] Ibid, p. 25.
[xxix] Ibid, p. 40.
[xxxi] The Lancet, ‘Obesity: we need to move beyond sugar’ (2016) 387 The Lancet, 199.
[xxxii] M Powell and F Chaloupka, ‘Food Prices and Obesity: Evidence and Policy Implications for Taxes and Subsidies,’ (2009) 87 The Milbank Quarterly, 229-257, p. 249.
[xxxiii] Veerman and Cobiac, p. 534.
[xxxvii] Re:think, p. 133.
[xxxviii] Ibid, p. 29.
[xxxix] Commonwealth of Australia – Australian Institute of Health and Welfare, Australia’s Food and Nutrition 2012, Canberra (2012), p. 96.
[xl] Ibid, p. 95.
[xl] N Antonopoulos, J Martin, ‘Goods and Services Tax – The Basic Food Exemption: Policy Brief’, Obesity Policy Coalition (2015), p.
[xlii] Ibid, p. 3.
[xliii] World Health Organisation, p. 32.
[xlv] Commonwealth of Australia Department of Health, Australian National Diabetes Strategy 2016-2020, Canberra (2015), p. 10.
[xlvi] World Health Organisation, Report of the Commission on Ending Childhood Obesity (2016) Geneva, p. 17.