Why GST should remain simple

April 21st, 2010 at 2:00 pm by David Farrar

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New Zealand is blessed with one of the cleanest value added taxes in the world, our . Every new good is taxed at 12.5% (likely to rise to 15%); the tax provides about a fifth of national tax revenue. …

A fun Australian case, via the Centre for Independent Studies daily email update, ideas@TheCentre:You wouldn’t usually expect to find baking recipes in court judgments, but Justice Sundberg of the Federal Court in Melbourne made an exception recently. In doing so, he demonstrated how overly complex Australia’s tax rules are.

Take 67.5% wheat flour, 20% water, 8% olive oil, 2% sea salt, 1.5% yeast, and 1% malt extract. Follow the instructions in Lansell House Pty Ltd v Commissioner of Taxation [2010] FCA 329, and what you get is either bread or a cracker.

At least that was the question Justice Sundberg had to answer. A small food importer from Melbourne had been importing Perfetto Mini Ciabatte, an oven-baked Italian flat bread that only culinary philistines – or the Australian Taxation Office – could mistake for an ordinary cracker.

Australian tax law has kept lawyers and bureaucrats busy for a long time over this mini ciabatta. Basic food stuffs are exempt from GST, but other foods are not. Thus, bread does not attract GST but crackers do.

The food importer thought he had a clear case when he claimed tax-free status for his mini ciabatta. He had even flown in Italy’s leading bread expert Giampiero Muntoni to testify in court. Signor Muntoni holds an EU certificate that entitles him to certify whether a product is a bread or a non-bread item for value added tax purposes in Italy. To this infallible bread pope it was clear that if the ingredients are that of bread, if it looks like bread, and if the Italian tax authorities classify it as bread, it must be, well, bread.

This was not good enough to convince an Australian court, though. Justice Sundberg noted that mini ciabatta cracks like a cracker; it’s sold next to crackers in Australian supermarkets; and a chemical analysis revealed similar gluten and protein content as that of crackers. In conclusion, he upheld that GST had to be paid on it.

It would be easy to find this issue ridiculous, but actually it is symptom of what is wrong with our tax law. It is incomprehensible that there should be different taxes for, arguably, very similar products.

Tax lawyers would do very well if we start introducing exemptions.

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36 Responses to “Why GST should remain simple”

  1. MIKMS (164 comments) says:

    Jaffa cake debate in Britain :D
    Is it a biscuit or a cake ?
    decided cake and not liable to VAT

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  2. workingman (84 comments) says:

    This example reminds me of the Jaffa Cake case in the UK.

    http://en.wikipedia.org/wiki/Jaffa_Cakes

    Who but a bureaucrat could come up with a rule that cakes and biscuits are VAT free, but a chocolate covered biscuit is to be subject to VAT.

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  3. kevin_mcm (152 comments) says:

    had a similar situation in south africa when I lived there maby years ago – a cooked chicken (being a takeaway meal) sold in a supermarket attracted tax, but an uncooked chicken (being food) did not. At least this was one thing the Labour party did right when they brought in GST

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  4. Rex Widerstrom (5,327 comments) says:

    Australia also rules out things like domestic rent and despite the fact that hordes of people have home offices and claim a tax deduction AFAIK there’s never been a case whereby the ATO has tried to have GST applied to that portion of rent applicable to the floorspace of a home office.

    These sorts of cases arise from two causes:

    1. Politicians trying to be too clever. There’s no logical reason a cake or cracker should be taxed and bread not. Clearly what’s happened is some well-fed pollies and bureaucrats have sat round and decided that while the plebs may have their cheap loaves, heaven forbid they should be able to afford the kind of treats fed to them at regular intervals on the taxpayers’ dollar. Modern day Marie Antoinettes, in fact (yes, I know she was misquoted or misconstrued or whatever, but for the purposes of analogy…)

    2. The ATO has got too greedy. Faced with what looks like bread, and an EU decision saying it is bread, they wasted more of the taxpayers’ money trying to claim it isn’t.

    The problem isn’t that food can’t be exempted from GST, it’s that it’s impossible to start subclassifying it. If NZ wanted to ensure that food remained affordable for its poorest citizens (growing in number as they are) it could simply take a common sense approach and say “If it’s sold to be eaten, it’s exempt”, and let them eat cake (and bread too).

    But no politician ever saw a tax s/he didn’t like, or figured s/he could increase.

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  5. aardvark (417 comments) says:

    Who on earth was the idiot that thought mere facts could sway the taxman into making sensible decisions?

    Only an idiot plays in a game where his opponent is the one who makes/changes the rules to suit themselves and who is also the referee.

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  6. RKBee (1,344 comments) says:

    It is incomprehensible to introduce exemptions in NZ for that reason… and a stronger argument to have one overall tax rate for all…

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  7. krazykiwi (9,189 comments) says:

    It’s all nonsense. I want :-

    - a universal low consumption tax (tick!)
    - a low flat tax on personal income
    - a low turnover tax on business revenue.

