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Greg Harford, the General Manager of Public Affairs at Retail New Zealand has drafted the following on proposals to reduce the threshold for GST for imported goods purchased online.
Many people agree that tax is a necessary evil that we need to provide core Government services. Many people also think that, if we have taxes, they should be as low as possible, and enforced both fairly and consistently.
Retail NZ was interested to see that the Taxpayers’ Union is running a poll on whether the Government should reduce the threshold at which GST is collected on imported goods. At the moment, a loophole in the law means that if you buy $399 worth of books from your local bookshop, you pay GST, but if you buy them from a foreign website, GST is not paid. This means that those shopping in local stores pay more than their fair share of GST, while those shopping online from offshore don’t pay their share. It also means that the New Zealand Government is effectively applying a reverse tariff against New Zealand businesses, and that it’s harder for Kiwi firms to compete for Kiwi business.
Retailers have long argued that the Government should close this loophole. New Zealand (and Australia) are well out of line with international best practice on this, and it is time for change.
It has been suggested that the arguments against this are that collecting GST would be administratively burdensome, that the tax collected may be less than the cost of collection, and that consumers will be forced to wait longer for the delivery of products.
The administrative question is a bit of a red-herring. Retail NZ and Booksellers NZ have been lobbying for the GST registration of foreign companies selling to New Zealand – so GST would be collected by foreign websites in exactly the same way that it is collected by New Zealand-domiciled retailers. This would largely remove administrative cost (the cost would be no different to the costs imposed on domestic businesses), ensure that the tax collected is greater than the cost of collection, and ensure that most goods would flow freely across the border, without delay or inconvenience to consumers.
The big foreign etailers are all in a position to “switch on” sales tax collection for New Zealand (they do it for some other jurisdictions). If the major etailers registered for GST, this would mean that GST would be collected on the vast majority of items imported into New Zealand.
The current process may, however, be required for goods purchased from boutique companies that do not register for GST. However the volume of items processed in this way is expected to be very small. This would, we expect, lead to a substantial reduction in costs to Government overall, which would be good news for taxpayers.
No tax system is perfect. GST is not a new tax. It has long been a tax on the consumption of goods and services in New Zealand. Some people may wish to have an argument about whether GST is a fair or appropriate tax system for our country. But if we have such a tax, it should be levied universally, irrespective of where the transaction takes place.
I was slightly concerned to read in a Taxpayers’ Union email that foreign websites could be banned from trading in New Zealand. To my knowledge, this has never been mentioned in the debate either here or in Australia, and we would certainly not support such an approach. We are not against online shopping, but we are concerned about a tax that is unfairly applied and seriously disadvantages New Zealand businesses.
Our point in relation to the 'banning' of foreign websites is that it is the inevitable conclusion if a foreign domicile website (say one offering music downloads) simply refuses to apply NZ's tax law. We of course hope that it never happens!
Her name is Alexa Rae Johnson. The same one who only moved to NZ this month to start a job here. Has been here working just one month, and already complaining that we’re not giving her a free $1,000.
Consider that the contribution was scrapped to fund the child poverty package. Now is Miss Johnson in poverty? Well, on her travel blog, she boasts of having traveled to 39 countries in the last couple of years.
Now this post is not a criticism of Alexa Rae. If a Government is silly enough to offer free $1,000 handouts to people who have just moved here, who wouldn’t want one. I’ve taken one. You’re a bit of an idiot if you don’t take one.
But the issue is whether the $1,000 hand out was a good use of taxpayer money. I’m not sure we need to help someone who has travelled to 39 countries save money.
While 2.5 million people have signed up to KiwiSaver 38 per cent are making no contributions to it.
Many of those members are likely to be children whose parents signed them up to take advantage of the now-removed $1000 kick-start.
So middle class families with smart accountants have all rushed in to get the $1,000 handout for their kids, but it doesn’t actually lead to them saving money. They just take the $1,000 and leave it there.
