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.
Barrister, Director and Consultant specialising in tax, family enterprise governance and succession, helping start ups and entrepreneurial enterprises grow safely and international expert on value added tax policy and implementation.