The Northern Territory receives a higher proportion of its revenue from the Commonwealth than any other Australian jurisdiction, with around 70% of its total revenue being provided by the Commonwealth. Around half of the Territory's total revenue is comprised of goods and services tax (GST) revenue.
With the apparent loss of $2 billion in GST revenue over the next four years, the Northern Territory Government has stated that it is facing a challenging budget position, needing to compensate for the lost Commonwealth funding by providing additional own sourced revenue to continue growth and the provision of essential community services.
The Northern Territory Government has released the Northern Territory Revenue Discussion Paper in an effort to give the community an opportunity to have its say on how the additional revenue is sourced. The paper provides a summary of the Territory's current tax and royalty systems, setting out policy objectives and existing economic efficiencies or inefficiencies, and provides a range of reform options for consideration in order to stimulate community input into the Territory's future fiscal strategy.
In response to the discussion paper, Chamber of Commerce NT chief executive Greg Bicknell has said that the Territory has four genuine options open to it. It can increase revenue, as contemplated by the discussion paper; reduce services, which is not a practical option for a community already dealing with significant gaps; win the argument with the Federal Government over the expected loss of GST revenue; or develop industry like onshore shale gas.
Fundamental principles
In developing its fiscal strategy, the Territory has stated that it aims to maintain a competitive tax environment that encourages investment, creates jobs and attracts business to the Territory, while raising sufficient revenue to contribute to funding government services. To do this, the Territory believes taxes and royalties need to:
- deliver sufficient revenue now and into the future to allow Government to deliver services and infrastructure to Territorians;
- be as efficient and fair as possible, making sure everyone contributes to the development of the Territory, having regard to their capacity to do so;
- be as simple as possible to minimise compliance and administration costs;
- be as stable and predictable as possible so Government can plan and budget for the future; and
- support job creation and not act as a barrier to investment in the Territory by remaining competitive with the other jurisdictions.
Existing own source revenue
Approximately 30% of the Territory's total revenue is own source, predominantly made up of taxes on Territory employers (payroll tax), which accounts for almost 40% of own source revenue, mining and petroleum royalties (royalties) at 21% and taxes on property (conveyance stamp duty) at 14%. The remaining own source revenue mainly comes from gambling taxes, motor vehicle taxes and insurance duty.
The three biggest contributors to own source revenue (payroll tax, royalties and conveyance stamp duty) can vary significantly from year to year, making it difficult to forecast accurately and making planning of future spending a challenging exercise.
Opportunities for reform
Payroll tax
According to the discussion paper, payroll tax is the largest contributor to own source revenue, and is the most stable and predictable of Territory taxes, although it can be heavily influenced by major projects.
The Territory has a high tax free threshold for payroll tax ($1.5 million), meaning that the majority of small business do not have to register for or pay payroll tax. Because of the high tax free threshold, the tax base is smaller and a higher tax rate is required to achieve the desired revenue outcome.
The key reform options raised by the Government in respect of payroll tax are either alterations to the payroll tax rate of 5.5% or to the $1.5 million tax free threshold.
A 0.1% change in the payroll tax rate would lead to a $5-6 million change in total revenue.
Lowering of the tax free threshold to $1 million, so that around 150 more businesses pay payroll tax, would raise an additional $11 million, while lowering the tax free threshold to $600,000 (on par with South Australia's threshold, the lowest in Australia), so that around 450 more businesses pay payroll tax, would raise an additional $24 million.
The Territory has also considered introducing payroll tax incentives to encourage employment, and the reduction of payroll tax exemptions.
The Territory should tread carefully when considering payroll tax reform and ensure that any reforms do not discourage businesses from expanding and taking on new employees in order to avoid additional taxes.
Royalties
Mineral royalties can provide significant amounts of revenue to the Territory, however as most mines in the Territory pay profit-based royalties, the levels of revenue are unpredictable, with some mines closing before incurring royalty liabilities.
The Government is interested to hear of potential reforms that would ensure Territory royalties are more effective and supportive of business, but ensure an appropriate return to the community for the extraction of non-renewable resources.
Some options put forward by the Government include an adjustment to the mineral royalty rate (while acknowledging that a high royalty rate may act as a disincentive to mining activities), the introduction of a value based minimum royalty (ensuring a return to the Territory for mining, regardless of the profitability of the mine) and the replacement of the profit based scheme with a value based scheme.
In respect of petroleum royalties, the Government has put forward options including converting the current 10% royalty scheme to a profit-based royalty scheme as well as considering alternative methods of determining the value of petroleum. The Discussion Paper notes that discussions on petroleum royalties do not presume any particular outcome of the Scientific Inquiry into Hydraulic Fracturing which is currently being conducted in the Northern Territory.
The Scientific Inquiry's final report, which is due to be released in March 2018, is likely to play a role in determining reforms in relation to petroleum royalties. Should hydraulic fracturing be permitted in the Northern Territory, this will be another significant source of revenue which at present cannot be accounted for.
Property tax
Conveyance (stamp) duty is the third largest provider of own source revenue in the Territory. It is difficult to forecast accurately as it is affected by property prices, sale volumes and large commercial transactions in an otherwise small market. Currently, duty is collected from the transfer of dutiable property (including, but not limited to, real property, mining or exploration rights, business assets and intellectual property).
The Territory has relatively high stamp duty rates in comparison to other jurisdictions, however does not have the annual land tax found in other areas. The high stamp duty rates can be seen as a financial barrier to transactions occurring, however a number of concessions are available, such as for first home buyers, seniors, pensioners and carers, or those purchasing their principal place of residence. These concessions amount to over $24 million of Territory revenue forgone each year.
The key reform options raised by the Government in respect of property tax include changes to stamp duty rates, the abolition of duty on non-land business property, the reform of legislation relating to landholders (including companies and trusts) and the imposition of an annual land tax as an alternative to stamp duty.
Members of the property industry have reacted with concern to suggestions of an increase in property tax. The Property Council NT's executive director Ruth Palmer has noted that the property industry is already one of the highest taxed sectors in Australia and that the introduction of a land tax would increase the already high cost of living pressures, and affect property owners and investors who have already paid stamp duty.
Other opportunities
The discussion paper outlines other reform possibilities relating to gambling taxes, motor vehicle taxes, insurance duties, banking taxes. It also considers revenue from various other own source revenue bases including fees and charges, pastoral lease rents and mineral and petroleum title rents.
Existing revenue sources and potential revenue sources are all being considered as the Territory attempts to shake up the status quo to become more self-sufficient.
Consultation process
The Territory wishes to engage with the community, along with industry and peak bodies during the period of November 2017 to January 2018, with the closing date for written submissions being 28 February 2018.
Submissions can be lodged with the Department of Treasury and Finance by email to [email protected] or by mail or hand delivery.
The Northern Territory Revenue Discussion Paper is available for download from www.RevenuePaper.nt.gov.au, which will also publish updates on timing of the consultation process and submissions made to the Department of Treasury and Finance.