GST - Questions & Answers

Posted: 28th September 2010

What will I need to do before the rate increase?

 Any change in the GST rate has many practical issues for all businesses to work through.  The GST rate increase will have far-reaching consequences for business systems.  It is critical for all businesses to have a structured process to assess the impact of the GST rate rise and their response to it.

When does the new rate start?

 The 15% GST rate will apply to supplies made on or after 1 October 2010.

Will there be any transitional provisions?

 In general, no.  All businesses must apply the new rate to supplies made from 1 October 2010.

No specific anti-avoidance provisions in respect of the GST rate increase have been introduced to date to prevent forestalling.  This is where taxpayers enter into arrangements to take advantage of the lower rate of GST for supplies that are actually made on or after the rate change date. The general GST anti-avoidance provisions could apply if the only reason a transaction is undertaken is to minimise the amount of GST payable.  Inland Revenue have indicated, "in excessive cases, the general anti-avoidance provisions in the GST Act may be application if it is clearly evident that businesses are restructuring their business practices to bring forward a material number of transactions."  Exactly what this will mean in practice could be difficult to determine and we expect further guidance to be forthcoming from Inland Revenue to give business more certainty.

Which rate will apply?

 The applicable GST rate depends on the time of supply.  Generally, this is the earlier of an invoice being issued or a payment being received.

 If the time of supply occurs before 1 October 2010, the supply will be subject to GST at 12.5% even if delivery of the goods or performance of the services are after the rate change date.

 If the time of supply occurs on or after 1 October 2010, the supply will be subject to GST at 15%.

 Special time of supply rules apply for certain continuous supplies of goods or services and for supplies between associated persons.

Don't I just change the GST rate in my system in one box on the computer?

 Unfortunately it is not as straight forward as this.  A new GST rate will need to be created within the accounting system in addition to retaining the 12.5% rate.  Both rates will need to be in the system for several months at a minimum to process various transactions under both rates.

 We expect that most modern accounting system should be able to cope with multiple GST rates.

What about my cash register system?

Many retailers have cash register systems that calculate GST at the point of sale.  If you use an electronic system to record retail sales, you will need to make sure it is adjusted to take account of the new rate from 1 October 2010.  You may need to consult your software provider or developer to determine how the changes will be made to your systems.

I use an electronic accounting system, does this mean I will need to buy new accounting software?

 It is not likely that you will need a new accounting system.  However, you will need to check that your accounting software can process invoices during the transitional period, when you may be issuing and receiving invoices at both rates.  You need to ensure that for standard rated supplies of goods or services made or received on or after 1 October 2010, the GST rate being used and shown on the invoices is 15%. 

What if I charge my customer the wrong amount of GST on an invoice?

 If you continue to charge GST at 12.5% on invoices raised on or after 1 October 2010, you will need to account to Inland Revenue for the correct amount and account for the higher amount in your records, i.e. 15%. 

 Do I have to pass on the GST increase to customers by increasing my price?

 This is a commercial decision for you to make and we have seen a wide variety of responses from businesses to date.

 For businesses selling directly to end consumers on a GST inclusive basis, profit margins and pricing points will be a significant issue.  For example, if you sell a product for $9.95 under the 12.5% rate and you keep it at $9.95 under the 15% rate, "after GST" revenue will decrease by 2.2%.  To maintain the gross profit under the 15% rate, the product would need to be sold for $10.17, which just doesn't have the same ring to it as $9.95.  We will be surprised if on 1 October there are many goods for sale at $10.17.

 What happens if I have contracts that span 1 October

 It is critical for you to consider the impact on contracts that span 1 October 2010.  The GST Act 1985 ("GST Act") already contains provisions dealing with the impact on contracts of a GST rate increase.  These provisions apply to modify existing contracts so that the price increases in line with any GST increase unless the contract expressly contemplates a change in the GST rate. 

 Where prices are "GST exclusive", the GST Act provides that the price of the contract will increase to the new rate unless the contract explicitly provides otherwise.  We recommend quoting contract prices as "plus GST" in all contracts where you are not selling to end consumers. 

 Where prices are "GST inclusive", the ability to increase the price for the GST rate rise was less certain under the old GST transition rules.  However, Inland Revenue have sought to clarify the treatment of "GST inclusive" contracts via a Budget Night legislative change.  It is now clear that the policy intent is for all "GST inclusive" contracts shall be deemed to be increased for the GST rate change.

 We would still recommend that care should be taken with any new "GST inclusive" contracts being entered into from now on.  The practical and commercial ability to increase the price under a "GST inclusive" contract will need to be carefully considered in addition to the legal obligations.

 Can I encourage customers to make an early payment?

 Some customers may be prepared to make a prepayment before 1 October 2010.  The rate increase provides businesses with an opportunity to encourage some customers to pay early as they will be charged GST at 12.5% rather than 15%.  Customers who are not GST-registered or unable to claim GST will likely perceive a benefit of buying early.  The GST increase may prove to be an incentive for these customers.  Where there is "excessive" activity to advance the time of supply so the 12.5% rate applies to sales, Inland Revenue may seek to impose the 15% rate via the general anti-avoidance provisions.

 Source: Deloitte