TalkTax

I recently received an invoice from the Wellington City Council for the first quarterly rates instalment for the 2010/2011 year. Enclosed with the invoice was a slip advising of the upcoming increase in GST rate and suggesting that ratepayers could save themselves some money by paying the remaining three rates instalments before 1 October if they can afford to do so. We thought it would be interesting to put this to the test with some back-of-the-envelope calculations.

My rough calculations suggest that any GST saved from paying the instalments upfront is likely to be outweighed by the additional interest costs of funding that payment. For example, a person paying 6% interest on their home loan and with an annual rates bill of $2,000 (exclusive of GST) would save $37.50 in GST by paying the remaining instalments in advance, but this saving is less than half the cost of funding that payment from now until the respective instalment dates (approximately $85 by my calculations). The result for someone who is mortgage free would be better but, even then, the GST saving is offset by the opportunity cost associated with the interest forgone on the sum paid in advance. There seems to be little benefit in paying the remaining rates instalments early, unless the Council is prepared to offer ratepayers a discount for doing so.

Similar considerations should also apply in determining whether to purchase big-ticket items prior to 1 October. The key difference between such items and council rates, however, is that the purchaser would at least obtain the (non taxable) benefit of having the use of the items from an earlier time.