13th March 2019

I want to open up another front in New Zealand’s “great tax debate” of 2019, it’s the 15% GST on new build homes.

Consider a new home advertised on the market for $600,000. Included in that price is GST of $78,261. The tax is collected by the property developer on behalf of the government, but is paid by the end consumer, the owner-occupier of the home. That’s a big chunk of tax. Worse, a first home buyer taking out a mortgage is going to be borrowing to pay it. Say you manage a $50,000 deposit, leaving $550,000 to pay back to the bank over 30 years. The GST component of your outstanding debt will be $71,739. Taking ASB’s current floating interest rate of 5.8%, you would be paying $79,796 in interest on the GST alone. More than double the original tax calculated on the value of the home. Your tax bill has effectively ballooned to  $158,000. The extra eighty grand doesn’t go to the government, of course, it’s more income for the bank. 

That’s the scenario for a new build, but it doesn’t stop there. Old houses are renovated, extended and maintained over time. Homeowners pay GST on building materials and labour by plumbers, chippies, electricians, etc. The GST incurred will be factored into the asking price when people sell.

It’s also true that GST on new builds has an influence on the price of all homes. The seller of an older home next door to a new build which has 15 per cent taxed on to the asking price has room to ask for more for the house they’re selling. A degree of market equalisation across new builds and existing homes is going to take place. 

It’s reasonable to conclude that GST on new builds, as well as GST on work done on existing homes, is contributing to all homes being more expensive. The mortgage payments of Kiwis are therefore higher, and the profits of the big four Aussie banks which dominate mortgage lending that much greater. International shareholders of those same banks are, I’m sure, grateful for our largesse. 

You’d think this would be national outrage, but there’s complete silence. The final report by the Tax Working Group rejected making any exemptions to GST. Even though exemptions and variable rates are the norm for countries that have a goods and services tax. New Zealand is the odd one out.

Defenders of GST tell us that it’s simple and shouldn’t be tampered with. That’s its beauty, they say. Perhaps banks can appreciate its beauty, but working your arse off to pay a mortgage that includes substantial interest on a tax, seems the most ugly of taxes to me. It’s fundamentally unjust to have to borrow to pay a tax. That goes for houses, but also cars, washing machines, funerals, and any other item people are forced, out of necessity, to borrow for. 

Here’s a challenge, then. Maybe all the politicians, columnists and media pundits horrified at the thought of having to pay tax on capital income, could summon the same outrage for GST’s impact on the unaffordable housing market. They might want to look at Britain, where their goods and service tax doesn’t apply to building materials and labour on new properties. Or they might refer to the GST rebate Canada has recently introduced to lower the price of new homes. Or perhaps we don’t have to look to overseas examples and conclude for ourselves that GST is a mongrel of a tax.

Borrowing to pay tax, when some people are making fortunes and not paying tax, just shows how obscenely weighted in favour of capital wealth our tax system is.