The Tax Working Group's paper calling for submissions explicitly seeks views on whether there could be items exempt from GST in order to benefit low income people

By David Hargreaves

It wasn't highlighted in the original terms of reference, and it was only obliquely referred to recently in Michael Cullen's first major speech as head of the Government's Tax Working Group, but it seems the possibility of applying exemptions from GST for certain items is being seriously considered by the group.

The issue of GST exemptions is specifically raised, in a prominent position, in the background paper just released by the group.

While all the talk has been around Capital Gains Tax, land tax, corporate tax and even an environmental tax, any move on exempting some items from GST could itself prove contentious.

When GST was introduced in this country in the 1980s a strength of it was seen in the fact that it didn't have any exemptions and therefore was uncomplicated and didn't cause any distortions.

Subsequent to that, there have been various thoughts and discussion on putting in exemptions.

Labour has previously campaigned on it (in 2011), but not in the last election. However, its coalition partner NZ First did have exemptions as part of its policies in last year's election.

Those arguing against exemptions - such as say on fruit and vegetables to assist the low income earners - make the point that the benefits of the exemption are then enjoyed by everybody, including the well-off. In addition there's the administrative complexity that comes with having some items exempt and not others. And also the likelihood that application of exemption on some items would then inevitably lead to calls for exemptions on other goods too.

However, it looks like this is one area the Government is prepared to wander into. How serious the working group is in actually examining exemptions remains to be seen. But just the very fact that it has highlighted them as an issue might encourage a wave of submissions and might force the group to look closely at actually putting exemptions in place.

For my part, I just wonder if throwing GST exemptions into the mix at this stage might not prove to be a major distraction that will put further strain on a working group that is working to a tight timeframe. I don't think GST exemptions are an issue that should be looked at by the group and just by raising the subject there is the possibility that the more pressing issues - such as that of a CGT - could be crowded out. I guess we will find out.

The Tax Working Group Submissions Background Paper, released on Wednesday,  is aimed at providing "more context" to the various tax issues "and the many more that are up for discussion over the next six weeks".

Making a submission can be done through https://taxworkinggroup.govt.nz,  with submissions closing on April 30.

In the paper, under a section titled 'Specific Challenges', there are these four topics:

• How would a capital gains tax (excluding the family home) or a land tax (excluding the land under the family home) affect housing affordability, and would these taxes improve the current system for capital income taxation? Relevant considerations will include: the impacts of these taxes on property-owners and renters; the ease of administering these taxes; the interaction of these taxes with the rest of the tax system; the extent to which the tax will incentivise productive investment as opposed to speculation; and the possibility of allowing for reductions in other taxes as a result of introducing them.

• Is there a case to introduce a progressive company tax (i.e. lower company tax rates for smaller businesses) in order to support small business?

• Is there a case to make greater use of environmental taxation to improve environmental outcomes and diversify the tax base?

• Could the Government assist low-income people by introducing GST exemptions for certain goods and services? 

So while GST exemptions didn't feature in the terms of reference as originally released, highlighting them in this paper does seemingly provide a risk that GST will feature prominently in submissions.

For his part Cullen in issuing the papers said a capital gains tax and land taxes would be "among the most contentious issues".

"I want to take this opportunity to remind New Zealanders that the family home is completely out of the mix but that still leaves plenty of scope to review other ways such taxes might be applied. Inheritance taxes are off the table too.

“This is very much the discussion and consideration phase. No decisions have been made and there are no preconceived ideas about where this process will end up. Every idea will be examined on its merits.

“We’re not being asked how to raise more revenue for the government but we are being asked how to maintain the current level in the face of some major future challenges such as an ageing population and new technologies.”

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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49 Comments

Land Value Tax, 'nuff said.

What if you dont actually own the land because you have a 100% mortgage and the real owner is the bank ?

If the title is in your name, you're responsible for the LVT. Would help to change the investment profile of NZ, reduce borrowing against land significantly, and make land affordable for those who would utilise it productively and efficiently.

This change would cost the banks a lot of money in reduced interest earnings.

You still own it, but the bank has security over it because you had to borrow to buy it. Whether they finance the purchase from cash or debt is the purchaser's problem.

If you have a mortgage, the bank doesn't pay to fix up your roof. Their interest in the property is secondary.