    Then I want 1000′s of tax accountants, IRD staff and other bureaucrats to find productive employment which will be generated as a result of a newly invigorated economy. When it happens I’ll no doubt wake up and shake my head wishing it could have all been true.

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  8. brucehoult (193 comments) says:

    Even food is not clear-cut.

    The poorest citizens already get government assistance in some other form. Simply ensure that is at an adequate level given that food is taxed and keep the GST simple for everyone else.

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  9. Jeff83 (771 comments) says:

    We (well I guess our indirect) team would kind of love it. But at the same time most of being logical people would also see the ridiculous waste that it would cause.

    The reason VAT / GST is a great tax is because by its very nature it is simple, as soon as you take that away loses many of its positive properties.

    There is a hilarious case in the UK about whether Pringles are a biscuit or a chip. The outcome….

    (a biscuit haha)

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  10. toad (3,672 comments) says:

    Agreed, DPF, the Greens have been through this debate several times, with some wanting to exempt fresh fruit and vegetables. The case for simplicity has prevailed in the Greens though – I think the Maori Party is the only party in Parliament that advocates an exemption regime.

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  11. RKBee (1,344 comments) says:

    toad 3:03 pm

    I think the Maori Party is the only party in Parliament that advocates an exemption regime.

    Well thats it look foreward to exemption then… or will that just be for Maori..

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  12. Manolo (13,514 comments) says:

    “think the Maori Party is the only party in Parliament that advocates an exemption regime.”

    And who knows? There is a possibility the “strong, firm, and decisive” leader Neville Key may grant the exemption request.

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  13. Kris K (3,570 comments) says:

    Australian tax law has kept lawyers and bureaucrats busy for a long time over this mini ciabatta. Basic food stuffs are exempt from GST, but other foods are not. Thus, bread does not attract GST but crackers do.

    Good grief!
    Since when have crackers been anything but “basic food” ?

    A slice of cheese with tomato on a cracker is hardly caviar and champagne – unbelievable!

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  14. Pete George (23,294 comments) says:

    It depends on what sort of cheese Kris. Mild is “basic food”, but Tasty is unnecessary over indulgence so fair enough it it is taxed.

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  15. MIKMS (164 comments) says:

    It is always interesting to hear from peopel from the far left crying that ‘basic essentials’ should be without GST, putting aside what could be described as a ‘basic essential’ You only have ot look at the variances in this bcase of Bread – when oyu think of basic bread you’ll think of the Homebrand or Budget stuff not the super nice pandoro stuff yet both are arguably covered as basic foodstuffs, you cannot limit is to only sliced bread becuase of the variance and many stores woul simply offer to slice the groumet bread to get further customers , if you limited it to sliced bagged ‘square bread’ you’d still have numerous problems

    better just to treat everything equally – especially when a budget/homebrand based bread’s gst = 21c

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  16. Pete George (23,294 comments) says:

    There is already a simple way for basic food to be taxed less or not taxed at all under our current GST system – grow your own (GST free) or make your own (GST reduced).

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  17. Bevan (3,965 comments) says:

    TOAD: Agreed, DPF, the Greens have been through this debate several times,

    I thought by now you would realise that anyone with more than half a brain cell gives a flying fuck what the Greens opinion is!

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  18. Kris K (3,570 comments) says:

    Pete George 4:15 pm,

    It depends on what sort of cheese Kris. Mild is “basic food”, but Tasty is unnecessary over indulgence so fair enough it it is taxed.

    Based on the current price variation between mild and tasty cheese I have long ago come to realise that tasty is indeed a luxury item.

    Pete George 4:24 pm,

    There is already a simple way for basic food to be taxed less or not taxed at all under our current GST system – grow your own (GST free) or make your own (GST reduced).

    You’re not a cheese maker by any chance, Pete?
    “Blessed are the cheese makers” – especially if you can do me a good tasty without the gst component – I won’t tell if you won’t.

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  19. Crampton (215 comments) says:

    Original post here, with some additional fun Canadian examples.

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  20. Pete George (23,294 comments) says:

    No, I don’t make my own cheese, don’t have cows. But I make my own bread sometimes (leavened). And grow quite a few berries and vegies, and have reduced GST eggs (thanks to chooks), and minimal GST mutton.

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  21. RKBee (1,344 comments) says:

    KK>>I have long ago come to realise that tasty is indeed a luxury item.

    Did you have to get rid of your girlfriend too…

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  22. Kris K (3,570 comments) says:

    RKBee 4:55 pm,

    KK>>I have long ago come to realise that tasty is indeed a luxury item.

    Did you have to get rid of your girlfriend too…

    Yeah, I gave her the boot a while before I gave up tasty cheese.

    And now the wife’s starting to outlive her usefulness and spending more than she should – might be time to move the old girl on as well …

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  23. Owen McShane (1,226 comments) says:

    The whole idea of exempting basic food runs into problems as soon as you have ethnic diversity.

