The jewellery tax practice that nets a free holiday

For each $1 spent on investigations, the agency finds $9.88 in evasion – surely one of the best investments in the history of government.

Iwas in a Wellington jewellers yesterday, pretending to be interested in diamonds, when a shop assistant made an intriguing proposition. ‘‘We do offer a tax-free service,’’ she said.

I had, admittedly, solicited this response: I’d asked if it was true that, as friends had told me, one could avoid paying GST on jewellery – provided one was holidaying overseas.

The ruse, as described to me, takes advantage of the fact that GST isn’t levied on exports, as it’s designed to tax only those items consumed within the country. And for genuine exports, this makes sense.

But jewellers have found a clever, and enduring, loophole. Anyone heading away for a long weekend in Sydney, or a winter break in Bali, can pick up their ring or necklace ‘‘airside’’ – at, for instance, Auckland Airport’s Collection Point.

Taking it overseas with them, and thus notionally ‘‘consuming’’ it outside the country, they need pay GST neither on pick-up nor – except in rare circumstances – on their return.

It is, if you do the sums, a nice little scheme. On a $4500 ring, the GST saved is $675, enough for a return flight to Sydney. On a $10,000 necklace, it’s $1500 – an airfare to Bali and back.

And, as it turns out, I needn’t have asked a sales assistant, because firms promote the loophole online. The Village Goldsmith tells customers they have to pay GST if they want to give a gemstone to their partner in New Zealand, but not if they do it overseas.

The Diamond Shop says, cheerily, ‘‘Many of our customers take advantage of these tax savings, which help pay for their holidays. Can you think of a more romantic way to save money?’’

Probably not – but I can think of fairer ones. Someone who scrimps and saves to buy their fiance´ e a present, but lacks the time or money to cover all the expenses of an overseas jaunt, will pay full price; a wealthy couple heading to the United States get 15% off and free flights. And in the latter case, the tax take is lower than it should be.

For all that, I don’t really blame people for using this loophole, especially when it’s perfectly legal and so widely advertised. It’s also very small fry in the greater scheme of things.

I just think the loophole should be closed. And we can expect that it will be, since our tax authorities have a proud record of tackling far larger problems.

That, in fact, is much the most interesting story here. Many people fear that tax loopholes – especially the genuinely troubling ones that reap the hyper-wealthy millions of dollars – will always be with us. But not so. Holes in tax law are closed all the time.

Sometimes the schemes in question are clearly legal but shouldn’t be, so the law has to be changed. Sometimes it simply has to be enforced.

In 2009, the big four Australianowned banks – ANZ, BNZ, ASB and Westpac – had to cough up $2.2 billion for having run so-called structured-finance transactions that created artificial ‘‘losses’’ to offset against their tax bill. The banks got absolutely monstered by Inland Revenue, and rightly so.

A few years later, two Christchurch-based orthopaedic surgeons, Ian Penny and Gary Hooper, were likewise found guilty of tax avoidance. They had, in essence, claimed that their income was corporate profit, which would have been taxed at 33%, rather than – as it actually was – personal income taxable at 39%.

The history of our tax system is, in short, a history of people thinking they’ve found ways to avoid paying their fair share, and then being trounced in court. While the authorities aren’t always successful, three out of every four cases is a victory, according to Inland Revenue.

For each $1 spent on investigations, the agency finds $9.88 in evasion – surely one of the best investments in the history of government.

Such investigations remain necessary. Inland Revenue estimates New Zealand still loses at least $1.1b each year in evasion; the global Tax Justice Network thinks it could be as high as $7b. That would buy a lot of extra cancer drugs or new school buildings.

Consider, too, the business dealings of the Wright family, controversial Rich Listers who in 2015 ‘‘sold’’ their chain of childcare centres for $332m to a charity they control.

The chain’s profits now go to the charity, untaxed, but are then sent to the Wrights as repayment for the ‘‘sale’’.

Effectively the family will, until 2030, bank the profits, but without having to pay millions of dollars in tax they would otherwise owe.

Although this is eminently legal, experts like tax professor Craig Elliffe have questioned whether it’s an appropriate use of charitable status. It certainly looks to me like a loophole. And there’s no reason we couldn’t close it. After all, we’ve done that time and again.