In fact the overall change in savings behaviour has been very limited:
KiwiSaver has cost the taxpayer more than $6 billion and its success in helping people who really need a boost in their retirement savings has been described as “marginal, at best” in a report released by the Inland Revenue Department.
Think what else we could have done with that $6 billion?
Of those who are saving 56 per cent have money taken from their salary and wages and of those 58 per cent contribute at the minimum 3 per cent rate.
But just one third of the income saved was estimated to be additional savings.
So of the 2.5 million in KiwiSaver just 62% are making contributions. That’s 1,550,000 people. And of those 1.55 million just 56% are contributing from their wages. That’s 868,000.
And of that 868,000 only a third are doing additional savings, which is 290,000.
So we’ve spent $6 billion and it has led to just 290,000 people actually saving more money. That’s a cost of almost $21,000 per net saver. Now these are ballpark numbers and not entirely accurate, but the overall picture is clear that it is a hugely expensive scheme that has had a modest impact at best on savings.
A costs and benefit analysis shows that for the period 2007/08 to 2013/13, the additional savings amongst the estimated target group for each $ of government spending ranged from $0.20 to $0.38 as the level of government contributions dropped with fewer new enrolments and policy changes.
So 20c saved for every $1 spent.
25% of the Crown subsidies were paid to the highest income quartile.
Middle class welfare.
David Farrar is a cofounder of the Taxpayers' Union and blogs at Kiwiblog.
In the last year there has been a lot of discussion regarding efforts by Auckland Council to fund its yawning funding gap, a gap that mostly relates to its transportation (roading) budgets. New tolls for existing motorways are a possibility, as well as distorying the Auckland Energy Consumer Trust so that Auckland Council (instead of the intendand benificiares) get the annual payout.
Feedback included one commentator who “shouted” (in bold caps) … “Hang On! lets not try to fill any funding gap before we first address Auckland Council’s wasteful and unaffordable expenditures which are so clearly out of control!” … the Elephant!
Fair point … so here, to start this particular ball rolling, are some simple financial facts concerned with Auckland’s expenditures.
The 2012- 2022 long term plan forecast Council group expenditures to increase by 24% over the next five years, although this year’s 2014 actual result is slightly less (by 3%) than that forecast.
Recent publicity surrounds the funding deficit issues referred to already, that is, the search for increased income and other sources to meet budgeted funding totals. But there is something important missing from this picture. Nowhere in the debate surrounding the financial management of Auckland Council is there to be found any call for or actions to address the funding shortfall by making budget savings derived from expenditure reductions.
How different this is from individual budget holders of our family’s expenditures or of firms in the private sector. Any private sector firm faced with a similar funding dilemma to that of the Council would not hesitate in wielding the axe to its expenditures. They would act promptly to lower their overheads, then most likely to reduce payroll, while all the while seeking more efficient and economical ways to produce their goods and services. So why is our Council somehow exempt from employing these sensible strategies?
It appears that the Council’s coercive powers give them an assured (taxation) basis for their revenues and that effectively removes any incentive or compulsion for their making cost savings.
This is the reason Councils usually just run “cost plus” budgets year after year. A small number, usually those reacting to pressures of their ratepayers, from time to time trim their costs. Currently though New Zealand Councils by and large show little interest in making cost savings as tables of recent year’s inexorable rates increases attest.
An analysis of alternative solutions, designed to modify Auckland Council budget strategies fall into two broad areas.
The first is to look at the Auckland Council culture and practices that have allowed this situation to develop.
The second addresses a range of specific tactics that can make inroads (savings) to meet balanced budget objectives..
So how did this expensive, unaffordable approach to Auckland Council financial management arise? There is no need to itemise these reasons as recent publicity has already done so. One glaring example of a lack of cost control however is the Council payroll. With over 1,100 (roughly 15% by number) of all Council employees drawing over $100,000 salary per annum this of itself is sufficient evidence of poor cost management for most ratepayers when their average incomes are in the mid-sixties.
