GST at 40: the case for keeping it simple

By Hana Straight & Allan Bullot

Forty years after its introduction, GST remains one of the largest and most reliable sources of government revenue. While the legislation has evolved to accommodate financial services, land transactions, digital platforms and cross-border trade, the core design adopted in 1986 remains largely intact. The fact that New Zealand has largely avoided disputes seen in other countries over whether bread is bread or yoghurt is yoghurt may be one of the clearest signs that the system's original design continues to work.

What is bread, and why would GST care? Is a receipt worth gambling with? Should lower income mean lower GST? These questions are part of the reality of some overseas consumption taxes (VAT or GST, depending on the country). By comparison, New Zealand’s GST system is notably straightforward compared with its quirkier overseas GST and VAT cousins. Our GST applies broadly, with very few exemptions, and has largely avoided the wider political influences and boundary disputes that have complicated other countries’ systems.

Many countries add complexity by applying different GST rates to different product categories or providing exemptions to some product categories for political, economic or social reasons, i.e. to encourage the purchase of “healthier” items or make essentials cheaper. Determining which category a product falls into then becomes an exercise in testing boundaries, with businesses arguing for the most favourable treatment and tax administrations looking to apply the highest rates possible. This has created the strange world of GST case law that provides unusual outcomes that are interesting even to those non-GST enthusiasts amongst us.

When bread is not bread (Ireland)

In Ireland, ‘staple foods’, including bread, are zero-rated for VAT.  What makes bread “bread” sounds like a simple thing, especially when you’re thinking about what a sandwich is made of. However, in Ireland it was determined that Subway’s bread contained too much sugar to be considered bread for VAT purposes and was therefore, more akin to “fancy baked goods” which did not attract the lower VAT status.

Why did the chicken cross the border (United Kingdom, Australia)

What should be simple is, of course, anything but simple under the UK VAT system. There are four classifications for taxing chicken. Live chickens are zero-rated, as are cold cooked chicken sold as takeaway food. Hot (i.e. rotisserie) chicken is standard-rated, even if it is intended to be eaten cold later, and cooked chicken (hot or cold) served in a café or restaurant is also standard-rated.

Strangely, this is also an issue in the Australian GST system. Live chickens and cooked hot chicken are subject to GST at the standard rate, while raw chicken and cooked cold chicken is generally GST-free.

Flippin’ yoghurt (Australia)

A case closer to home considered the treatment of a flip strawberry shortcake yoghurt (where you ‘flip’ one side of the package containing biscuit pieces and chocolate chips into the yoghurt before eating it). Yoghurt in Australia is GST-free, while biscuits are subject to GST. The business treated the product as a single supply of yoghurt. However, the ATO and the Administrative Appeals Tribunal disagreed, finding that it was a combination food and that GST was payable on the whole product at the standard rate.

Encouraging compliance

Prior to the move from tax invoices to taxable supply information, tax invoices could be referred to as “cheques from the government” – if you were GST registered and held a tax invoice, you would receive money from Inland Revenue.

The tax invoice lottery (Taiwan)

In 1951 the Taiwanese government faced a problem with unreported cash sales, and therefore missing out on tax revenue. In a unique move it turned tax invoices into lottery tickets.  Every invoice, which customers started demanding from sellers, displayed eight random numbers. These numbers could then be entered into regular draws. Sales tax revenue increased by 75%. This lottery continues today with a current top prize of NZD $555,100 every two months.

Offsetting the impact of GST

GST is generally considered regressive when measured against income because lower-income households spend a greater proportion of their earnings on consumption than higher-income households. In New Zealand, there is no direct compensation or reduction in GST to lower income households, although they may receive indirect compensation through the social benefit system (when the GST rate last increased, so did benefits).

Similar but different (Singapore)

Singapore introduced GST in 1993, based partially on New Zealand’s broad-based single rate model with few exemptions. However, unlike New Zealand, Singapore operates a GST voucher scheme under which lower- and middle-income households receive GST relief, including annual cash payments, to reduce the regressive nature of the tax. When Singapore last increased its GST rate between 2023 and 2024 (to help fund increased healthcare and aged care) it also introduced a SGD$6.6 billion support package to offset the GST cost to Singaporean households.

Multiple issues

The price is right? (Canada)

Advertised prices globally generally include consumption taxes. However, Canada took a different approach by making prices GST-exclusive, partly because each province has individual sale taxes, as well as a desire for the tax amount not to be ‘hidden’ within the price.  Common exceptions include petrol, for which posted prices include sales and excise taxes, and sales through coin-operated machines.

Complications (Brazil)

Brazil is widely regarded as having one of the most complicated indirect tax system in the world. Multiple different consumption-style taxes apply at the federal, state and municipal levels, each with its own rate and reporting requirements. This creates major headaches as a single transaction can trigger multiple taxes to be returned in multiple places. Reform is underway to try to simplify the current system.

Final thoughts

While it is entertaining to consider the various quirks that exist in other jurisdictions, they highlight the greatest strength of New Zealand’s GST system: its simplicity. A broad base and a largely uniform rate leave little scope for disputes over whether something is truly bread, how yoghurt is packaged or how chicken is served.

This simplicity provides practical benefits. Businesses face lower compliance costs, consumers have greater certainty, and Inland Revenue does not need to devote as many resources to classification disputes. It also reduces the opportunity for lobbyists to influence how the GST system develops.

The lack of excitement surrounding GST in New Zealand is one of the reasons it continues to be regarded as the move efficient consumption tax globally.