I managed to check in on the tax working group yesterday. It looks like they're tackling the real issues. I don't see anything unusual here. https://i.imgur.com/jb1FAk4.jpg

Well, the Good Intentions Paving Company (2017) Inc is gonna foobar GST. It's as simple and as sad as that.

Exemptions are nigh-on impossible to remove once implemented, open the door to special interests, voter blocks and identity group-du-jour pleadings for Yet Mo' Exemptions, and make compliance a retalier's nightmare and a consultant's wet dream. Ah, GST, I hardly knew ye.....indeed.

Of course the great unwashed will lap this up: it's vote purchase at the wholesale level and will fly through. Watch the Sallies, the assorted SJW's and the commentariat hail it as the best thing that could happen.

Consider the ATO rules for food: imagine yerself as the proprietor of a thriving tourist-oriented bakery with a side business in wedding and event catering, plus souvenirs and trinkets, and try to decide which of These groups ye should declare yerself to be in for GST purposes: (from the ATO site here):

We have defined each business type that can use the business norms method to clarify the conditions for eligibility.

"If your business type is not listed in the Business norms table you cannot use the business norms method.

Table: Business norms
Type of retailer GST-free sales of stock GST-free purchases of stock

Cake shops 2% 95%
Continental delicatessens 85% 90%
Convenience stores that prepare takeaway food but do not sell fuel or alcohol
22.5% 30%
Convenience stores that do not prepare takeaway food and do not sell fuel or alcohol
30% 30%
Fresh fish retailers 35% 98%
Health food shops 35% 35%
Hot bread shops 50% 75%
Pharmacies that also sell food
Dispensary: non-claimable 98% 2%
Over the counter: 47.5% Nil
Rural convenience stores
Converters: 22.5% 30%
Non-converters: 30% 30%

Cake shops
For the business norms method to apply, your retail cake shop:

  • has a cash flow which is mainly from sales of cakes, pastries, or similar products (as opposed to products of bakeries or bread shops),
  • and does not operate as a cafe.

Continental delicatessens
For the business norms method to apply, your delicatessen (or continental delicatessen):

  • mainly sells processed meats, small goods, salamis, cheeses and similar items
  • does not sell mostly grocery items, and
  • does not make any cafe or restaurant sales.

You must meet these conditions even if your store is known as a 'deli' or delicatessen.

Convenience stores that do not sell fuel or alcohol
The standard percentages for convenience stores (also known as a mixed business, milk bar or deli) depend on whether you sell any takeaway food.

Convenience stores that prepare takeaway food (converters)
For the business norms method to apply, your convenience store:

  • sells mixed business product lines such as milk, bread, soft drinks, cigarettes, confectionery, ice-cream or groceries
  • does not sell fuel or alcoholic beverages, and
  • converts GST-free food into taxable food (for example, you prepare hamburgers or sandwiches).

This definition does not include stores where the majority of sales are of takeaway food.

Convenience stores that do not prepare takeaway food (non-converters)
For the business norms method to apply, your store:

  • sells mixed business product lines such as milk, bread, soft drinks, cigarettes, confectionery, ice-cream or groceries
  • does not sell fuel or alcoholic beverages, and
  • only resells products (you do not prepare taxable food, such as hamburgers, from GST-free ingredients).

If you convert GST-free food into taxable food (for example, you prepare hot cooked chickens and sandwiches) the business norms percentages for converters (above) apply.

Fresh fish retailers
For the business norms method to apply, your fresh fish retail shop:

  • mainly sells fresh fish and other seafood, with some sales of cooked fish and chips, and
  • is not a 'fish and chip shop' or takeaway that mainly sells cooked fish and chips with only a very small amount of fresh seafood sales.

Health food shops
For the business norms method to apply, your retail health food shop:

  • has a cash flow which is from sales of food, food supplements, vitamins and other health food products, and
  • does not convert GST-free food into taxable foods, (for example, you only resell items and don't prepare sandwiches or make your own health food bars).

Hot bread shops
For the business norms method to apply, your retail hot bread shop's cash flow is mainly from sales of bread (as opposed to shops that specialise mainly in cakes).

Pharmacies that also sell food
For the business norms method to apply, you operate a pharmacy with:

  • dispensary sales (for example claimable NHS prescriptions)
  • non-claimable private prescriptions and over-the-counter (OTC) sales, including food sales, and
  • a SAM turnover of $2 million or less after deducting dispensary sales of claimable NHS prescriptions, including any patient contributions.

