The ubiquitous goods and services tax was introduced on October 1, 1986 as a key part of the economic reforms of the Fourth Labour Government dubbed Rogernomics.
Then finance minister Sir Roger Douglas had the opportunity to implement his reforms after Labour won a landslide victory in the snap election in 1984.
The new government inherited an alarmingly high budget deficit and overseas debt, an over-valued dollar and soaring inflation.
New-right policies were being introduced around the world but Sir Roger seemed to have known he only had a short time to move New Zealand into one of the most free-market economies in the world before then prime minister David Lange got cold feet and paused for a cup of tea.
In a short space of time, Sir Roger introduced deregulation, privatisation, the sale of state assets and the removal of subsidies, tariffs, tax breaks and price controls.
GST was added to the mix in 1986.
Deloitte Dunedin tax partner Peter Truman said there was a rush by consumers to purchase big-ticket items before GST’s introduction.
"This created a boom-and-bust scenario over a short window spanning October 1."
GST was a tax on end consumption.
While businesses still paid GST on goods and services they acquired, they were able to claim the GST back from the Government. However, end consumers could not claim a credit back for the GST they paid.
Mr Truman said GST was seen as more equitable than income tax as all end consumers paid the tax.
The rules were more straightforward than income tax and there were fewer distortions.
The introduction of GST enabled income tax rates to be cut, reducing the incentive for taxpayers to try to artificially reduce taxable income.
"Compliance costs are lower because the rules are easier to understand. The relative compliance costs for Government and businesses are far cheaper per dollar of tax collected than for income tax."
The New Zealand GST system had fewer exceptions than the indirect tax systems in most other countries, he said.
It was often held as an example for other countries considering introducing indirect tax systems.
The main exceptions were residential rentals and financial services.
Most other supplies were subject to GST at a single rate.
In comparison, Australia, which introduced GST in July 2000, had no GST applying to basic foods, health, education and child-care services.
In some other countries, GST was know as VAT, or value-added tax.
There had been changes in GST legislation since 1986 to improve the effectiveness of the tax, Mr Truman said.
Examples included placing restrictions on claiming notional GST credits when property was purchased from a non-GST registered vendor — particularly where the vendor and purchaser were associated persons.
Other examples were tightening up on being able to GST zero rate a supply of goods by paying a deposit while the goods were outside New Zealand before importation by the supplier and compulsory GST zero rating of land transactions between GST registered persons.
The latter measure was designed to reduce the fiscal risk to the Government when properties were sold but a previous charge by a secured lender meant no GST was collected by the Government although a GST refund was payable to the purchaser.
Recently, the Government had been working on modernising GST to cope with technology changes and also the greater internationalisation of consumer spending behaviour such as purchasing goods online and offshore, Mr Truman said.
Legislation dealing with services supplied from offshore had recently been enacted to collect GST from entities such as Netflix which could supply services to New Zealand consumers but without any physical presence in the country.
Further consideration was being given to how high-volume low-value goods supplied from offshore could be subject to GST.
Currently, New Zealand Customs did not collect GST or duty on goods imported with a value less than $400.
The Government was working on how it could efficiently collect GST on goods under the $400 threshold when overseas suppliers were shipping a lot of goods to New Zealand, he said.
The Australian Government recently announced rules requiring the overseas supplier of goods to pay Australian GST when they were shipping more than $A75,000 ($NZ78,900) of goods to Australia each year.
"While the GST system has been in place for 30 years, there are many transactions still causing confusion."
Deloitte continues to provide a lot of advice on was the practical application of the land compulsory zero rating provisions.
The rules were designed to reduce the fiscal risk to the Government.
But they continued to create ongoing issues through parties not understanding matter.
Other common errors arose through business people not returning GST or claiming GST in the correct period, Mr Truman said.
GST legislation set out prescriptive rules for what was known as the "time of supply" but the timing when GST was recognised might be different from the accounting period in which the transaction was recognised in financial statements.
The receipt of a deposit might mean GST on the entire value of the transaction needed to be returned.
Accounting software such as Xero was making GST compliance more straightforward for businesses.
Improvements to the return and filing processes were coming in conjunction with Inland Revenue’s new computer systems project, he said.
AT A GLANCE
• GST accounts for 32% of all tax and customs duty collected by the New Zealand Government.
• $18.3billion was collected in 2015-16.
• Nearly 3million GST returns are filed each year.
• GST rate was initially 10%, increased to 12.5% in July 1989 and 15% in October 2010.
• Each GST rate increase was compensated for with drops in income tax rates at the same time. Total tax collected did not change, rather more indirect and less income tax was collected.
• 3300 shortfall penalties were imposed on GST registered persons in 2014, amounting to $7.2million. This represented 55% of all shortfall penalties imposed by Inland Revenue in 2014.
