Tax on a tax - officials recommend letting Government keep GST on unemployment insurance

Contributions to the Government's proposed social unemployment insurance scheme will likely be subject to 15 per cent GST, netting the government hundreds of millions of dollars in revenue - something National calls a tax on a tax.

Papers released under the Official Information Act show officials recommended against allowing earners to claim a deduction on the GST they pay on their levies. Officials recommended a law change to stop any deductions being claimed.

The application of GST to the social unemployment insurance levies is included in the current proposal for the scheme, which will levy 1.39 per cent of employees' pay packets, with an equivalent 1.39 per cent levy charged on employers - much like ACC.

Those levies will go to funding ACC to operate the scheme, which is estimated to cost $3.5 billion a year. The scheme will pay 80 per cent of workers' incomes after they are made unemployed (capped at salaries of $130,911), for up to seven months after they lose their job.

Employers will be able to claim deductions for the GST they pay, but employees will not.

A 15 per cent GST charge on the employees' share of the cost works out at about $250m in additional revenue to the core Crown.

Finance Minister Grant Robertson said "final decisions of the scheme are still being worked on".

National's finance spokeswoman Nicola Willis said the "proposed GST charge is yet another grab on Kiwis take-home pay by Labour, intended to boost the Government's coffers at the expense of workers".

"In the middle of a cost of living crisis this is completely the wrong thing for the Government to be doing," Willis said.

She said National opposed social unemployment insurance, which it has dubbed a "jobs tax" and would repeal it.

Act leader David Seymour also opposes social unemployment insurance, but said if it was rolled out it would make sense for GST to be applied to it in some way.

He said there needed to be "some sort of parity" with private providers of income protection insurance.

But he said the catch is that most people paying private income protection insurance are "contractors - people who can deduct it as an expense against their income". The Government's scheme would widen this to all income earners, most of whom would not be GST registered and would have to pay the full fee on their levy.

Willis asked Robertson in the House last week about whether the "jobs tax" would be subject to GST and how much he expected it to raise.

Robertson replied by saying there was "no such thing" as a jobs tax.

The consultation document outlining the first public blush of the scheme said levies would be subject to GST.

Official Information Act requests published by Treasury on its website reveal officials wrangled over how the fees should be treated.

The papers suggested that the levy be treated like ACC levies and deducted from employees' pay.

"An interpretation of current law suggests that employees may be allowed a deduction for the employee levies deducted from their income.

"From a policy perspective, it is preferable that employees are not permitted this deduction. This treatment would be consistent with the tax treatment of the ACC Earners' Levy and the framework for the taxation of individuals in general where employees are not permitted deductions for expenses incurred in producing that income," officials warned.

They added that allowing deductions would also have a "significant" fiscal cost to the Crown.

Robertson has defended the model of unemployment insurance noting the wage subsidies both National and Labour governments have used during significant economic shocks like the Christchurch earthquakes and the Covid-19 pandemic.

Those policies were funded by borrowing and taxation - social unemployment insurance would effectively pre-fund unemployment support to lift those costs off the Crown's balance sheet.