In the interests of brevity we now merely list some of the missteps that have lead to the creation of our under-performing, expensive monster of a Super Council:
The result of these circumstances are well understood by Auckland ratepayers - just look at their rates bills and see the nearly daily headlines of the latest examples of Council waste and extravagance. Lack of control of Council expenditures has lead to unaffordable rates and their projected high percentage annual increases.
Only a total turnaround of leadership and of Council culture plus effective cost savings tactics can address these issues. Electors, as ratepayers seeking better value for their money have their opportunity next year to (albeit somewhat indirectly) set affordable cost-effective budgets by electing a Council with these as their principal agenda.
Larry Mitchell is a local government financial analysist. The views are his own and do not necessary reflect those of the Taxpayers’ Union. Larry can be contacted vai firstname.lastname@example.org.
Auckland Ratepayers “Wake Up” at last
Bernard Orsman's analysis last week of Auckland Council's financial trouble got right to the heart of the matter. The section headed "Hey Big Spender you’re in a deep financial hole" accurately nails the central issue facing Auckland’s overtaxed ratepayers. With a new 2015-2025 long term plan gearing up, Auckland Council's control of its expenditure long based on borrow and spend, at long last will now be put under the microscope.
The best place to start with the analysis is the new purposes of local government post the 2012 changes to the Local Government Act. Section 10 (requiring "cost- effective infrastructure expenditure") and section 11 (which lists the "core" activities) suggests that the Council is now staying well outside the typical activities we associate with councils.
Of course, Auckland Council has been quick to run to Wellington for funding of its plans, but I think Central Government should withhold any consideration of tolls, regional sales taxes (or other alternatives) until Auckland Council can produce solid evidence of its adoption of a principled "cost effective" "core" services-based budget. At present it is anything but.
In his regular blog this week, Joel Cayford, Reflections on Auckland Planning makes some telling and useful points with his advice directed straight at Auckland Councillors. These include the suggestion that in place of existing assumptions - that ratepayers should foot the bill for the city’s growth-infrastructure, affordability to ratepayers must become the central issue:
“Under the Council's present policy settings, ratepayers can't afford the Auckland Plan, and it's not equitable to require ratepayers to subsidise Auckland's economic growth. It's not that urban growth is a bad thing ... it becomes a bad thing, an unaffordable thing for existing ratepayers ... that does not justify overloading existing Auckland ratepayers with growth infrastructure costs”
Other worthwhile suggestions he makes for Auckland Councillors to consider ... “while they are at it’ are all matters that echo sentiments true of many other New Zealand Councils. These include:
Joel concludes by taking a swing at the vexed Housing Affordability conundrum, not merely an Auckland issue. He presents it in this way:
My biggest policy concern with the growth pathway Auckland is headed down is the assumption that existing ratepayers will subsidise costs of growth infrastructure needed to accommodate new ratepayers ..., then the true costs of new accommodation will not be paid by those buying into that part of Auckland's property market. This inbuilt subsidy is already causing property market failure. The craziness of Auckland's property market is partly driven by Auckland Council growth policies.
Let’s hope that this time, Auckland Councillors do two things:
First: They must be persuaded of the importance of achieving what was hoped when the former Auckland councils were amalgamated in the first place. It was supposed to be driven by excellent performance management and reporting, high standards of accountability and value for money and
Secondly: They should take up the enlightened constructive suggestions of Joel and other commentators - in the interests of their long-suffering ratepayers.
About two weeks ago Labour released its tax policy programme that it intends to implement if elected Government come 20 September. Predictably the increase in personal tax rates by 3% to 36%, and the confirmation of a capital gains tax, was widely criticised by senior National ministers as envy taxes and a hindrance to investment.
Whatever one’s personal view, the good news for voters is that for perhaps the first time in a number of elections there are now very clear differences between the two large political parties on taxation policy. While tax will unlikely be the determining factor of which party voters will support, it is at least good to see some very clear and distinct alternative thinking between the two main political parties. The most obvious difference being a capital gains tax.
