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That was then, this is now.

In the last couple of weeks I’ve learnt how much more complicated things are for businesses in 2010 than they were in 1989.

When we last had a GST rate increase in 1989 businesses were given about 3 months to get ready to change from a 10% rate to a 12.5% rate. They did it and no doubt with some teething problems.

The trading world is so different now. Here are just some of the differences which will mean added complications for some businesses as they try to accommodate the new 15% GST rate from 1 October 2010:

  • 24 hour trading – this is much more prevalent, especially supermarkets. What do businesses do at midnight on 30 September/1 October? Close up for a couple of hours? I’m certain they can’t just flick a switch. In 1989 a lot of retailers put new pricing labels on shelves before the changeover date but covered them up with something like post-it notes. At midnight staff went around and removed all the post-it notes to reveal the new prices. I suppose that’s one approach.
  • Internet trading occurs 24 hours.
  • Electronic payment systems are more sophisticated and complex.
  • What about vending machines?
  • Credit terms are more common and agreements such as layby sales where payments will be made before 1 October but the goods picked up after 1 October.
  • There are all sorts of special trading arrangements such as loyalty schemes, rebates, vouchers, prepaid cards etc.
  • Barter transactions or “in kind” sponsorships are more frequent where something is provided now in return for something else over a period of time.
  • Computer based financial systems are much more complex with some businesses having separate systems for stock records, pricing, sales recording, purchasing, customer and supplier databases and accounting records.

And I could go on.

Why are these things never as simple as at first they seem and why is it better technology seems to create work rather than save time and effort?




How do you make a caravan 25cm wider?

Makers of caravans in the UK will no doubt be pondering this very question following the UK Customs and Excise directive on 20 April 2010 that to be eligible for VAT zero rating a caravan must now be at least 2.55 metres wide. This is an increase from the previous minimum width of 2.3 metres.

Too bad if you make caravans 2.4 metres wide. You have to charge more VAT when you sell them.

I can readily accept the notion of NZ MAF inspectors travelling around the country with rulers to ensure fishermen are not keeping snapper less than 27 cm long but I’m struggling a bit with a picture of VAT inspectors in the UK getting rulers out to determine whether something should be subject to tax.

You wouldn’t want to get it wrong just for the sake of 1 mm or so would you?

Perhaps the obesity epidemic in the UK has reached such levels their Government has identified a social imperative in encouraging the manufacture of wider caravans.


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Internet purchasing and GST

If you are in NZ and order stuff via the internet from an overseas supplier there could be GST costs.

My experience is that in most cases the actual sale price from the overseas supplier will not be subject to NZ GST.

However, when the product arrives in NZ you might have to pay GST to the Customs Department. All imports are levied with GST when they arrive unless an exemption applies.

There are some exemptions and the one used the most for internet retail sales is an exemption from customs duty (which includes customs GST) if the total amount of duty and GST payable would be $50 or less.

So, as an example, if we assume the only duty payable on the item is GST then you can import it if the purchase price was $400 or less, i.e. the GST component of a $400 item is $50 so it falls within the exemption.

BUT, that number will change after 1 October 2010 when the NZ GST rate increases to 15%. From that date, if the item is only subject to GST (because no other customs duty applies) then you will only be able to import exempt of GST if it cost you $333 or less.

This is of course unless the government decides to increase the exempt threshold of $50 which currently applies to low value imports. At the moment I’m not aware of any statements about this but I believe it is under consideration.

It is more complicated if the item you import is also subject to other customs duties so you need to be careful.


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Australian shopping tips

Here’s a way to save GST and have a good time.

Travel from Auckland to Sydney (return flight around $400). When in Sydney spend $8,000 on goods and services which are subject to GST. You really need to consume all of them in Sydney for this to work.

You’ve saved $400!! Yes I couldn’t believe it either. That’s the difference between the GST cost in Australia (10%) and the new rate in NZ after 1 October 2010 (15%). A 5% return on your money. So your airfare is free.

How’s that for a fantastic money making venture? Spend 8k and get a free trip to Sydney.

Only trying to help.



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GST Rate increase confirmed

The wait is over. New Zealand’s GST rate will increase on 1 October 2010 from 12.5% to 15%. Businesses which divide their sales by 9 to calculate their GST liability will now have to multiply by 3/23.

At midnight on 30 September businesses will need to be ready to ring the tills at the new prices as 1 October ticks over. New labels have to be put on stock, price lists have to be changed, shelving labels updated, computer systems and bar coding updated. Then they have to be able to deal with situations when people buy stuff on 30 September at 12.5% and return it 2 days later (say because it’s faulty) and get a replacement when GST is 15%.

Sounds like a good time to be a tax consultant or IT specialist.



Have you got unused vouchers?

