A business lens on taking GST off fruit and vegetables
Tax Alert - September 2023
By Mirei Yahagi & Jeanne du Buisson
The Labour Party’s recently announced tax policy for the upcoming 2023 election includes removing GST from the sale of fruit and vegetables. This has undoubtedly been one of the key election topics discussed in the past month. While much attention, especially in the media, has been directed towards the potential benefits (or not) for consumers, there have been limited discussions in the media on the policy’s likely impact on New Zealand businesses.
The proposal would align New Zealand more closely with the “Value Added Tax” rules in other countries like the United Kingdom and Australia, where there are a number of food-related exemptions. However, the implementation of Labour’s GST policy will not be straightforward and represents a substantial departure from New Zealand’s much envied “pure” GST legislation.
In New Zealand GST is a broadly based consumption tax, meaning that the end consumer bears its cost. Therefore, removing GST from fruit and vegetables would appear to offer a benefit to ordinary consumers by, in theory, reducing the cost of the fruit and vegetables they consume. However, like most things, in reality, the situation is more complicated. When considering the broader implications for businesses this policy change is likely to lead to increased compliance costs, which in turn will erode any savings for consumers.
GST should not be a cost to businesses
One of the fundamental principles of GST is that while it is effectively collected by GST-registered persons (e.g., a business), it should not be a cost for those businesses. While GST-registered persons are generally required to charge GST on sales they make in New Zealand (output tax), they are also generally allowed to deduct the GST charged on purchases (input tax). End consumers therefore ultimately bear the cost of GST as they are not GST-registered and are not entitled to input tax credits for the GST charged on their purchases.
Simply put, removing 15% GST off fruit and vegetables (i.e., making them zero-rated supplies) has no impact on the input tax the businesses can claim in their GST returns, as businesses are doing this already (provided that they use the fruit and vegetables for their business activity). Businesses like cafes and restaurants won’t see a reduction in their costs of sales. Any GST paid on the purchase of fruit and vegetables is already claimed back from Inland Revenue.
GST should not be complex
GST is intended to be a relatively simple and efficient system to tax consumption without distorting consumers’ preferences between different goods and services. Currently imposed at a single rate of 15%, GST encompasses a wide range of goods and services, with few exemptions. This has resulted in GST becoming one of New Zealand’s most important, widely encountered, and arguably most successful taxes. GST is New Zealand’s second most important tax in terms of the revenue raised (in 2021-22 Inland Revenue collected approximately $24.7 billion in GST, around 25% of New Zealand’s total tax revenue).
The proposed policy introduces complexity by distinguishing between different categories of food products. The current idea by Labour is to remove GST from fresh and frozen fruit and vegetables while maintaining it on “processed” fruit and vegetables, such as canned and dried items. While this framework may seem straightforward on paper, the reality is that classifying products can be challenging and Australian businesses’ experience with classifying GST on food provides valuable insights into the potential impact on New Zealand businesses. Under the Australian GST Act, a “supply of food” is generally GST-free, unless it falls into specific categories such as “restaurant meals”, “confectionery”, “bakery products”, and “prepared foods”.
As you can imagine, boundary issues arise leading to debates over whether certain food items fit into the defined categories. One recent example is the Australian Administrative Appeals Tribunal case between a yoghurt manufacturer and the Australian Taxation Office. The yoghurt manufacturer is known for its “flip” style yogurt, which consists of the primary compartment holding flavoured yogurt, while a smaller separate compartment containing dry inclusions of cookie fragments and white chocolate chips. The determination was that these dry inclusions significantly contribute to the product’s marketing and consumer experience. They are also easily identifiable and don’t constitute a standalone product apart from the yogurt. Consequently, the product is regarded as a combination of flavoured yogurt, cookie pieces, and white chocolate chips.
The Australian GST Act designates yoghurt as GST-free, and cookie pieces and white chocolate chips as falling under the categories of “biscuit goods” and “confectionery”, which are subject to GST at a standard rate. Given that the “flip” yogurt product combines various foods (0% and 10%), at least one of which aligns with the Australian GST Act’s excluded food categories, it was decided that the entire product is ineligible for GST-free treatment.
This Australian case highlights the increased complexity of classifying food for GST purposes. The product’s marketing, packaging, and consumption methods often play a pivotal role in the classification, which is likely to extend to New Zealand as well. Ongoing innovations in the food industry, particularly in plant-based products and novel food combinations, will likely also fuel this complexity.
This complexity also presents a greater risk for suppliers that sell high quantities of food products, as an incorrect GST classification can quickly become an error that will have a material financial impact. The above complexity also does not account for the necessary systems changes that food product suppliers will need to deal with, such as implementing methods to differentiate the qualifying items and non-qualifying items, as well as applying the correct GST coding treatment within accounting systems. A study conducted by an accounting software company revealed that, when compared to New Zealand, Australian businesses are spending twice the amount of time on internal costs for GST compliance, and twice the amount on external bookkeeping expenses. While Labour suggests that modern technology could alleviate compliance costs, this has not been the case internationally. It would also not eliminate the potential for costly legal disputes in the wake of such changes.
From a purchaser's perspective, often a taxpayer is only ever acquiring goods and services with GST charged at 15% or 0%. Businesses will need to get used to making purchases where the GST charged on the total supply could range between these two percentages (for example if office food supplies are being acquired with a mix of fruits, vegetables, and other products). This may lead to increased complexity around accounts payable processes and internal controls verifying GST treatments (for example, software checking that the GST on an invoice is equal to 15% may start detecting false errors).
It is important to note that, depending on the election’s outcome, the proposed policy could be in legislation from 1 April 2024. This timeline does not offer suppliers adequate time to establish sufficient systems for policy implementation or seek guidance on boundary-related concerns.
Should GST be touched?
In summary, tinkering with GST will cause more headaches for New Zealand businesses which are already facing a squeeze in their margins due to inflationary cost increases. To avoid being hit with a big tax bill, impacted businesses will also need to spend more on resources to ensure that they are making the correct GST determinations.
Given the effectiveness of the current GST rules in New Zealand and the challenges presented by removing GST from fruit and vegetables, in our view a better alternative would be to consider options to promote healthier choices and support households with direct financial support.
If you have any questions on GST or how GST impacts your business, please don’t hesitate to get in touch with us.
September 2023 - Tax Alerts