Your pharmacy must also:

  • be registered for GST
  • not have adequate point-of-sale equipment to identify and record your OTC mix of taxable and GST-free sales, even if your dispensary systems (with your shopfront point-of-sale equipment) can identify and record your dispensary sales (for claimable NHS prescription), and
  • sell taxable and GST-free food from the same premises.

If you meet all of the eligibility requirements, you can use the business norms percentages to estimate your GST-free sales and purchases at the end of each tax period, rather than having to record every transaction at the point of sale.

Before applying the business norms percentages you must:

  • deduct the patient contribution for claimable NHS prescriptions from your total amount of sales (that your shopfront point-of-sale equipment has recorded)
  • identify the non-claimable dispensary and OTC components of your sales, and
  • apply the relevant business norms percentages to each component.

These figures, plus the total of your claimable dispensary sales, will give you your total GST-free sales.

Your dispensary sales of claimable NHS prescriptions, including any patient contributions, should be included in total sales at box G1 of your activity statement. All claimable NHS dispensary sales are GST-free, while all purchases of dispensary items (both claimable and non-claimable) are taxable.

Rural convenience stores
For the business norms method to apply, your rural convenience store (also known as a mixed business, milk bar or deli):

  • sells taxable and GST-free food from the same premises
  • derives its income mainly from the sale of 'mixed business' product lines (such as bread, milk, dairy products, cigarettes, confectionery, and grocery lines), but not where the majority of sales are of takeaway food items
  • does not sell alcoholic beverages, and
  • has a SAM turnover of $2 million or less after deducting any fuel sales, and Australia Post agency business.

Your rural convenience store must also:

  • be registered for GST, and
  • not have point-of-sale equipment that can identify and record your mix of taxable and GST-free sales such as groceries, drinks etc (even if you have adequate point-of-sale equipment to identify and record your fuel or Australia Post agency business sales).

Before applying the business norms percentages, you must:

  • deduct any fuel or Australia Post agency business sales from total sales
  • deduct any fuel or Australia Post agency business purchases from total purchases, and
  • apply the relevant business norm percentage for a:
    • converter, for example, you may convert some GST-free bread and fillings into sandwiches, or GST-free potatoes and fish into taxable fish and chips, or
    • reseller, that is, you do not prepare takeaways or hot food.

And that's only Food....imagine Essentials such as Electricity, Firewood, Blankets, Sanitary Products, Spectacles, aspirin.....there's an excellent case to be made for these and a plethora of others to be Exempted.....it's a Lobbyist's Dream assignment.

I'm gonna call all this proposal my personal Cullen fund, because it assures me of an extremely well-funded retirement if differential GST rates come to pass.

And I'm gonna buy some GST-free potatoes and fish, turned into taxable fish and chips, on the way home....

Let's Do This!

Yes but they can create a whole new bureaucratic empire to define what constitutes a boiled egg. This is looking like harking back to the last Labour lot control freakish ambitions of we say you do. Use this light bulb, shower at this temperature. Here we go again.

Fiddle with GST and make it way more complicated and the only people it will benefit are the accounting profession who will charge OTT fees to unravel the mess it creates

No, the benefits flow to the Bureaucrat Class; more need for their services, more staff, bigger budgets, more pay, more pension funding, bigger offices, better offices, more career paths, and More Power. We the people are all forelock tuggers when dealing with the Bureaucrat Class. Form filling, queing, waiting for approval. Forelock tuggers all.

What a terrible idea. Keep GST in its current form, a consumption tax universally applied but at as low a rate as reasonably possible. This issue is a complete distraction

Just dump GST, tax elsewhere.

We don't need more compliance costs so lower all GST or eliminate GST altogether.

We don't want to end up like other tax havens where the cost of living is really high for the locals due to GST like sales tax being the primary tax revenue for the Government. Let's not forget that the increase to 15% by the National coalition was only a temporary measure (what a way to sell that load of bull).

The accountants and lawyers will be rubbing their hands with glee - everyone else cringes.

Of course they will be ............ they are already the most highly paid profession in NZ

GST exemptions are an absolute nonsense and would impose a huge additional non productive compliance cost on the economy. Low income groups are already ready well served by working for families etc. If they must it would be far cheaper to increase benefit payments.

Good point , so will the much touted and soon to be built "affordable houses " be GST exempt when our offspring buy them ?

