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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.

Iain

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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.

Iain

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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.

Iain