Celebrating 30 years of GST – New Zealand’s best export

The year 1986 was central to the New Zealand we know today. David Lange was Prime Minister, the Cavaliers toured South Africa and Halley’s Comet made a rare pass across our night sky. However, perhaps the most important event of all came on 1 October, when the goods and services tax (GST) was introduced in New Zealand.

Not many will recognise the date, or even understand why it remains important, though the introduction of GST is arguably the most significant tax reform in New Zealand throughout the entire 20th century. It’s also one of our best exports to the world – along with the All Blacks.

On the 30th anniversary of the landmark tax introduction, there has never been a better time to look at what makes our GST a best-in-class model throughout the world.

A fast rollout

The speed of execution of the GST policy, after the July 1984 snap election, was remarkable. It took everyone by surprise and involved a lot of political courage, as well as fine minds to execute the plan.

The GST was introduced as a broad-base, low-rate tax. It applied to virtually all transactions involving goods and services at a low 10%. This would increase to 12.5% on 1 July 1989 and to 15% on 1 October 2010, meaning New Zealand arguably no longer has a low-rate GST model.

Regardless, today’s annual GST take is more than $17 billion and contributes about 30% to overall tax revenue.

Pure simplicity

Our effective GST helps keep our personal income tax rates lower across the board than comparable OECD countries. The beauty of New Zealand’s GST is that it applies to just about everything, and it is hard to avoid. This is a state of paradise for both the Government and Inland Revenue. As David Lange said at the time, “even drug dealers pay GST”.

There are only a few exemptions such as residential rentals and financial services. Financial services are exempt because they are hard to value while exported goods and services are zero-rated, allowing exporters to claim GST on costs. What’s more, New Zealand has a single rate when GST does apply, and we don’t adopt multiple GST rates and complex exemptions seen elsewhere. Compare this to other countries and we see how simple and effective our GST is.

In 1993, the leader of the Australian Liberal Party, John Hewson, struggled to explain to ABC’s Current Affairs programme how a proposed GST (with several confusing exemptions) would apply to a birthday cake. The long-winded and unclear explanation – which focused on whether the cake was iced or had candles – ended with presenter Mike Willesee telling Dr Hewson “if the answer to a birthday cake is so complex, you do have a problem with the overall GST”. The party leader would then go on to lose what was earlier considered an “unlosable election” later that year.

The ability to evolve

From a policy angle, GST is an agile tax that can be easily modified for the modern environment or circumstances as they arise. The best recent examples are the tax switch in 2010 (GST up and personal taxes down) and the Netflix tax for online services kicking off on the 30th anniversary date on 1 October. Taxing offshore sellers of remote services provided to Kiwis is a great example of our GST adapting to the digital economy.

However, the tax has undergone numerous changes over the past three decades, including significant reforms after a comprehensive review in 1999. Milestone amendments were made to keep pace with modern business transactions, such as zero-rating supplies of business-to-business (B2B) financial services from 1 January 2005, and compulsory zero-rating of B2B land transactions as of 1 April 2011 and there are recent proposals to address GST on capital raising costs. The financial services zero-rating rule is unique on the global GST stage, helping banks and financial services sellers claim GST on costs that exempt suppliers could not otherwise claim.

Throughout all the small evolutions, our GST has remained as simple and effective as ever.

Future refinements may focus on low value imported goods and rules to ensure our GST law keeps pace with business accounting systems.

A time to celebrate

France may have invented value-added tax, but New Zealand perfected it. As Kiwis, we have become very comfortable with the GST, and we should be proud of our individual story. New Zealand has one of the purest forms of the tax, and every other country would dearly love to have the beauty and efficiency of New Zealand’s model. It is possible that the UK may even look to New Zealand’s GST design following Brexit and once the country is unconstrained by the EU value added tax directives.

GST must surely be one of our best exports to the world. Let’s celebrate that fact.

Eugen Trombitas is a Partner at PwC and a GST specialist.

* In this article, I refer to the "fine minds" that made our GST system a reality. This recognises the architect Sir Roger Douglas and his Associate Finance Ministers (Trevor de Cleene, Richard Prebble and David Caygill), the chair of the GST Advisory Panel Dr Don Brash (expertly supported by fellow panellists Richard Green, Alan Martin and team), Ian Dickson and the Treasury team, Jeff Todd and his team, Ian Fraser, Marilyn Goddard, and the talented and committed Inland Revenue GST project group (Graham Holland, Paul Mersi, Graham Tubb, Bruce Quigley and Michael Evans).