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GST rise off tax reform table

Big question: Is it tax-free pizza roll or a GST-incurring pizza product. Picture: Ian Munro/The West Australian

The Federal Government has moved to stop a politically dangerous debate on increasing the GST ahead of the next election, using its tax White Paper to effectively kill the idea.

Releasing a discussion paper today, which will be the basis of a White Paper to be delivered early next year, the Government makes clear that despite major problems with the GST it would only change the tax if it had the unanimous support of the States and across the parties.

But a range of other taxes, including State stamp duties, are in the Government's sights, as are company and income tax rates.

Treasurer Joe Hockey said the Government must reform taxes so they were lower, simpler and fairer.

"The problem we face is that our current tax system, which was designed before the 1950s, is ill-suited to the 2050s," he said.

The discussion paper, prepared by Treasury bureaucrats, warns that Australia is heavily reliant on income and corporate taxes, which account for about 70 per cent of the total tax take.

The reliance on individual income will intensify in coming years unless tax cuts are implemented.

The report finds bracket creep in the next two years will push another 300,000 workers into the second-highest marginal rate of 37 per cent once their wages hit $80,000 a year. The average annual wage now is $75,000. By 2050, nearly half of all taxpayers will be in the top two tax brackets.

The discussion paper also flags reducing high effective tax rates, which act as a barrier for parents to work extra hours because the extra income they earn is more than offset by increased tax or loss of welfare benefits.

It says targeting tax cuts at lower income earners should generate a higher workforce participation response than if they were skewed at higher income earners.

Another area requiring urgent attention is the 30 per cent company tax rate, which is higher than in other countries.

The discussion paper notes spending in areas that do not attract the GST - such as health, education, rent and financial services - has risen faster than in other parts of the economy.

GST, the third-biggest tax collected by the Government, has declined relative to the rest of the economy over the past decade.

At 10 per cent, Australia's GST rate is low by world standards, it has many exclusions and the threshold for it to be imposed on imported goods is relatively high.

Despite these problems, the discussion paper says there is almost no chance of changing anything about the tax.

"The Australian Government will only consider progressing any such proposals if there is a broad political consensus for change, including agreement by all State and Territory governments," it said.

The paper shunts addressing the distribution of GST revenue, Premier Colin Barnett's major gripe, to a separate White Paper on Federal-State relations.

Treasury highlighted the complexity of Australia's tax system with a simple piece of bread with sauce, cheese and meat on top.

When the GST was introduced in 2000, a deal between the Howard government and the Australian Democrats excluded fresh food. But over the years it has become clear the dividing line between fresh food and takeaway meals has changed.

According to Treasury, pizzas and pizza subs and pizza pockets clearly attract the 10 per cent GST. Yet a pizza roll should be GST-free - unless it starts to look or taste like a pizza.

To tell the difference, the tax office has made rulings on the depth of the topping (too many anchovies will turn your roll into a pizza), the dough recipe (if it is fresh bread rather than a pizza base) and the size of the roll.