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Tuesday, August 23, 2005

Petrol, Food and GST

It is a rare day when I find myself agreeing with Michael Cullen. Recently Winston Peters has suggested removing GST on petrol as a means to ease the picking of taxpayers pockets. The problem with this philosophy is that as soon as you open the door for petrol, food will be next, followed by medicines and many more.

The simplicity of our GST is fantastic. We have GST on (almost) everything. This makes it very simple to manage and to calculate GST returns from a business perspective. There are a few special cases where GST is not charged - but by design, these occur relatively infrequently. By removing GST on the most commonly used items, you would overnight create a nightmare for businesses in tracking and recording GST/GST exempt payments. This could very potentially mean greater costs passed onto consumers as compliance systems for GST are added to business to ensure that they comply with each and every GST allowance.

For simplicities sake, please keep GST flat and on all goods and services. An income tax cut is a much simpler solution that won't require a massive waste of money retooling businesses to cope with complex GST like Australia - and for no financial benefit to the business.

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Posted by Bernard Woolley | 8/23/2005 11:22:00 AM


Blogger tincanman said...

For inter-business costs GST is effectively ignored as well as people simply claim it back. What I would like to see though is removal of GST payments on items purchased from overseas. I recently purchased a rather expensive keyboard to help with RSI and the cost was doubled by the various taxes and apparently I cannot claim the GST portion back through business.

8/23/2005 11:34:00 AM  
Blogger JamesP said...

Why not just cut the existing petrol levy? Goods specific taxes are almost as bad as goods specific tax exemptions.

8/23/2005 11:40:00 AM  
Blogger ZenTiger said...

My business sells overseas and local. I need to track GST exempt sales (overseas) and GST on sales and purchases (local). It isn't that hard.

My business only sells to businesses. So even though I add and collect GST, the business I've sold to has to pay and claim it back.

In that situation, it would be nice not to have to charge GST to a GST registered business, as they'll only claim it back. It would also be nice to show a company card (or provide a purchase order) whenever making a purchase and not have to pay the GST at time of purchase.

My accounts can handle that quite easily, and I don't become an unpaid tax collector for the government, risking penalties for an incorrect return.

8/23/2005 11:56:00 AM  
Blogger Bernard Woolley said...

James - agree, I'd like to see less of the 'specialist' taxes and duties as well

Tincanman - I guess you are not able to claim the GST on the overseas item because it can't be claimed back against a New Zealand producer. Yeah, as soon as GST on an item is over $50, they'll charge it. Also be wary against getting items delivered to a work address - they'll tax it immediately, whereas there appears to be more lee-way if the item it delivered to a residental address and appears to be for personal use.

Zen - Overseas isn't too hard to deal with, I use MYOB and can easily mark them as No-Tax or Exempt. There would always be a component of GST that you would have to pay (to cover the difference between what the company paid for it, if they are onselling), but it would just reduce to being the GST on the profit that the company you're purchasing from is making. Be a nice way to expose profit margins eh? ;) I sure as hell wouldn't want GST to work that way, and I imagine many others wouldn't.

I think the current system for GST is one of our simpler taxes and works well.

8/23/2005 12:09:00 PM  
Blogger ZenTiger said...

Bernard, the flat GST rate does make life a little simpler. In Ireland they cope with 3 GST rates. Food is on the bottom rate (nil), electricity and such on the middle rate (around 13% from memory) and petrol and cars on the top rate (21%).

My tax scheme of the week is:

income tax: ZERO
company tax: 1% of turnover
GST: 20%
FOREX going OUT of NZ: 2% govt fee
Prebate: $50 per month per person in NZ

A prebate offsets GST on food and basic expenses, and is paid to every person in NZ at the beginning of each month by direct credit into a nominated account.

In exchange: No tax deductions, no tax returns, no need for company tax returns. Companies would be audited for GST compliance and paying the turnover taxed based on quarterly turnover statements (invoicing).

This would wipe out huge amounts of tax code, bureaucracy, incentive to dodge taxes etc.

It is estimated 10-20% of a product cost is in accounting and compliance overheads. This would encourage price reductions and give local producers an edge over heavily bureaucratic producers elsewhere in the world.

Accountants would have to refocus on business advice, not tax issues.

Small businesses would not be unfairly hit with compliance issues. They often have to work late into the night, because turnover does not justify a full time accounts person. Our biggest weapon against multi-national leverage is helping small businesses.

A 1% turnover tax is more easily computed and less easily disputed. It is more easily costed into the financial activities.

I've been looking to find the turnover value of NZ trade. If it is as high as I think it is, the GST rate could be cut below 20% - maybe 17%.

