With a wealth or capital gains tax no longer in play, the replacement policy is a removal of GST from the sale of “fruit or vegetables”. This has been presented as part of a “Cost of Living Plan” to provide some relief to substantial price inflation over the last year.
This change would be one of the most substantial changes to New Zealand GST legislation in recent memory. It would bring New Zealand in line with offshore GST / VAT regimes such as the United Kingdom and Australia.
While the Labour Party estimates a cost saving of around NZ$20 per month for a family, there are at least two concerns with the proposal:
1. Will the GST saving be passed in full to consumers?
Labour’s policy states that the newly established Grocery Commissioner would oversee pricing to ensure that sellers do not profit from the changes. How exactly this would be achieved is not made clear, especially given that these changes will result in compliance costs that may be passed on by increased prices, potentially diluting the benefit of the policy.
2. The classification of products for GST purposes may lead to difficult boundary issues.
For example, the policy notes that it is acceptable to cut items and sell them as packaged products but canned products are considered processed so do not receive any GST reduction. ‘Mixed’ items will be a particular concern in terms of classification – for example, a packaged salad product containing sachets of flavouring products. This could result in a price distortion between what might otherwise be seen as a similar product.
While Labour suggests that modernized technology could assist with reducing compliance costs, that would not remove the potential for costly litigation following such a change. For example, a United Kingdom tax decision concluded that a confectionary retailer did not have to pay VAT on the sale of marshmallows as they were ingredients used for cooking rather than confectionary ready for eating. In that decision a substantial amount of tax revenue hinged on the size of the marshmallows. The concern will be that similar litigation in New Zealand could further increase compliance costs reducing the benefit of any GST relief.
The mechanism for providing GST relief would be to treat qualifying sales as ‘zero rated’ – technically subject to GST but with a 0% rate. That would mean suppliers could still claim GST credits for all related expenditure, including the purchase of the products.
The package will be funded by removing tax depreciation deductions from commercial buildings – reversing the change made in March 2020 as part of a COVID-19 tax relief package. That change was intended to provide tax relief to businesses following a Tax Working Group recommendation which noted that New Zealand’s approach was unusual and that commercial buildings have a real rate of physical deterioration over time. While that change was thought to be permanent, the new policy announcement suggests it was a temporary COVID-19 support measure and hence it is being removed.
This contrasts with the National Party’s election tax policy which so far has focussed on adjustments to most income tax brackets, coupled with a reversal of recent tax changes to residential property investments, including the limitations on interest deductibility.
Depending on the outcome of the election, the GST package could take effect as early as 1 April 2024. The ambitious timeframe would give suppliers very limited time to put in place systems necessary for the change and to take advice on boundary issues.
If you have any questions about the matters raised in this article, please get in touch with the contact listed or your usual Bell Gully adviser.