There is little doubt that a capital gains tax will come to New Zealand eventually. Whether it is in 2015, 2018 or 2028, New Zealand will get a capital gains tax. We are one of the only developed countries not to have a capital gains tax and while it is true that it takes some years before it becomes a significant revenue contributor, once implemented it will influence investment decisions and also contribute towards our infrastructure requirements and social spending needs. It is difficult to rationally argue against a capital gains tax on economic grounds. However, the timing of when such a tax should be introduced, and the immediate impact this might have on investment, are issues that voters will be weighing up.
As someone that has a good understanding of how large companies structure their New Zealand business investments, it’s disappointing that almost all parties continue to seek to score political points at the expense of multi-nationals. Labour is no exception in making its tax policy announcement, highlighting its intention to provide additional funding to enable many specialist tax investigators to base themselves in the downtown offices of those multi-nationals considered to be serial tax avoiders. Apparently some $200 million per annum of additional tax revenue will be raised simply by doing this. Whether this is politics or a genuine expectation on the part of Labour’s finance spokesman David Parker is something that could be debated well into the night. National has not been innocent of similar point scoring and regularly highlights how much extra resource and effort it is putting into the fight against large multi-national tax avoidance.
The actual reality of the situation, however, is that our Inland Revenue Department is already perhaps one of the most aggressive revenue authorities in the developed world when it comes to applying the tax avoidance provisions to collect additional revenue. Where taxpayers legitimately take a tax position that the Commissioner does not like, all too often the response is not one of challenging the technical merits of the position, or recommending to Parliament a legislative response is required, it is to jump straight to applying the tax avoidance provisions to achieve the outcome the Commissioner considers just.
The impact of this approach on new investment in New Zealand is difficult to gauge, however, there is little doubt that foreign investors are not only aware of the “avoidance risks” of investing in New Zealand, they also place a risk factor on New Zealand investment that did not previously exist. Basing many specialist tax investigators at the premises of multi-nationals is therefore highly unlikely to bring in any more additional revenue than is already being collected; and certainly not the $200 million per annum that Mr Parker has budgeted.
Without fundamental reform of how we tax non-residents, there is little that can be done to collect tax revenue from companies that do not have a significant presence in New Zealand. The solution lies in making New Zealand a jurisdiction where multi-nationals wish to be based, not in applying the tax avoidance provisions to those companies that currently are based here.
Remembering that this “tax avoidance” initiative announced by Labour is about ensuring everyone pays their fair share of tax, it was disappointing that perhaps the most obvious source of additional revenue under the “paying your fair share” heading has been overlooked. Rather than seeking to gain headlines at the expense of multi-nationals, a much greater return on investment could be achieved by targeting additional resources at our black economy. Estimated at as much as $20 billion by some economists, if only GST was collected on just 20% of this, an additional $600 million more tax revenue would result. This is greater than all of Labour’s personal tax hike, the capital gains tax and the additional $200 million avoidance revenue combined. If income tax was also collected this additional revenue could potentially double. Reduce the black economy by half, and up to $3 billion of additional tax revenue could be collected.
If Government, regardless of political persuasions, is serious about ensuring everyone pays their fair share of tax, then surely this must be where the significant investment is made. Better use of technology and a more strategic approach to information sharing could result in enormous amounts of additional revenue coming from a large sector of society which illegally operates outside the tax system.
Grandstanding at the expense of multi-national companies, whose investment dollars New Zealand needs if we are to prosper long term, is not a good look and will do nothing to raise additional tax revenue or encourage new investment. Our Inland Revenue officials are already overzealous in their application of the tax avoidance rules and if anything they should be encouraged to pull back a tad rather than become even more aggressive.
Regardless of the winner on September 20, the challenge for the post-election Government is to grow our revenue base in a manner that does not discourage investment and truly does result in everyone paying their fair share. Tax should be used as a tool to encourage, not discourage investment….and anyone operating outside of the tax system should be the focus of significant additional audit activity.
This article is the opinion of KPMG Tax Partner Tony Joyce
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