Understanding GST Rates: Which Products and Services Are Taxed

In New Zealand, most goods and services are taxed at a standard GST rate of 15%. Here's what you need to know about what is and isn't taxed.

Standard Rate: 15%

Most products and services, from groceries to electronics, include GST at 15%. This rate applies across most sectors to simplify the tax system.

Here's a list of common items that attract the standard 15% GST rate:

Everyday Consumer Goods

• Food and groceries: Unlike some countries, New Zealand applies GST to all food items, including basics like bread, milk, and fresh produce.
• Clothing and footwear: All clothing items, including children's clothing.
• Household goods: Furniture, appliances, kitchenware, etc.
• Electronics: Computers, phones, televisions, and other electronic devices.
• Personal care items: Toiletries, cosmetics, and hygiene products.

Services

• Professional services: Legal advice, accounting services, consulting.
• Trades and repairs: Plumbing, electrical work, car repairs, etc.
• Healthcare: Most medical services and prescription medications (though some healthcare services are exempt for certain providers).
• Education: Private education and training services (public education is generally exempt).
• Hospitality: Restaurant meals, accommodation, and entertainment.
• Utilities: Electricity, gas, water, and telecommunications.
• Transport: Bus fares, taxi services, domestic air travel.

Property and Construction

• New residential properties: The first sale of a newly constructed home.
• Commercial property: Sales and leases of commercial property.
• Construction services: Building, renovations, and related services.

The broad application of the standard rate makes New Zealand's GST system one of the most comprehensive and simple in the world. With fewer exceptions and special cases than many other countries, it's easier for businesses to comply with and for consumers to understand.

Zero-Rated and Exempt Services

Certain items, like exports, are zero-rated, meaning GST is not charged but they are still reported. Some financial services are also exempt from GST, meaning GST is not charged or reported on these transactions.

It's important to understand the difference between zero-rated and exempt supplies, as they have different implications for businesses:

Zero-Rated Supplies (0% GST)

Zero-rated supplies are still within the GST system but are taxed at 0%. Businesses making zero-rated supplies:

• Don't charge GST on these supplies
• Can still claim back GST on expenses related to making these supplies
• Must still report these supplies in their GST returns

Common zero-rated supplies include:

• Exports: Goods and services supplied to customers outside New Zealand.
• Sale of going concerns: When a business is sold as a functioning operation.
• Certain precious metals: Like fine gold, silver, and platinum.
• International transport: Services that begin or end outside New Zealand.
• Certain supplies to diplomats and international organizations: Based on specific agreements.

Exempt Supplies

Exempt supplies are outside the GST system entirely. Businesses making exempt supplies:

• Don't charge GST on these supplies
• Generally cannot claim back GST on expenses related to making these supplies
• Don't include these supplies in their GST returns

Common exempt supplies include:

• Financial services: Interest payments, bank fees, insurance premiums, etc.
• Residential accommodation: Long-term residential rentals (more than 28 days).
• Donated products and services: By non-profit organisations.
• Private sales: Occasional private sales by individuals not in business.
• Certain educational and healthcare services: Provided by specific non-profit entities.

Special Cases

There are a few special cases worth noting:

Mixed Supplies

Sometimes a transaction includes both taxable and exempt elements. For example, a financial services company might charge a fee for advice (taxable) alongside providing a financial product (exempt). In these cases, the business needs to apportion the GST accordingly.

Second-hand Goods

GST-registered businesses purchasing second-hand goods from non-registered individuals can claim an input tax credit based on the purchase price, even though no GST was actually charged. This is known as the "second-hand goods input tax credit" and prevents double taxation when these goods are later resold with GST added.

Land Transactions

The GST treatment of land can be complex. Generally:

• Sales of commercial property attract GST at the standard rate
• Sales of residential property by GST-registered developers (first sale) attract GST
• Sales of existing residential property by individuals are generally outside the GST system
• Special rules apply to land transactions between GST-registered entities

Why Do Some Items Have Different GST Treatment?

Zero-rating for exports helps New Zealand businesses stay competitive abroad, and exemptions for financial services simplify tax reporting for complex transactions.

The different GST treatments serve specific policy purposes:

Exports (Zero-Rated)

Exports are zero-rated to ensure New Zealand goods and services are competitive in international markets. If GST were applied to exports, New Zealand products would be at a disadvantage because they would effectively be taxed twiceÔÇöonce in New Zealand and again when the importing country applies its own consumption taxes.

Zero-rating means exporters can claim back GST on their inputs without having to charge GST on their sales, maintaining price competitiveness while still participating in the GST system.

Financial Services (Exempt)

Financial services are exempt primarily because of the technical difficulty in determining the value added at each stage of financial transactions. For example, it's challenging to identify the exact "value added" in an interest payment or insurance premium.

While exemption means financial service providers can't claim GST on their inputs (potentially increasing their costs), it simplifies the system by avoiding complex calculations and potential distortions in financial markets.

Residential Accommodation (Exempt)

Long-term residential accommodation is exempt to keep housing more affordable and to simplify compliance for landlords. If residential rent were subject to GST, it would increase housing costs for tenants who cannot claim GST back.

International Comparisons

New Zealand's GST system is known internationally for its broad base and single rate, which contrasts with many other countries:

• Australia: 10% GST with exemptions for basic food, healthcare, education, and financial services.
• United Kingdom: VAT at standard rate of 20%, reduced rates of 5% and 0% for different categories of goods and services.
• Canada: 5% GST federally plus provincial sales taxes at various rates, with multiple exemptions and rebates.
• European Union: VAT rates vary by country, with standard rates between 17-27% and various reduced rates for specific categories.

New Zealand's simpler system with fewer exemptions and a single standard rate reduces compliance costs and economic distortions, though it does mean basics like food are taxed at the full rate unlike in many other countries.

Practical Implications for Consumers

For most day-to-day purchases, New Zealand consumers will pay 15% GST. The main exceptions consumers might notice are:

• No GST on residential rent
• No GST on interest payments (e.g., mortgage interest, savings account interest)
• No GST on insurance premiums
• No GST on private sales between individuals (e.g., private car sales, garage sales)

For businesses, understanding which supplies are standard-rated, zero-rated, or exempt is crucial for correct GST treatment and reporting.

Conclusion

New Zealand's GST system is designed to be straightforward, with most goods and services taxed at the standard 15% rate. The limited exceptionsÔÇöprimarily exports (zero-rated) and financial services (exempt)ÔÇöserve specific policy purposes while maintaining the system's simplicity.

This clarity makes it easier for both businesses and consumers to understand their obligations and rights within the GST framework. While some might prefer more exemptions for basic necessities (as seen in other countries), the broad-based approach minimizes compliance costs and reduces economic distortions that can occur with multiple rates.

For businesses, understanding which category your supplies fall into is essential for correct GST compliance. When in doubt, consulting with a tax professional or Inland Revenue can provide clarity on specific situations.