Former prime minister John Howard overruled two key ministers in setting the GST-free threshold for goods bought overseas at $1000, despite warnings this could harm local businesses and squeeze tax revenue.
The threshold, which retailers say encourages people to shop at overseas online stores, was set at $1000 in 2005 for all goods arriving in Australia by post, air or sea cargo.
Letters accessed under freedom of information laws show two ministries closely involved in the issue - Treasury and customs - had pushed for a $500 limit.
Moreover, Mr Howard was told a higher GST-free threshold could have negative consequences for businesses and tax revenue.
Assistant treasurer Mal Brough, writing on behalf of then treasurer Peter Costello, told Mr Howard in 2005 that a $1000 threshold could damage local businesses.
"The implementation of a $1000 across-the-board threshold could create an incentive for consumers to import low-valued products [of less than $1000] from overseas to avoid paying Australian taxes, which in turn could have an adverse impact on Australian businesses," Mr Brough wrote in September 2005.
Mr Brough, a Liberal candidate in the coming election, said the higher threshold would cost millions in forgone GST receipts each year, with the possibility this revenue hole could expand "significantly over time". Customs minister Chris Ellison also argued the threshold should be set at $500, saying this struck the right balance between the need for simplicity and revenue.
Mr Howard opted for the higher $1000 level, citing the government's commitment to "reduce the burden of regulation".
Other information on how Mr Howard reached his decision was redacted by the Department of the Prime Minister and Cabinet.
"I recognise in arriving at my decision that option three [the $1000 threshold] represents a greater potential loss in GST revenue to the states and territories than either of the other options canvassed in your letter," Mr Howard wrote to Mr Ellison in September 2005.
The department said it was likely to have advised Mr Howard on the decision but it could not find the relevant briefing documents.
The threshold has been a persistent gripe of the retail industry in recent years, due to the rapid growth in online shopping, helped by the strong dollar.
Retailers say Australia's threshold is unusually high, with Britain setting its limit at £18 ($30) and Canada at $C20 ($21). Cash-strapped state governments argue they could raise hundreds of millions more by lowering the threshold.
But a Productivity Commission review in 2011 found lowering the threshold would not raise enough extra revenue to justify the extra cost of handling millions more parcels. Treasury is now investigating the issue again.
Tax Commissioner Chris Jordan said on Wednesday lowering the threshold would probably involve requiring credit card companies or overseas retailers to charge GST.
"It has got to be a technology solution," Mr Jordan said. "It can't be an old-fashioned solution of the post office or customs putting stickers on parcels and assessing how much is to be paid."