All roads lead to a tax shake up after EV ruling

The 1997 High Court case banning state franchise fees levied on tobacco, liquor and petroleum was one of the catalysts for the introduction of the 10 per cent GST.

As the federal treasurer at the time, Peter Costello, wrote in his memoirs, “The High Court decision became the trigger to announce a taxation taskforce” led by Treasury secretary Ken Henry to develop a tax package including the GST.

The High Court ruled 26 years ago that the franchise or licence fees collected by the states were duties of customs and excise, so the taxes on tobacco, liquor and petrol could not be imposed by the states because, under the Constitution, commerce between the states must be free.

The tax packaging industry is now promoting salary sacrificing for EVs as a tax-minimisation scheme for higher income people.

Costello had already begun publicly hinting that the tax system was broken soon after the May 1997 federal budget.

The High Court’s decision in August of that year put the tax reform effort into overdrive, after people realised the state indirect tax base had collapsed and was being underwritten by the Commonwealth.

Initially, the Commonwealth took over state excises on tobacco, alcohol and petroleum on behalf of the states. To deter taxpayers claiming refunds for past invalid state taxes paid, the Commonwealth passed a law to tax any refunds at 100 per cent.

The messy stopgap fix was not sustainable.

Ultimately, a uniform 10 per cent GST was introduced, while abolishing wholesale sales tax that discriminated against certain products at different rates.

Personal income taxes were cut, welfare payments increased to protect the poor, and other state taxes, such as on bank accounts and share transactions, were abolished.

Fast-forward to today and state treasury departments are anxious about the EV decision. They are seeking legal advice on how far-reaching the implications are for their tax bases.

One school of thought is that Victoria drafted its EV user charge legislation too broadly and sloppily. Had it been more tightly written and narrowly applied, the tax may have been permitted.

Hence, NSW and Western Australia, which are both scheduled to begin imposing EV taxes in 2027, still hope they may be able to proceed.

“The NSW government will have to carefully study this decision and determine whether or not the previous government’s legislation remains constitutionally valid and if not, whether or not it can be revised so it falls within the scope of NSW’s constitutional authority,” NSW Treasurer Daniel Mookhey said last week.

“We would expect the Commonwealth government to be a party to the solution now, to ensure that all road users are making a contribution to road maintenance.”

Victoria’s Treasurer Tim Pallas is seriously worried too.

There is lingering concern that a raft of state taxes are only one High Court challenge away from being prohibited.

The Albanese government will come under pressure from the states to impose a federal road-user charge on behalf of the states.

It should have already happened after Henry’s 2009 comprehensive tax review, which recommended road-user charges on all vehicles, before electric vehicles were widely thought of.

Henry found the hodgepodge of fuel excise, stamp duty on motor vehicles, the luxury car tax and vehicle registration fees didn’t make sense and that they should be replaced.

A comprehensive cents-per-kilometre road-user charge would be a better cost recovery scheme to pay for the cost of road damage, congestion and emissions if there was no carbon price.

Road-user charging would be centrally administered by the federal government. The federal, state and local governments would share in the revenue consummate with their road spending responsibilities.

Had it been implemented, the High Court’s decision last week would never have happened. It’s yet another cost of the delay to tax reform.

Motor vehicle groups are generally supportive of shifting to road-user charging.

Applying the distance charge to EVs and hybrids – which are exempt from fuel excise – should be relatively easy, before many people are driving them.

Instead, EVs are benefitting from the Commonwealth’s ridiculous exemption from fringe benefits tax, cash subsidies from state governments, and discounts on stamp duty and registration fees.

Exempting low and zero-emission cars from FBT potentially saves high-income buyers as much as $30,000, excluding other state government handouts.

It gives a full income tax deduction for the costs of acquisition and maintenance of an EV, plus all costs are GST free.

The tax packaging industry is now promoting salary sacrificing for EVs as a tax-minimisation scheme for higher income people.

The scheme is inequitable, economically inefficient and make almost no difference to global carbon emissions.

Moreover, federal-state tax reform will need to expand beyond road-user charges as state tax bases come under pressure.

According to a new paper by indirect tax lawyer Kevin O’Rourke presented to the Tax Institute, it is now time for the states to collectively step up and progress state tax reform and federal-state intergovernmental reform.

“GST will be an essential feature of that reform,” O’Rourke says.

O’Rourke says the under-taxation of financial services under the GST is ripe for reform. Taxing financial services could raise about $6 billion a year, even if other GST exemptions for fresh food, health and education are left untouched.

“The states could probably do with that revenue after last week’s High Court decision on the road-user charge,” O’Rourke says.

Whether they like it or not, Anthony Albanese and Jim Chalmers will come under renewed pressure from the states to confront tax reform. Just like 26 years ago, the High Court’s decision is too big to ignore.