The idea for a broad-based consumption tax was first proposed by then federal treasurer Paul Keating at the 1985 Tax Summit but was dropped at the behest of then Labor Prime Minister Bob Hawke after pressure from the ACTU, welfare groups and business, which did not like its association with proposals for capital gains and fringe benefits taxes.
The idea was refloated in 1991 by the opposition Liberal-National Coalition, and was the centrepiece of the opposition's Fightback, platform at the 1993 election, when Keating was Prime Minister. The opposition had difficulty explaining the policy, as illustrated in leader John Hewson's Birthday Cake Interview, and Keating's campaign exploited public distrust of the GST. The GST was seen as the main reason for the opposition's surprise election loss of the 'unloseable election' in 1993.
John Howard was re-elected leader of the Liberal party in 1995, and pledged to "never, ever" introduce the GST. Howard led the Liberal-National Coalition to a large victory in the 1996 elections.
In the lead-up to the 1998 election, Howard proposed a GST that would replace all sales taxes, as well as applying to all goods and services. The Howard Government suffered a 4.61 percent two party preferred swing against the coalition, gaining 49.02 percent of the vote, but retained a parliamentary majority of seats in the lower house, describing the victory as a "mandate for the GST". Lacking a Senate majority, and with Labor opposed to the introduction of the GST, the government turned to the minor parties for support.
A prominent selling point of the legislation was that all revenues raised the GST would be distributed to the states. As such, an agreement was enacted with the state and territory governments of Australia in 1999 that their various duties, levies and taxes on consumption would be removed gradually over time, with the budget shortfall being replaced by GST income from the Commonwealth Grants Commission. Furthermore, (federally levied) personal income tax and company tax was reduced to offset the GST.
During the 1998 election campaign, the Democrats leader Meg Lees stated that they were opposed to the GST unless food, books and tourism packages sold offshore were exempt and other tax measures were implemented. The government initially stated that these exemptions were not possible, and looked more likely to win a compromise with independent SenatorBrian Harradine, but eventually a compromise was reached with Lees, including most basic food items being exempt from the GST, library purchases of books being refunded the GST, a temporary 8% refund on school textbooks, increases to welfare payments, and greater powers to the ACCC. A proposal was made to exempt tampons from the GST, but it was dismissed by the Prime Minister. The legislation was passed on 28 June 1999 as A New Tax System (Goods and Services Tax) Act 1999. It gained assent on 8 July 1999 and came into operation on 1 July 2000.
John Howard had said that the "GST would never become part of Liberal Party policy", and then went on to implement it after changing his mind and taking it as a policy to the 1998 election. It was passed by the Senate in June 1998 in a heaviliy amended form. The then Leader of the Democrats, Meg Lees viewed the dilution of the GST legislation as a success, but the issue split the Democrats, with Senators Natasha Stott Despoja and Andrew Bartlett crossing the floor to vote against the GST. The move triggered infighting amongst the Democrats, and while the Democrats performed reasonably well in the 2001 federal election when Stott Despoja was party leader, the infighting worsened, resulting in Stott Despoja being forced out of the leadership and the loss, at the 2004 federal election, of the balance of power they once held in the Senate. The annihilation of the Democrats was completed at the following election in 2007 when they lost all their remaining seats.
Australian Labor Party leader Kim Beazley continued to oppose it during the Howard government's second term. During the 2001 election campaign, Labor made a 'GST rollback' a centrepiece of its election platform. Labor attempted to reprise the effects of the birthday cake interview by deriding the application of GST to cooked and uncooked chickens, but failed to ignite public response to the limited scope of the rollbacks applying only to gas and electricity bills. Labor lost the election, effectively ending all serious opposition to the GST.
In early 2006, the New South Wales (NSW) State Government and the Federal Treasurer Peter Costello launched adversarial advertising campaigns concerning distribution of the GST to the states. NSW Treasurer, Michael Costa argued in full-page newspaper advertisements and on televised commercials that NSW consumers paid AUD$13 billion in GST but received only AUD$10 billion back from the Commonwealth Grants Commission, and as such he said that NSW was subsidising resource rich states like Queensland and Western Australia. The Federal Government counteracted with its own advertising campaign which claimed that NSW had breached its contractual obligations under the 1999 GST Agreement by continuing to charge unfair stamp duties and land taxes, which were supposed to have been abolished. After weeks of intense media and public pressure, the NSW State Government announced in its Budget that it would reduce stamp duty and land tax; however critics argued that the State Government did not go far enough with much broader tax reform in NSW required to help encourage investment and business that had been forced elsewhere due to an unfavourable NSW business environment. This was in response to the Commonwealth allowing another AUD$72 million in grants to NSW, in addition to existing annual increases.
Critics have argued that the GST is a regressive tax, which has a more pronounced effect on lower income earners, meaning that the tax consumes a higher proportion of their income, compared to those earning large incomes. Peter Costello, the acting Federal Treasurer who introduced the GST, counters that, due to the corresponding reductions in personal income taxes, state banking taxes, federal wholesales tax and some fuel taxes that were implemented when the GST was introduced, people were effectively paying no extra tax.
The preceding months before the GST became active saw a spike in consumption as consumers rushed to purchase goods that they perceived would be substantially more expensive with the GST. Once the tax came into effect, consumer consumption and economic growth declined such that by the first fiscal quarter of 2001, the Australian economy recorded negative economic growth for the first time in more than 10 years. Consumption soon returned to normal however. The Government was criticised by small business owners over the increased administrative responsibilities of submitting Business Activity Statements on a quarterly basis to the Australian Taxation Office.
A study commissioned by the Curtin University of Technology, Perth in 2000, argued that the introduction of the GST would negatively impact the real estate market as it would add up to 8 percent to the cost of new homes and reduce demand by about 12 percent. The real estate market returned to boom between 2002 and 2004 where property prices and demand increased dramatically, particularly in Sydney and Melbourne. During the 2004-2006 period Perth has also witnessed a sharp climb in real estate prices and demand.
Before the introduction of the GST, goods could be purchased from suppliers offering duty free pricing upon presentation of a current passport and airline tickets. The goods would then remain sealed until the passenger had passed through the customs area at an airport.
Following the introduction of the GST, a receipt for goods with a combined total over AUD$300 is eligible for a refund of any GST paid upon exiting the country with refunds claimed at a TRS (Tourist Refund Scheme) counter at the airport. The advantage of this arrangement is that goods purchased up to a month prior to departure may be freely used within Australia prior departure as long as they are carried in hand luggage and presented when making a refund claim. This obviously does not extend to consumable goods such as food and beverages, or any services such as plane tickets or hotel room charges.