Calculating theoretical GST liability
We use gross domestic product (GDP) by expenditure type as the foundation for estimating theoretical GST liability. GDP represents the total of the value added in the production of goods and services in the domestic economy.
As the Australian GST system is a tax on final consumption expenditure on goods and services within the domestic economy, theoretical GST liability is the sum of final private consumption expenditure, investment expenditure, and government expenditure on goods and services subject to GST. It includes:
- household final consumption expenditure by expenditure/commodity type
- final consumption expenditures of non-profit organisations servicing households subject to GST that is irrecoverable by the non-profit organisations
- final consumption expenditures of government (including individual and collective consumption expenditure) subject to GST that is irrecoverable by government
- gross fixed capital formation (typically private residential dwelling expenditures) that is subject to GST
- transfer costs subject to GST.
For each expenditure category, expenditure is split according to the different GST treatments: zero-rated, standard-rated, reduced-rated and exempt.
We determine the value of exemptions in the Australian GST system using Treasury Tax Expenditure Statement data and our internal estimates. Exemptions in theoretical GST liability have three components:
- the impact of zero-rating and exemptions that reduce the GST base
- the cascading effect from exemptions at middle stages of the production/distribution chain
- adjustments to the GST base as a result of 'netting out' the sales and adding the input purchases by below-threshold small businesses.
We also include adjustments for components that do not constitute national consumption (that is, consumption by Australian residents on overseas goods and services and non-resident consumption in Australia), and remove any concessions in the GST base not incorporated above (such as turnover thresholds).
The theoretical GST tax base is then multiplied by the appropriate GST rate to obtain the theoretical GST liability.
Actual GST revenue (both cash and accrual values) is subtracted from the theoretical GST liability to estimate the GST gap, both with and without debt.