    Is mutton bird a basic food or a luxury?

    Are Kina a basic food or a luxury?

    Smoked salmon is a luxury to many but bagels and lox?

    And ricotta is a basic cheese for an Italian but they may have to buy cottage cheese to avoid the GST.

    I wonder if they would decide butter is a basic food but olive oil is a luxury?

    Keep it simple.
    But if you think that is complicated try the ETS. Given that no one person knows how to make a pencil how can anyone calculate its carbon footprint? And if you cannot calculate the carbon footprint of a pencil how so you green rate a whole building?
    If I was starting over I would get a degree in greenwashing and challenge every rating.

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  24. Jeff83 (771 comments) says:

    Couldn’t resist

    Bevan
    I thought by now you would realise that anyone with more than half a brain cell gives a flying fuck what the Greens opinion is!

    So the reason you don’t care is because you don’t even have half a brain then?

    Hint: read your sentence literally.

    Muppet.

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  25. peterwn (3,208 comments) says:

    In England, excise duty on wine is levied in bands depending on alcoholic content. A wine importer imported a blend of wine A and wine B. A smart cookie in the importer’s office found that less duty was payable if they imported wines A and B separately then mixed them at the bottling plant. Customs and excise tried to grab extra duty on the basis that the blended wine was ‘produced’ in UK but the court did not see it that way. There was also the pre VAT case where the authorities tried to levy purchase tax on chastity belts as they were considered ‘furniture’ whereas the maker argued they were ‘safety equipment’ which did not attract purchase tax. The latter view prevailed.

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  26. Tauhei Notts (1,642 comments) says:

    The GST on food I believe is principally because of the late Trevor de Cleene’s persuasion. As an extremely clever lawyer he could foresee the awful problems that the Aussies are now finding. He was my favourite politician.
    This Aussie story reminds me my favourite David Lange quote. He had been explaining that the sale of a chook that was live was subject to GST. If the chook was killed it was food and was exempt. If it was frozen it was still food and exempt. If it was smoked it was processed food and was taxable.
    His knock out line;
    “The thought of Australians traipsing around supermarkets with rectal thermometers to see if their chicken is taxable; it defies belief!”

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  27. side show bob (3,660 comments) says:

    KrazyKiwi for prime minister.

    Toad been a Melon I would have thought you would have throw in some electric puha along with your greens.

    Eric Crampton wants to get with the program. When has any government wanted a simple tax system. God fucking forbid the peasants ever work out their true tax liability’s. If he recons New Zealand’s GST’s system is simple he should visit one of my mates who puts in his returns at six month intervals. He has now gone thru two audits and 4 accountants. Not only is he confused so are the professionals, his accounting is described as creative.

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  28. Inky_the_Red (744 comments) says:

    Simple set GST at zero percent. Replace it with a small (say 0.5%) FTT. That way everyone pays tax like bankers who like to speculate with other peoples money over night.

    GST on food disproportionately impacts on the poor. This is explained by Engel’s Law.

    Engel’s law is an observation in economics stating that, with a given set of tastes and preferences, as income rises, the proportion of income spent on food falls, even if actual expenditure on food rises. In other words, the income elasticity of demand of food is less than 1.

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  29. big bruv (13,552 comments) says:

    Toad

    “Greens have been through this debate several times, with some wanting to exempt fresh fruit and vegetables.”

    So the way you melons would get around this issue would be to tax the hell out of anything YOU PEOPLE decide is not healthy.

    One day I would love one member of the Red/Greens to tell us in detail what taxes they would raise and by how much.

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  30. toad (3,672 comments) says:

    Bruv, that was a suggestion from some in the Green Party. It was rejected by the membership. It will probably come up again, and I hope it will still be rejected.

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  31. kaya (1,360 comments) says:

    Yet another example of the monkeys in the middle (bureaucrats) proving their irrelevance. It really is time to tell these muppets to fuck away off.

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  32. Bevan (3,965 comments) says:

    So the reason you don’t care is because you don’t even have half a brain then?

    Ohhhhhhh I left a word out! Fucken sue me retard…

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  33. AndyC (28 comments) says:

    If you want to make a difference for poorer people then exempt domestic water and electricity. Both suppliers have domestic and buisness tarrifs and compliance costs would be near zero as they already know who buys what. I’m open to why this would be bad but as far as I can see its only downside would be that makeing electricty cheaper would encourage more use.
    Dont get me started about GST on Rates and petrol when thay are both taxed already.

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  34. Crampton (215 comments) says:

    @sideshow: I didn’t say “easy”, I said “cleanest”. Systems elsewhere are worse.

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  35. Jeff83 (771 comments) says:

    Bevan: Fucken sue me retard…

    Says the guy who said the complete opposite of what he intended to.

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  36. Bevan (3,965 comments) says:

    Jeff – its the Internet, nobody gives a flying fuck who wins and loses an arguement, or who looks stupid. Anyone who does must have a sad sad life.

    Is your life that sad Jeff?

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