I doubt it somehow

Leave GST alone. The simplicity is the beauty.

Not to mention its a fairer form of tax than PAYE

If the working group seriously considers exemptions from GST for more than 30 seconds before rejecting the idea they will prove themselves to be the wrong people for the job.

On the other hand it would be nice to save 15% on my fresh vegetables (black truffles, $10 cauliflowers, imported out of season asparagus...)

Oh for goodness sake .............. is there nothing else on the COL agenda other than taxes ?

With regards to GST , why would you want to mess with it anyway ?

Its working well right now and is a massive source of money for Government.

Not to mention its fairer to tax someones spending by way of GST than tax them for doing an honest days work .

Just adding a comment - don't forget that GST at 17% was supposed to entirely replace all the other taxes. clearly that idea was a fizzer.

I'd still like to see a paper that will identify what a FTT/Tobin tax (or what ever you'd call it) would reap in comparison with other systems.

Another discussion that i feel would be worthy is To what purpose Government should spend these taxes. I note in a SST article a week ago it was identified that MPs get $2.50 on every $1 they contribute towards their retirement fund. Why can't i get that, i'm a Government employee?

If you go back to the beginning Lange’s government Introduced GST despite it not being on their manifesto, but they compensated by reducing income tax, there was an aim by Roger Douglas to arrive at a flat tax. Labour then increased it to 12.5% but I cannot remember if income tax then reduced again relatively. There it stayed until Key’s increase, unsignalled yes, to 15%.But in the interim Clark & Cullen had hoisted income tax right back up there. That’s how governments work. Rob us to pay Peter & Paul. Jim Anderton I recall recanted his advocacy of GST by saying it was a tax on the poor man and not the idle rich, and that was all the justification Labour needed to hide behind. The merry go round goes round and round, almost as if money is siphoned out of our pockets by centrifugal force.

Hey but hang on a minute before we exempt anything we will just increase GST to 20% so that the Govt does not miss out on any revenue.

As I've said before do away with all the current taxes and implement an APT Tax (Automatic Payment Transaction Tax) across the board no exemptions......It's a flat rate, it's extremely fair, doesn't have preferences as to the investment/income or expenditure activity, captures every transaction whether it is internal to NZ, or coming into the country and or leaving the country so those Big 4 Banks and Google etc all get to contribute too along with foreign investors, ........everytime a house is bought or sold the government gets to clip the ticket......also every interest payment whether it is an expense or income..........

For all those people who think the black market will increase......well it is already there........
Change the design of the currency more regularly.
Have enormous penalites.

Simon Bridges, I feel sorry for you. They appear to be in full swing and busy forming committees and groups to fix unbroken things. Looks like there will be a lot of mess left for you to clean up in 2020.

It is such a dumb idea that I smell a rat. Or more correctly a squirrel .... of the deliberate distraction type. Ardern scrambling to construct the latest official version on sex abuse within the party, Adams comes out firing with the spectre of tax and spend socialists filching your nest egg and lo the Cullen ghost of christmas past suddenly materialises running interference with a hackneyed, obvious non starter, but predictably contentious proposition.

Will he address the need for taxation, by recommending the abolition of working for families, accommodation supplements and excess immigration, all of which underpin the property values of his rich pricks??
Or just fiddle with GST as a populist might?

Is there any lefty Labour supporters out there that still think that this coalition knows what the hell it is doin?..

Seriously they are inept, and that is showing up more each day!

God help us! No I don’t think he can!,,,,

Come back National all is forgiven

Clearly the state of things is far worse than was originally thought, causing consternation. It isn't going to be easy getting this country back to where people can afford to live in it, but someone has to try, National were/are not interested and as ramshackle as it might appear right now, those of us who believe there is much repairing to be done, believe there is more chance with a government prepared to acknowledge it than one that was happy to spend the bulk of nine years just denying. Get over it.

... you still don't believe that Labour will have a billion houses built and 100 000 trees planted in 10 years time ... tisk tisk ... ye of little faith ... or was that meant to be the end of child poverty for a billion Kiwi kids ? ...

yes , them prefab tree houses paid for with the money that grows on trees

Though I didn't vote for Labour I'm not quite ready after this short a time to join the Tea Party ranting and railing that's going on here. I figure they deserve at least a quarter of the time allowed to National - i.e. 9 years' inaction on the housing crisis they campaigned on - before going completely rabid. The double standard folk on here have is incredible - though unsurprising.

