vultures circle australian retail gst

This article originally appeared in Inside Retail on 21 November 2014.

You can easily spot a catastrophe, but gradual decline can go on for years unnoticed. This is the reality for the Australian retail industry, slowly suffocating under the burden of ever-increasing labour costs, onerous workplace regulations and tax and duty free direct imports. Yet, no one seems to care.

While labour costs and workplace regulations are important, it’s a major anomaly in the GST system that has everybody talking.

If you want to buy anything online from overseas for less than $1,000, your purchase is exempt from GST and customs duty. This gives international retailers at least a 10% price advantage, before taking into account all the other factors. As it stands, it’s virtually impossible for local retailers to be price competitive online, as well as in their brick and mortar stores.

To highlight my point, Australia Post recently launched a new service to make it easier for Australians to buy goods from the US over the internet. When the ‘vultures’ feeding on the wounds of Australian retail are Australian themselves, it may be wise to start paying more attention to the problem at hand. And, industry figureheads agree – in an article published in the Australian Financial Review on 12 November 2014, Gerry Harvey accused Australia Post of “aiding GST avoidance”.


Help? Not anytime soon…

It seems logical that government would act to shelter the industry from unfair competition, but so far this hasn’t happened. In fact, in October 2014, Inside Retail reported two disappointing outcomes:

  1. During a meeting of small business ministers (state and federal), it was announced that no action would be taken to lower the value at which GST is applied to goods purchased online.
  2. Senior federal government officials assured the Australian Retailers Association that the issue remains on the agenda, but state governments oppose any changes to GST.

Realistically, it looks as if nothing will be done until at least 2016, with the cost of GST collection cited as the primary reason for inaction. Apparently, the extra GST revenue generated through lowering the $1,000 threshold would be in excess of $500 million per year, with the cost of collection through Customs estimated at $2 billion. But, I would like to assert that collection through Customs isn’t the only, or most efficient, way to help the retailer industry and harvest the GST revenue in question.


Retail is hurting and the pain could spread

Before I discuss an alternate solution, I want to elaborate on the wider possible economic fallout if this issue isn’t addressed.

I first voiced my concerns that the $1,000 threshold was negatively impacting the Australian economy in an article published in The Age in July 2012. At the time, I consulted extensively with retail industry leaders, senior politicians and lobby groups and most echoed my sentiments.

In my investigations, it was clear that large retailers could re-route online orders to an overseas fulfilment facility and therefore ship goods free of duty and GST. But, in most cases, I was informed that these businesses didn’t want to export jobs overseas – they would rather rely on the government to fix the problem. I only wish that our state and federal governments had adopted a similar attitude.

Now, knowing that governments continue to stall in finding a solution, the same large retailers may change course and move their growing ecommerce business abroad at the expense of their brick and mortar stores in Australia.

This will lead to fewer jobs, less tax revenue, reduced demand for retail real estate and other related economic liabilities. It’s a plausible notion that the government may eventually succeed in achieving the ‘impossible’ – to export shop assistant jobs overseas.

Unfortunately, smaller retailers don’t have the resources to move their fulfilment operation offshore. When pushed too hard they will have no option but to fold.


Context

Roughly 40% of online sales currently go overseas, translating into approximately $6 billion annually flowing offshore. Given that retailers such as supermarkets don’t really suffer from the GST anomaly, this leakage hurts specialty retailers the most.

Statistically, the $6 billion problem may appear insignificant with total annual retail turnover in Australia at approximately $200 billion. However, if you exclude supermarkets and hardware stores a different picture emerges. The undeniable fact is that a lot of specialty retailers are hurting right now.

How much damage must be inflicted on the retail sector of the economy before the federal and state governments act to remove this (in effect) negative tariff?


An alternative to Customs

A Treasury report, published in July 2012, suggests that Australia Post, express carriers and freight forwarders should be allowed to take goods ordered online out of Customs once community protection and biosecurity screening are complete.

Australia Post and the carriers could then be asked to collect the GST and handling fees. This, in conjunction with GST collection at source, would likely be enough to address the problem while eliminating the excessive costs associated with the Customs ‘solution’.

Let me elaborate.

Any parcel containing an overseas online purchase valued in excess of (say) $20 would have to be collected from the Post Office, with GST and handling fee paid on collection. If GST has been pre-paid the parcel will be delivered directly to the customer.

Major overseas retailers should be asked to collect GST pre-payments at the time of purchase and reemit the tax to the Australian Customs Department. Organisations such as Amazon would be inclined to comply, as this would allow them to continue direct deliveries.

If a preparatory period were allowed, most overseas retailers would have this model in place by the time the scheme became operational.

And, it would be surprisingly easy to cover most relevant purchases using this method: Amazon and eBay alone handle approximately 35% of all overseas internet purchases in Australia. A similar model operates in the UK, so this proposed solution is by no means reinventing the wheel.

The problem can be fixed, it just needs the political will to do so.

Australian retailers deserve a fairer go.

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ABOUT THE AUTHOR
Andrew Gorecki, MD of Retail Directions, has worked with the retail industry since 1985. Industry insiders appreciate his strategic advice and insights, as he lives and breathes for the industry. Andrew received a nomination for the Australian Entrepreneur of the Year Award in 2010.
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