Geof Nightingale: Selective GST use noble but foolish

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Someone once said for every tax problem there is a solution that is straightforward, uncomplicated and wrong.

Both Labour and the Maori Party want to remove GST from fresh fruit and veg to make it easier for hard-pressed NZ families to eat healthy food. The objective is admirable - it sounds simple and straightforward, but unfortunately using GST to achieve that objective is wrong, and will do more harm than good.

Australia exempts "good" things from its GST. Things like fresh food, education and medical services.

So, the argument goes, why can't we? Well, a recent federal court decision in Australia is a pretty good example of why we shouldn't.

Luxottica sold prescription glasses. Under Australian GST law, the prescription lenses were GST-free, but the frames were subject to GST. Luxottica came up with a deal that offered the frames at a very steep discount, and the lenses at normal price, as long as the customer bought both at once.

This meant the GST content of the pair of glasses was dramatically reduced. The Australian Tax Office didn't like that result and took Luxottica to court. But the courts have just said tough luck to the ATO.

What might happen in New Zealand if GST was taken off fresh fruit and veg? Let's say just before the election, John pops down to his local fruit and veg shop and buys a bag of apples for $4 and a bottle of coke for $2. Total purchase is $6 and of that 78c is GST. Then, after the election, the law changes and GST is taken off fresh fruit and veg.

The local fruit and veg shop owner is a keen follower of Australian GST cases and he's seen the potential of the Luxottica ruling. The next time John visits for his apples and coke he is made a special offer - if John buys the bag of apples for $5, he can have the coke for 48c. The combined purchase is $5.48, just what John expected, so he does the deal.

The shop owner is also delighted, his sales after GST have risen from $5.22 ($6 less 78c GST) to $5.42 (because he pays no GST on the apples sold for $5 and only has to pay 6c of GST on the coke's sale for 48c).

Down in a basement in Wellington, Bob who counts the Government's GST is dismayed. His GST take has dropped from 78c on the transaction to 6c. Bob rings Phil, the new PM, and breaks the bad news that the Government will need to reduce spending.

Geof Nightingale is a tax partner at PwC and was a member of the Tax Working Group.