If after nine years Labour has only equaled National's effort of fewer than 100 affordable houses (for example), then there'd truly be something to rant about as some on here are doing.

Rick, for me it’s not the delay per se it’s the fact that PT parroted on for years about his policy but evidently didn’t do the hard policy thinking to make sure he could deliver.

Lambasting at six months vs. excusing after nine years does not look like even-handed comparison at all. It looks like statements motivated by long-held allegiances.

I'm gonna lobby Sir Mickey for a GST exemption on Patak's " Brinjal ( Eggplant ) Pickle " ... ... I really love that stuff .... spicy Indian goodness .... Yummy gummy ...

... and quadruple the GST on tofu ... blah ...

What? Take GST off Mrs. Patak's most excellent Lime Pickle, I say. Tax free beer, and bread, and butter, and cheese, and fish and chips too. Just the essentials, you understand. Oh, but what about milk, and cream, and steak, and broad beans. One can dream....

Food or condiment? Decoration or health supplement? Laxative medicine or soul healing balm? We'll need to have a conversation, set up a committee to decide.

Ideally a progressive GST would be the way to go, but tricky to implement.

for example
$100 purchase with 1% gst = $1
$200 purchase with 2% gst = $4
2 separate $100 purchases = $2gst. (not $4)

To get around that problem would be difficult.
Every person & business would have to have a card (or app) that cumulates all their purchases on either a 12 month or rolling 12 month basis & that card (or app) would have to be presented with a purchase to determine the marginal GST to be paid.

There would be an advantage of having the app in that it would be a perfect recorder for insurance purposes assuming the purchase record flows back to the app.

The secondary problem would be arbitrage. Someone sitting on a lower marginal GST rate could buy something cheaper for someone on a higher rate. There is the potential for multiple small companies to be set up to take advantage of this rather than 1 large company. There would have to be tax laws to stop this.

The same issue would exist for a progressive company tax as well.

Tax the banks, I say. A simple turnover tax at 1 cent per $100. No exceptions. That way even Google pay....

From above comments, i estimate we need to form about 26 working groups and about 29 committees. if it works fine, if not, blame the committee. Great. lets get busy and the peasants will know we are fixing a lot and will deliver all the houses.

And plenty of caterers!

For a start lets get rid of provisional tax, what other country expects you to pay tax in advance, it's very hard on new businesses.

Then look how you want to encourage people to behave. I think we need to encourage innovation, risk taking and creativity. We need to leave these people with more money in their hands not less.
If you start with a goal it's easier to get the right outcome. Thats not more tax, more government spending more bureaucracy. It's more money in workers hands it's incentives to take risk and set up new business and be innovative.
It's not speculation in non productive assets, it's not policies that incentivise landlords and asset banking. It's not rewarding people who via speculation create a market that makes housing unaffordable for so many, it's not about letting rent climb to %50 of many peoples take home pay. It's not about encouraging debt to ridiculous levels, then letting banks become the most powerful businesses in the country.

I think the present tax system is part of the reason NZ has become so expensive. We need more competition in so many businesses.

I think PAYE tax has become a bit of a nonsense , WFF families mean many pay no tax for years.

It's far better to find away to deduct the interest use depreciation and all the other advantages of asset ownership than to create something of value.

^this^

Provisional tax is all about collecting it before you can go bust and/or scarper. As you suggest it can be a catalyst for both. What you get sick of though is all this tinkering and tampering with with indirect tax, a la GST, with compensation to say income tax. But income tax is such an easy target. As soon as there is an excuse or opportunity, justified or not, up it goes again.

I'm interested in a GST exemption for building materials and labour on new dwellings.
If they do it in the UK, why can't we.

Better still why bother collecting GST at all nobody wants to pay it.

Obviously there's initial merit due to the cut it could take off construction. However, if land prices are still higher than can be afforded by the working population, this only benefits the landed gentry. It again leaves more of the tax burden on working plebs and creates another exemption for those who can increase their wealth through land while avoiding more tax.

What's the problem with taxing speculation? Cullen's saying "games up boys". Find a new field to plow.

Remember that the lower paid and beneficiaries were compensated for the introduction of GST with a substantial one-off welfare increase as a new base rate and reduced tax rates.

If we were to foolishly modify GST with exemptions for basics - then we should reverse the benefits increases.

Won't be a very popular - yet quite rational initiative !