What is GST? A Simple Guide for Beginners

Have you ever noticed an extra charge on your receipts when shopping in New Zealand? That's likely the GST, or Goods and Services Tax. But what exactly is GST, and why do we pay it?

What is GST?

GST stands for Goods and Services Tax. In New Zealand, GST is a 15% tax on most goods and services sold for domestic consumption. The final price of a product or service typically includes GST, meaning consumers see the total price upfront.

Unlike in some countries where tax is added at the checkout, New Zealand displays prices with GST already included. This practice makes shopping more straightforward since you know exactly what you'll pay from the start.

GST provides crucial revenue for the New Zealand government, helping to fund essential services such as healthcare, education, public infrastructure, and welfare programs. When we pay GST, we're contributing to these services that benefit the entire community.

Why Do We Have GST in New Zealand?

GST was introduced in New Zealand in 1986 as a way to simplify the tax system and broaden the tax base. Before GST, there were multiple indirect taxes on various goods and services, which created confusion and made tax compliance more complicated.

The implementation of GST was part of wider economic reforms. New Zealand was one of the first countries to adopt a comprehensive GST system, and it has remained largely unchanged in its basic structure since introduction, which speaks to its effectiveness.

With GST, New Zealand moved to a system where a single tax applies to most transactions, which streamlines tax collection and makes the system simpler for businesses and consumers alike. This system is considered fair because everyone pays the same percentage regardless of income level, though it's worth noting that GST can take up a larger proportion of lower incomes.

How Does GST Work?

When a business sells a product or service in New Zealand, it adds GST to the price. This means the consumer pays the price of the item plus the GST amount. The business then collects this GST and periodically pays it to the government.

For example, if you buy an item that costs $100, GST at 15% would make the total price $115. That extra $15 is the GST, which the business collects on behalf of the government.

This collection system works through a chain of transactions. When businesses buy goods or services, they pay GST on their purchases (called "input tax"). They can then claim this amount back, offsetting it against the GST they collect from their own sales (called "output tax"). This ensures that GST is only effectively paid by the end consumer.

Let's look at a simple example:

1. A timber supplier sells wood to a furniture maker for $115 ($100 + $15 GST)
2. The furniture maker creates a table and sells it to a retailer for $230 ($200 + $30 GST)
3. The retailer sells the table to you for $345 ($300 + $45 GST)

In this chain, the furniture maker pays $15 GST on their purchase but collects $30 GST on their sale. They pass $15 to the government (the difference between what they collected and what they paid). Similarly, the retailer pays $30 but collects $45, passing $15 to the government. In total, $45 of GST is paid to the government, which is 15% of the final consumer price before GST.

Who Needs to Pay GST?

Everyone who purchases goods or services in New Zealand generally pays GST as part of the total price. For individuals, GST is included in everyday purchases without requiring any extra action.

For businesses, however, there are specific GST obligations. Any business that earns more than NZD 60,000 in a 12-month period is required to register for GST. These businesses must then charge GST on their sales, file regular GST returns, and pay the GST they collect to Inland Revenue.

Businesses below the $60,000 threshold can voluntarily register for GST if they wish. This might be beneficial for businesses that primarily sell to other GST-registered businesses, as it allows them to claim back the GST they pay on their own purchases.

It's worth noting that some overseas businesses selling to New Zealand consumers may also need to register for and charge New Zealand GST, particularly for digital services and low-value goods.

What are the GST Rates in New Zealand?

In New Zealand, the standard GST rate is 15%. Most goods and services fall under this rate, but there are some exceptions:

• Exports: Goods and services sold overseas are generally zero-rated, meaning they don't incur GST. This helps keep New Zealand exports competitive in international markets.
• Financial Services: Most financial services are exempt from GST. This includes services like loans, interest, bank fees, and insurance premiums.
• Residential Rent: Long-term residential accommodation is exempt from GST.
• Donated Goods and Services: Items donated to non-profit organisations are not subject to GST.

It's helpful to be aware of these categories, especially for businesses handling exports or financial products, as the GST treatment affects pricing and reporting requirements.

How Does GST Impact Everyday Life?

For most Kiwis, GST is a part of daily life, automatically included in the price of goods and services. Whether you're buying groceries, dining out, or booking a service, GST is usually already part of the total price.

This makes it simple for consumers, as there's no need to calculate it separately. However, GST does affect the cost of living, as it means a 15% tax is applied to many daily purchases.

While some countries exempt basic necessities like food and children's clothing from consumption tax, New Zealand applies GST consistently across almost all goods and services. This simplicity helps keep administration costs down but means that GST applies even to essential items like groceries and healthcare.

Because GST takes a higher proportion of income from lower-income households (who spend more of their income on consumption), the government uses other mechanisms like income support payments to help offset this impact for those who need it most.

GST for Visitors to New Zealand

If you're visiting New Zealand, you'll pay GST on most goods and services you purchase during your stay. However, in some cases, you may be able to claim a refund of the GST paid on goods you take out of the country when you leave.

To qualify for a GST refund, purchases usually need to meet certain criteria, such as being made from a retailer who participates in the refund scheme and being of a minimum value. Not all retailers participate in these schemes, so it's worth asking before making large purchases if this is important to you.

Conclusion

In New Zealand, GST is a straightforward way to collect tax on the goods and services we use every day. It's essential for funding the public services that support our communities. By understanding GST, we can better appreciate how it contributes to New Zealand's economy and learn what it means for us as consumers or business owners.

Whether you're shopping or running a business, understanding GST will help you make informed choices about your purchases and tax obligations. While GST adds to the cost of goods and services, it also contributes to the social infrastructure that makes New Zealand a great place to live and work.

For businesses, understanding GST is crucial for compliance and financial planning. For consumers, being aware of GST helps us understand what we're paying for and how our everyday purchases contribute to the country's public services.