Compromise put up in 'repugnant' plan for GST

By BRIAN FALLOW economics editor

Accountancy firm Ernst & Young, whose clients include many tourism operators caught by controversial changes to the GST laws, is proposing a compromise.

The Government's proposed amendments were "repugnant to the rule of law," as expressed by constitutional lawyer and former Prime Minister Sir Geoffrey Palmer to the finance and expenditure select committee yesterday, said Ernst & Young.

But it acknowledged the political reality that the Government was looking at claims from tour operators of $125 million in refunds, plus another $50 million from educational institutions, and was not prepared to wear that bill.

Ernst & Young proposed limiting the retrospectivity of the amendments - one of the main concerns of objectors.

It suggested that GST refunds could be claimed only for the two years before May 1999, and the claims must have been made before last May 14, which was when the Government said it would amend the law.

Ernst & Young tax partner Alan Judge estimated this would cost the Government $40 million, or $25-30 million if the refunds were subject to income tax.

Inland Revenue's tax policy head, Robin Oliver, broadly confirmed that estimate.

The controversial provisions relate to GST on services used in New Zealand by non-residents before 1999, and mainly affect tourist firms and educational establishments with foreign students.

The Court of Appeal ruled in the 1995 Wilson & Horton case that zero-rating was allowed when the contract was made with a non-resident who was outside New Zealand.

The previous Government amended legislation in 1999 to restore the principle that services in New Zealand should attract GST regardless of who used them.

But that change was not made retrospective, prompting a stream of applications for refunds.

"What has changed between May 1999 and May 2001 to require retrospective legislation dating back to 1986?" asked Mr Judge.

"If it is purely the fiscal cost of paying valid refund claims submitted during that period then the retrospective legislative changes sends an extremely worrying message to the business community that retrospectivity on the grounds of fiscal expediency is acceptable."

Several submissions to the select committee argued that the proposed changes were inequitable, treating people in the same situation differently.

"And that's a fairly fundamental principle," Sir Geoffrey said.

Companies that did not pay the GST, on the assumption that these services were in effect exports, are in the clear because the Government is not going after them retrospectively.

Those which did pay GST, on the grounds that the services were consumed in New Zealand, but who have since received a refund, are also in the clear.

About $17 million has been paid in refunds.

But as the proposed legislation stands, those who have applied for a refund but not yet received it will be out of luck - unless they can prove they will pass it on to the tourists or clients who used the service.

Otherwise, Revenue Minister Michael Cullen contends, it would just represent a windfall to the firms.

"The money is not theirs to claim. They simply collected it and passed it on to the Government."

But Don Gunn, president of the Inbound Tourist Operators Council, said his members competed in an international marketplace and their customers were only interested in the final price.

Even if the tourists could be traced and refunded the GST - which was impossible - it would represent a windfall to them.