30 years of GST by Dale Adamson
13 Oct 2016
On 1st October, GST celebrated its thirtieth birthday. When it was introduced, by David Lange’s Labour Government in 1986, its purpose was to raise a substantial part of the revenue required to fund Government spending by imposing a tax on goods and services consumed in New Zealand. The initial rate was 10%, with an increase on 1 July 1989 to 12.5%, and a further adjustment 1 October 2010 to 15%. The GST collected in the 2015-16 year of $18.3 billion accounted for 32% of all tax and customs duty collected by the NZ Government.
Our GST is regarded as one of the purest forms of the tax in the world. The key is its simplicity. The aim was for GST to be borne by the end consumer, to be efficient and fair and have no exceptions. Exceptions can create loop holes. We do have exceptions such as financial services and residential rentals, but these are easily defined, thus avoiding arguments in interpretation. Compare this with our closest neighbours. Go to a supermarket in Australia and your frozen pizza bases will be exempt, but the frozen pizza next to it will be subject to GST. What about a base with only the sauce added?
There are arguments put forward to make basic food items, medical and educational expenses exempt. They state that low income earners are forced to spend money on making ends meet. Thus, the majority of their income, apart from that spent on residential rental, is subject to GST. On the other hand, the wealthy save money and financial services are exempt. The counter argument is that this sector would also spend more overall and still pay far more in GST. Remember even though criminals and drug dealers may escape the Income Tax net they will pay GST.
By having a broad base, the overall GST rate can be kept lower. The UK’s VAT system is a 3-rate system. Most goods and services are 20%, with a reduced rate of 5% on items such as children’s car seats and home energy. Basic food and children’s clothing are 0%. Their system also has quirks e.g. shortcake with a caramel & chocolate topping is zero rated while shortbread biscuits with partial chocolate covering is standard rated at 20%. Where is the logic?
The initial introduction of GST and subsequent rate changes have been part of broader fiscal changes. In 1986 the top individual tax rate was 66%. This was lowered to 48% over a two year period. The so called “tax switch” in 2010 resulted in the reduction of corporate tax rate from 33% to 30%, and the top personal tax rate from 38% to 33%.
Income tax reductions have not just affected the high income earners. The current median income of about $45,000, when inflation adjusted to 1986 values, would have attracted an average income tax rate of 26% in 1986, compared to an average rate of just over 15% in 2016.
Although the basic concepts have remained over the 30 years, the GST system has been refined to close loopholes and prevent abuse. One major change occurred in April 2011, with the compulsory zero rating of land transactions between registered parties, and amendments to the rules for claims under change of use adjustments.
The government also provided a birthday present to some NZ suppliers with the introduction on 1 October 2016 of the “Netflix” tax. Previously overseas suppliers on services such as e-books, music downloads, software, movies and television online could undercut NZ suppliers of similar services, as they did not have to charge and account for the 15% GST. Now the larger players are caught. It is estimated that the Government was missing out on $180 million per year by not collecting GST on online purchases, including $40 million on iTunes, Netflix, Spotify and other online services. Online purchases of goods may be subject to GST when they physically arrive in the country. But only if the total tax & customs duty exceeds $60. This equates to a value of $400. As low value imports have been growing on average14% per year, there have been calls to lower this value to $200. However, the Customs Minister has advised that costs of processing would exceed the revenue gain.
Happy Birthday GST.