The New Zealand Tax Podcast. Is it time to increase the GST threshold?, a GST trap for Airbnb providers, and The Great Tax Debate on wealth taxes

As is well known, income tax thresholds have not been increased since October 2010. What also gets overlooked is that the GST threshold of $60,000 was last adjusted in April 2009. And this week, Stuff ran a story about Kristen Murray, who has petitioned Parliament to have the GST threshold increased to $75,000.

She argued in her petition that the lower threshold is crippling small businesses. Inland Revenue disagrees but Kristen has gained the support of BusinessNZ, who supports regular indexation of tax thresholds.

A BusinessNZ economist noted that the effect of inflation means that the $60,000 threshold set back in 1 April 2009 should now be roughly about $82,000. Now the driving principle of the GST system is a broad based, low-rate principal approach and a reasonably low threshold is consistent with that approach.

GST came into effect on the 1st of October 1986 and the threshold set then was $24,000.

Looking at the table above it has actually more or less kept pace with inflation based on where it started - until now.

Notwithstanding that, given that it's now 14 years since it was last adjusted, some form of increase to the threshold is not unreasonable. And the number of businesses a threshold change could affect is quite significant.

According to Inland Revenue data supplied to Parliament's Finance and Expenditure Committee in 2022 there were 264,457 taxpayers who are GST registered, but with turnover of $60,000 or less. There’s another 27,000 or so  with turnover between $60 and $75,000. So, as we said, increasing the GST threshold could take a large number of taxpayers theoretically out of the GST net.

But GST has an interesting effect and it's also seen officially as a main pillar against tax evasion because of its comprehensive nature. Pretty much everyone finishes up paying GST somewhere along the line, even those within the cash economy. They still finish up paying GST when they're purchasing supplies, food, petrol and the like. So, there would be a natural reluctance on the part of Inland Revenue to increase that threshold substantially. But to repeat an earlier point after 14 years, it's not unreasonable.

By the way, Kristen’s suggested $75,000 threshold would actually bring it in line to the Australian threshold, which is A$75,000. I think one of the things they could also borrow from Australia is perhaps allow for quarterly GST returns.

There are therefore risks about the GST threshold being too high and the base being narrowed, but if they kept it too low then businesses may deliberately hold back from growing and crossing the GST registration threshold.

Over in the UK, where the equivalent of GST, value added tax or VAT, registration threshold is £85,000, there is in fact a very noticeable drop-off effect around that threshold.

The reason possibly might be because once you are VAT registered, you're charging VAT at 20%, so businesses that can't see themselves growing substantially quickly pass that threshold may be quite reluctant to effectively increase prices by 20%.

Now, I'm not aware of any such evidence here in New Zealand. And I think the issue, which Kristen pointed out, compliance is a bigger issue for micro-businesses. With compliance there comes a point where there is an irreducible minimum. Whether we're at that point there know I don't know. As I mentioned earlier, offering opportunities around quarterly reporting would perhaps help. And these days, the advent of software programs such as Xero, MYOB, and Hnry do help micro-businesses manage their tax much more effectively.

But in terms of GST and tax administration, I think the next big step would be to zero rate all supplies between GST registered businesses. That would help put an end to the merry go round which goes on right now where a GST registered business charges another GST registered business GST, collects and pays that GST to Inland Revenue, while the GST registered business, which has just paid GST, then claims it back from Inland Revenue. Overall, there's no net GST effect. I therefore think moving to zero rate such B2B transactions is a logical step. How far away that is, I don't know. It doesn't appear to be on Inland Revenue’s work programme at this point.

At the moment, we're left with the only other adjustment that might help microbusinesses would be to increase the GST threshold. As I said, my view is something like that should happen soon, but we'll have to just wait and see.

Airbnb, GST and unintended consequences

Moving on, and still on GST, I came across a case this week where a residential property owner couldn't let the property so decided to change his approach and started letting it out as an Airbnb.  Airbnb letting represents taxable supplies for GST purposes. He was GST registered for another activity and he did include the Airbnb income in his GST returns.

The issue has now popped up that he wants to sell the property. And it looks like unless he is selling to a GST registered person when compulsory zero rating will apply, then he has inadvertently given himself a GST problem. If he sells the property, which remember was originally a residential property to a non-GST registered purchaser, the sale price the price will become GST inclusive, which basically will bite into his margin.

This is a good example of paying attention to what's going on around your activities and that you should always seek advice when you propose to do something that may have GST implications. Tax is full of unintended consequences and for this particular taxpayer, I'm afraid there probably is a huge unintended consequence of basically surrendering the equivalent of 13% (the GST inclusive portion of the sale price) on a residential property sale. He was already carrying on a GST activity already and Airbnb just represented additional taxable supplies. So, for anyone thinking of switching from residential property letting to Airbnb that's a trap to watch out for.

The Great Tax Debate – “Think of the consulting fees!”

And finally, on Friday night I was part of the Great Tax Debate organised by the Tax Policy Charitable Trust, where I and several other tax practitioners debated the proposition: A wealth tax is the best solution to wealth inequality.

I was the leader of the affirmative team, and I was ably assisted by Mat McKay of Bell Gully and Sladjana Freakley of EY. Opposing us were Robyn Walker of Deloitte, Simon Akozu of MinterEllisonRuddWatts and Jeremy Beckham of KPMG. Professor John Prebble, one of THE gurus of New Zealand tax, chaired the debate. We had a lot of fun on the topic including an interesting Q&A session where someone asked, “Has EY gone woke?” The answer, of course, is no.

In the end thanks mainly to some pretty shameless populism including an appeal to the base instinct of the tax consultants in the audience, “Think of the consulting fees!”, we in the affirmative team sneaked home. Before the debate started everyone was asked to register their position as a yay or nay. And then the net movement from that would determine the winner. And we managed to move the dial several points in our favour. But before the Green Party start jumping up and down celebrating “We told you people wanted a wealth tax”, over 60% were still against a wealth tax.

As I said, it was a lot of fun with plenty of laughs all around. The question about whether EY has gone woke raising one of the bigger laughs. I’d like to thank the organisers, the Tax Policy Charitable Trust, hosts Bell Gully, Professor Prebble, my team-mates, Mat and Saldjana and our opponents, Robyn, Simon and Jeremy together with the 80 plus attendees in the audience for a fun night. We hope to see more of these debates in the future.

That’s all for this week. I’m Terry Baucher and you can find this podcast on my website www.baucher.tax or wherever you get your podcasts.  Thank you for listening and please send me your feedback and tell your friends and clients. Until next time, kia pai to rā. Have a great day.