The departure fee on FOREX helps to tax foreign investment as it leaves the country. Just like people pay the bank 1% (or more) to transfer the loot, it would just be an expense factored in, with no business deductibility to weasel out of it.

8/23/2005 12:16:00 PM  
Blogger ZenTiger said...

Oops, prebate suggestion was up to $50 per week (around $230 per month.

Note also it is the scheme of the week, not year. Maybe I'll have an award for the scheme of the year, once we devise 52 of them....

8/23/2005 12:19:00 PM  
Blogger tincanman said...

Thanks for the tip Bernard. I'm more or less reconciled with the idea anyway now as most of my business expenses are either to Telecom for net access or to overseas software / hosting / etc. providers. Simplification of the any tax system is ideal as it reduces costs significantly and at the end of the day it's fairer, isn't it?

My first boss in South Africa was a multi-millionare and paid R22,000 in tax during the first year I knew him. He wangled it so that we paid effectively about a fifth of the tax we should have, all through legitimate measures. Well. Semi ligit. A business is allowed to spend R1500 in a single payment for casual wages without declaring the recipient. When you're only earning R12,500pm that was enough to put you a tax bracket or two lower and was paid in cash. A good way to avoid that top rate of ... what was it ... 45%? Or 49%?

But keeping everything straight was so complex we needed a team of accountants to manage everything and at the end of the day what we owed to society was not being paid. (Reasonably owed)

8/23/2005 12:20:00 PM  
Blogger Bernard Woolley said...

Zen - interesting stuff. I've been wanting to put together a post alone a similar line of no income tax, but tax consumption - through increased GST. The only issue I see is that as phil suggested, taxing something bad could discourage sales and tax take may potentially drop.

Re: turnover tax - what you're really saying is that GST on revenue would be 21%, whilst GST on expenses would be 20%. Not quite as easy to calculate as divide by 9, but as long as it is applied to all it is still somewhat simple and easily managed.

Re: income tax - there probably needs to be some base flat income tax rate to balance income against expenses, say a flat 15% on all income tax. No brackets.

What would be nice, is to be able to set GST and income tax at the same rate. Some may say this is taxing twice, but I think for reasons of stability, it would be wise for us to spread the tax burden between two different bases - income and consumption.

8/23/2005 01:08:00 PM  
Blogger Lucyna said...

Bernard, getting rid of income tax would mean for everyone that there would be no need to file personal tax returns. This would dramatically increase everyone's privacy, and reduce the size of the IRD.

I was reading somewhere that when income tax was introduced in America, lack of privacy was a big issue. I suppose to us now who are used to a lack of privacy, it might not be such a big deal.

8/23/2005 01:23:00 PM  
Blogger Bernard Woolley said...

Lucyna - ah but if it is a flat rate, there is no need to file a return if it is deducted at source. If employers, financial institutions all deducted the same income rate at source. You wouldn't need the corrections because everyone has had their tax deducted at the same (and correct) rate. No tax tables for employeers. No bureaucracy to ensure that the 'correct' amount of tax has been deducted. You can reduce the size of the IRD with doing away with income tax.

8/23/2005 01:28:00 PM  
Blogger Bernard Woolley said...

Opps, 'without doing away with income tax'

8/23/2005 01:29:00 PM  
Blogger Lucyna said...

Ok, then, you've got me there, Bernard! I'd still rather get rid of it, though.

8/23/2005 01:38:00 PM  
Blogger ZenTiger said...

Bernard, turnover tax is not quite the same as 21% GST. Some companies sell GST exempt goods - such as exporters.

I'd calculate it on the pre-GST amount.

8/23/2005 01:50:00 PM  
Blogger Bernard Woolley said...

Hmm, turnover tax would be very unfair on high-volume, low-margin companies as they would pay a disproportionate amount relative to more profitable businesses that run on higher margins and lower turnover.

8/23/2005 02:04:00 PM  
Anonymous Anonymous said...

I would hope to see National and/or ACT talk about Petrol rises under Labour/Green.

Carless days was in the media last week but no-one made the running on it.

8/23/2005 03:11:00 PM  
Blogger ZenTiger said...

Bernard, I guess the question is how much impact does one percent have, compared to the effort of tax compliance.

If a business runs at a profit, how much profit do the high volume places expect to make, where they'd be taxed 33% and pay accounting (and even salaries become easy to manage on zero tax, with less issues getting behind of PAYE etc).

8/23/2005 08:44:00 PM  
Blogger Lucyna said...

Anon, you're right about carless days. I had a bit of a freak out there, it was like how will I get the kids to school? We carpool already, what if our carpoolee has the same carless day? It would be a logistical nightmare.

8/23/2005 08:55:00 PM  

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