Paul McGonigal, manager at PricewaterhouseCoopers in Auckland outlines some steps for businesses to take to help cope with the increase in GST.
With October 1 rapidly approaching, it is crucial to form a project team and start planning to avoid unnecessary costs or risks.
There are a number of simple steps businesses can take to manage the rate change:
*Plan early - the rate increase will affect all parts of your organisation, not only tax.
*Consider forming a project team comprising finance, IT and sales and marketing staff to identify potential issues and opportunities.
*Review current GST practices - particularly in relation to timing and invoicing.
*Test system changes before going "live" on October 1.
There are eight key questions:
1. WHAT CHANGES ARE REQUIRED TO ACCOUNTING AND REPORTING SYSTEMS?
Most accounting and reporting systems will require changes to accommodate the new rate of GST. Systems must be capable of issuing and processing tax invoices and credit/debit notes at both the old and new GST rates.
Default settings in both sales and purchase modules will need to be changed to reflect the 15 per cent rate.
2. WHAT GST RATE APPLIES WHEN A TRANSACTION SPANS OCTOBER 1?
The GST rate which applies is the rate at the "time of supply" - generally the earlier of an invoice being issued or any payment being received. For recurring or successive supplies of services, a special rule states GST timing is when payment is due or received rather than when an invoice is issued.
3. CAN PRICES BE INCREASED TO REFLECT THE 15 PER CENT GST RATE?
The GST Act gives businesses a limited right to gross up prices to take into account a new higher rate of GST.
The right to increase the price applies to all existing agreements and those entered into before January 1, 2011 (i.e. within three months of the rate increase).
The gross up right does not apply if the contract expressly precludes the increase or other legal constraints exist.
4. HAVE YOU STARTED REVIEWING CONTRACTUAL TERMS AND DOCUMENTATION?
All existing contract terms should be updated for the new 15 per cent rate. Commercial decisions must be made as to the appropriate pricing and the impact on margins.
Tax invoices issued after October 1 must be updated to reflect the new 15 per cent rate.
5. DO YOU NEED TO MAKE A PAYMENTS BASIS ADJUSTMENT?
All businesses registered on a payments (cash) basis must account for and deduct GST using the new 3/23rd fraction for payments made and received from October 1 onwards (regardless of what GST rate originally applied to the supply).
To ensure that businesses are not economically advantaged or disadvantaged because of the rate change, a special adjustment is required to be made in the GST return covering September 30.
6. HAVE YOU CONSIDERED PERIODIC CONTRACTS?
Where services agreements span October 1, different GST rates (12.5 per cent and 15 per cent) could apply if the customer pays periodically.
7. WHAT OPPORTUNITIES AND CHALLENGES ARE THERE?
The GST rate increase is likely to affect spending patterns. There may be an opportunity to review pricing, and consider marketing and promotions around October 1.
The rise means a 20 per cent increase in potential GST exposure. It is important to review practices to ensure the transition to 15 per cent will be smooth.
8. ARE THERE ANY TRANSITIONAL RULES TO BE AWARE OF?
The Government has made changes to the transitional rules to assist taxpayers.
Inland Revenue will issue guidance in relation to filing GST returns and issuing tax invoices and credit/debit notes during the transition to 15 per cent.
Updates on the rules will be available at www.pwc.com/nz/en/GSTDirect
Paul McGonigal is a manager at PricewaterhouseCoopers, Auckland.