Improvements proposed to GST treatment of financial services

Banks, credit unions, life insurers and other financial institutions would be treated more like other enterprises and allowed to recover GST on purchases related to the supply of their services to businesses under proposals put out for discussion today by the government.

“The simplicity of New Zealand’s GST regime derives from its comprehensive coverage,” Dr Cullen said today. “Even so, when GST was introduced, it was decided that areas such as financial transactions could not be accommodated within normal GST rules, so they were made exempt.

“This exemption can penalise the finance sector because it can prevent them from claiming GST refunds so, after consultations with the industry, the government is now proposing to bring within the GST system financial services that are supplied to businesses.

“Time and international experience have shown that it is possible to zero-rate GST on financial services supplied to registered businesses, which is what the government is proposing. In practice, this means that financial services would still not attract GST, but suppliers of these services to businesses would be able to recover GST on the purchases related to them. We expect that this would lower the cost to businesses of using financial services,” Dr Cullen said.

“The financial services proposal complements an earlier proposal to charge GST on imported services. Under current law, imported goods, but not services, are subject to GST. The exception for imported services serves as an incentive for certain businesses to import services rather than acquire them locally. The government plans to introduce legislation relating to both proposals at the same time.”

“The discussion document also proposes a number of other GST changes in the financial services area, such as narrowing the definition of financial services,” Dr Cullen said.

The discussion document, “GST and financial services”, is available at www.taxpolicy.ird.govt.nz and www.treasury.govt.nz. The closing date for submissions is 6 December 2002.

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