If you have book, music or other vouchers lying around consider using them before the GST rate increase. If they are dollar value vouchers you are likely to get less for them after the new GST rate comes in because prices overall are likely to rise.



Does avoiding GST pay?

As tax rates increase so does the propensity of people to look for ways to avoid paying the extra tax. This week politicians have been arguing about who pays the most income tax and whether tax reductions are fair when they benefit high income earners more.

Are we likely to see increasing attempts to avoid GST following an increase to 15%? GST avoidance isn’t new. Attempts have been made to determine the size of the GST “blackmarket” where goods and services are exchanged for cash outside of the GST system. Then there are cases such as the Auckland woman jailed this month for GST fraud.

The question though is how high GST goes before consumers start altering their spending habits in response. It’s a trade-off for the Government. Less spending means less GST for the Government, lower profits for retailers and therefore lower business income tax for Government. It will be interesting to see what, if any, effect a 15% GST rate has.

I know of two legitimate ways to avoid GST. One is not to spend anything and the other is to live overseas.

The problem with the second option is you probably just end up paying GST in another country. But would that be so bad if our rate is 15% and, say, Australia’s is 10%? Perhaps the 5% difference makes Australia a slightly more attractive retirement option? Your retirement savings could go further.

And what are the economics of New Zealanders buying stuff overseas instead of in New Zealand? Is that another way of avoiding GST? Let’s look at an example. An Avanti Black Thunder 26-2 bicycle costs $AUD 579 in Australia. The same bike in NZ is $NZD699. Both prices include local GST. I could buy the bike in Sydney free of Australian GST (if for example I buy under an Australian Duty Free scheme while on holiday there). So the cost to me would be $AUD526. Converted to NZ dollars at 0.80 that’s $NZD657. If I bring the bike back with me as part of my personal luggage I have to consider NZ Customs Duty and GST payable on importation. There is no customs duty for bicycles. Also, there’s a $700 concession for personal items accompanying a traveller provided they’re not for any commercial or business purpose. So it’s possible to bring the bike to NZ without any NZ GST cost. I’m ignoring any extra baggage charge from the airline but clearly there are other things to consider. In general terms though, the bike costs me $657 instead of $699.

It seems to me a shopping trip to Sydney specifically to save money by not paying NZ GST is unlikely to stack up economically. Once you go over the $700 personal concession you have to pay GST here when you bring the stuff back with you so it’s hard to see it being worthwhile. Only time will tell whether the new 15% rate alters the spending and travel habits of New Zealanders but it’s hard to see any leakage for the Government from kiwis going on overseas shopping expeditions.



New Zealand GST Rate Increase

Welcome to the first blog dedicated solely to New Zealand’s Goods and Services Tax (or “GST”).

Yeah I know, it’s not as exciting as political scandal or the lives of the rich and famous but there are already plenty of places to go to whet your appetite if you’re in to that stuff.

I spend my days studying and advising others on GST. I live and breathe GST so am probably a bit of a geek.

The aim here is to provide some perspectives on our GST system and generate some debate. While the topic might seem highly technical there’s no doubt GST directly affects us all, has had prominence recently in the media and is set to be a talking point for some time yet. In fact I’ve even witnessed non-GST geeks talking about GST around the dinner table.

Finance Minister Bill English will deliver the Government’s Budget in two days. Depending on your view of Mr English’s capacity for surprise it’s probably fair to expect a GST rate rise to 15% (currently 12.5%) effective from 1 October 2010. That seems to be the prevailing view of commentators.

Let’s assume the predictions come true. What does that do to New Zealand’s reputation for having a “low rate broad based” GST system? Well I reckon that reputation pretty much disappears.

Sure, back in 1986 when we started with GST at 10% in comparison to other countries our rate was at the lower end. Since then there has been an explosion of countries introducing some form of VAT/GST with more than 130 having adopted the system. Rates vary. In some countries they go as high as 25%.

I’m afraid, based on my analysis of many countries a rate of 15% can hardly be described as “low” particularly when you consider how broadly it is applied. If you look at our neighbours in the Asia Pacific region and our major trading partners in other parts of the world a 15% rate is somewhere in the middle of the field and if you’re talking about food, medicine, education, utilities, childcare, children’s clothing, healthcare and reading material it is in fact pretty high.

At 15% New Zealand will have one of the highest, if not the highest, GST rate on food.

In my opinion it won’t be accurate to continue describing our GST system as “low rate broad based”.

So what? Well, pressure has to increase for New Zealand to provide some relief for the items mentioned above which nearly every other country with a GST system taxes at a much lower rate or not at all. We’re already seeing this pressure starting to build. The Labour Party has announced it would look at exemptions for food. The Maori Party has a Bill before Parliament at the moment seeking to exempt “healthy food” from GST.

The next few months are going to be very interesting. I have no doubt GST will continue to be in the news.

Watch this space.