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1. What impact will the GST rise have on GST registered persons?
As long as the person is GST registered and the cost relates to the business then very little. This is because if people are GST registered then while the GST charged on purchases increases by the 2.5%, you will be able to recover this when filling in GST returns. There may however be a small cashflow issue as people will have to carry the additional GST cost offset by additional GST income on sales. They will however bear the cost of the additional GST on expenses which they cannot claim, for example, on private expenditure.
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2. What, if any, financial or administration work will be required before 1 October?
If a GST return spans September/October a transitional return will need to be filed – basically two individual returns (ending September 2010 and October 2010). Those with returns ending at 30 September will file as usual. Those on payments basis will need to make a list of all goods and services sold or purchased prior to 1 October but not paid for at 30 September and then complete a Rate Change Adjustment form with their return, effectively ensuring that payments made after 30 September are still accounted for at the GST rate when goods and services were provided. Invoice basis clients are generally not required to do a Rate Change Adjustment. If the person makes ongoing GST adjustments, for instance for a vehicle which is partly private, these amounts will need to be recalculated using the new rate.
If there are any questions around this then we advise that you speak to your accountant.
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3. What system changes will be required?
This will depend on what accounting package is used by the person. People will need to ensure they have the latest version of QuickBooks (version 2010/2011), Cashmanager (2010), Cashmanager Rural (v4) and MYOB (version 19) which allow the use of dual rates, both 12.5% and 15%. Users of Xero, Moneyworks and BankLink will not need to upgrade, although changes will need to be made to the GST rate. Again it is advisable to speak to your accountant to ensure the correct version where applicable is installed.
People using a manual system to calculate GST will need to change their calculations. It will be advisable that taxpayers check that their accounting system is correctly calculating amounts pre and post 30 September.
For more details, please see: GST Changes & Your Accounting Software
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4. When will you have to implement the changes?
The 15% GST rate will be effective from 1 October 2010. In general terms, any sales or purchases made on and after this date will be at the 15% rate. The correct GST rate is determined based on the “time of supply”, which generally is the earlier of when an invoice is issued or an amount is received in respect of that supply. It will be important that people understand if the time of supply is pre or post 30 September so that the correct GST can be used.
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5. How do you calculate the new GST amount?
Where the GST exclusive amount of an item is known, multiplying this by 1.15 (or 23/20) will provide the new GST inclusive amount of the item. Where the GST inclusive amount of an item is known, dividing the amount by 1.15 (or multiply by 20/23) will provide the GST exclusive amount of an item. To calculate the GST amount on an item multiply the GST inclusive amount of the item by 3/23.
For example:
A tractor is sold for $60,000 including GST. The GST exclusive amount of the tractor will be $60,000 / 1.15 (60000*20/23) = $52,173.91. The GST will be the difference, being $52,173.91 X 0.15 (60000*3/23) = $7,826.09.
If we add the exclusive amount to the GST we get back to the inclusive amount: $52,173.91 + $7,826.09 = $60,000
It will be prudent to check around 30 September that the tax invoices issued correctly record the GST amount. If not you should raise this with the supplier.
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6. Is there anything you can do to minimise the impact of the rise?
Plan well ahead of time, given that there is less than one month to go before the change is effective. This would ensure that processes are in place and there will be a smooth transition.
Remembering for GST registered people buying goods or services as part of their business the additional GST is not a cost to them but is claimed back from IRD. If people are considering larger “private” purchases which attract GST then they may wish to complete the purchase prior to the 30 September to ensure only 12.5% GST is paid.
It is important to note everyone will be affected by this change. For GST registered businesses the effect on business costs will only be in terms of cashflow until the additional GST can be claimed back. The additional GST will increase the cost of most private purchase (as this cannot be recovered) however this is the aim of the tax increase – to increase the GST cost to the final consumer.
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7. What will the impact be on rental properties?
Residential rental properties are GST exempt, accordingly GST does not have to be returned on any rent but on the other hand GST cannot be claimed on expenses. Therefore the cost associated with a rental property such as rates, insurance and repairs will increase as GST cannot be claimed back on these costs. It is anticipated by Treasury that residential rents will increase by 1.4% more than usual over the next three years due to this.
Investors owning residential rental properties will therefore need to consider if they can increase the rents to ensure the return for the property does not diminish due to the higher GST inclusive cost.
In relation to the rental of commercial properties for GST registered taxpayers, (i.e. should a person be renting land, or owns a commercial property) any invoice issued on 1 October or later will need to calculate GST at the higher rate. The higher GST cost on purchases will be able to be claimed back from the IRD so costs will not increase.
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8. If I am scaling back my activity am I best to do it before or after October 1?
If you are looking at deregistering for GST then doing this prior to the rate change will be advantageous. Any assets on hand when deregistering for GST require GST to be paid on them, based generally at the market rate on that date. Thus deregistering prior to 1 October will create a cost at 12.5% of the assets value, and after 1 October a cost of 15%. If a business has an expected turnover of more than $60,000 per annum (GST inclusive) then they generally cannot deregister.
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9. I am looking at buying a second-hand asset for my business from an unregistered person, when am I best to do this?
If the seller is not GST registered and not associated with the purchaser and the purchase is prior to 1 October then the purchaser is entitled to claim GST based on 1/9th of the purchase price. In this case buying the second hand asset (from a non registered and non associated party) after 1 October may be advantageous, if the decision was solely based on the GST rate because 3/23rd of the purchase price can be claimed.
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10. How will the increase in GST impact customer demand?
In the past, similar increases in the GST rate have seen increases in demand prior to the change for high value consumer goods and upon implementation of the new rate this demand has subsided. It will therefore be important for people, particularly those in retail, to pre-plan in order to meet any increased demand but also to avoid carrying excess inventory and potential cash-flow problems for when the demand may subside.
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11. Are there penalties applicable if I get things wrong?
Businesses are required to correctly calculate the GST due and if they fail to do so the possibility of penalties arises.
In the Budget the Government introduced legislation which compels the IRD to remit penalties and interest to the extent which these were caused by the GST rate change. The legislation will take effect from 1 October and is only effective from that date through 31 December 2010.
This remittance will not apply to shortfall penalties; for example if a taxpayer does not take reasonable care in preparing the GST return, or adopts an unacceptable position. To ascertain whether the penalties should be remitted the IRD will look at the error objectively – this is required by legislation. There are further changes currently before Parliament which will allow remission when mistakes occur which relate to ongoing contracts.
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12. What are the IRD proposed transitional rules to make things easier?
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We are happy to provide specific advice regarding the GST changes and how these will affect your business operations. Please contact Frank Burgess in Christchurch or Michael Turner in Dunedin if you wish to discuss this, or any other matter.
This information has been prepared by Polson Higgs as a service to our clients. It is intended to highlight recent developments and issues, and should not be used as a basis for making decisions. We recommend you seek professional advice from us before taking action on any specific issue.
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