Smoke and Mirrors: Applying the Full Taxation Model to Government Under the Australian and New Zealand GST Laws

VAT EXEMPTIONS: CONSEQUENCES AND ALTERNATIVES, Rita de la Feria, ed., Kluwer Law: The Hague, 2013

Sydney Law School Research Paper No. 13/49

41 Pages Posted: 10 Jul 2013 Last revised: 25 Oct 2016

See all articles by Rebecca Millar

Rebecca Millar

The University of Sydney Law School

Date Written: July 1, 2013

Abstract

The treatment of government under the value added tax is an ongoing source of difficulty for many countries, including the Member States of the EU. It is often suggested that the problems created by exempting government from VAT (or treating it as out of scope) can be systematically addressed by adopting a full taxation model, which preserves the VAT chain and expands the tax base. The GSTs of New Zealand and Australia are generally cited as prime examples to be followed.

This paper goes beyond the generality in which such recommendations are generally couched, to examine in detail the approach to the public sector in the New Zealand and Australian GSTs. It illustrates how those models actually work in practice, considering government-to-government, government-to-business, government-to-consumer, and business-to-government transactions, and evaluating the approaches against the two separate streams of reasoning that underpin support for the full taxation model: expanding the tax base and removing the problems of exemption by preserving the VAT chain. It is commonly presumed that the solution to one of these problems implies a solution to the other but this is not necessarily the case, as closer scrutiny of the antipodean approaches reveals. While the New Zealand GST law does indeed aim to do both, the ‘full’ taxation model followed in the Australian GST law addresses the problems of exemption while consciously disavowing any attempt to expand the tax base and in fact contracting it. While it is true that both approaches are probably simpler for government than the EU VAT, it would be wrong to conclude that they are without problems, and equally wrong to conclude that in practice all government activities are effectively included in the VAT chain.

Keywords: VAT, GST, value added tax, goods and services tax, VAT treatment of government, taxing public sector finance flows, full taxation in VAT, New Zealand GST, Australian GST, VAT and grants, VAT and subsidies, comparative tax law, comparative law

JEL Classification: K10, K30, K34

Suggested Citation

Millar, Rebecca Mescal, Smoke and Mirrors: Applying the Full Taxation Model to Government Under the Australian and New Zealand GST Laws (July 1, 2013). VAT EXEMPTIONS: CONSEQUENCES AND ALTERNATIVES, Rita de la Feria, ed., Kluwer Law: The Hague, 2013; Sydney Law School Research Paper No. 13/49. Available at SSRN: https://ssrn.com/abstract=2291320

Rebecca Mescal Millar (Contact Author)

The University of Sydney Law School ( email )

New Law Building, F10
The University of Sydney
Sydney, NSW 2006
Australia

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