Most property investors breathed a collective sigh of relief when Prime Minister John Key effectively swept capital gains and land taxes off the table. He has, however, left a 2.5 per cent increase in GST firmly on the agenda.
Gavin Holley, KPMG Business Advisory Director explains:
The Government has not simply been looking to fund personal tax cuts, but to re-shuffle the tax burden as a whole to make it 'fairer' while maintaining the total tax take.
An increase in GST will not only widen the tax net and fund personal tax cuts, but it will also create an incentive (albeit short term) for New Zealanders to save rather than spend.
The last increase in the GST rate was more than 20 years ago in July 1989. On an international comparison New Zealand has had a reasonable length of time with the same GST rate. A 15 per cent GST rate will still be under the global average rate of 15.26 per cent. However, New Zealand would be above the Asia Pacific average rate of 10.8 per cent. The GST rate increase to 15 per cent equates to a 2.2 per cent overall increase on a GST inclusive basis.
But putting politics and international comparisons aside for a moment, what are the practical implications for business of an increase in GST? At first glance, they do not seem to be too onerous. And they need not be, if the change is thought through and planned for ahead of time. Below are some key things you should think about in the lead up to any rise in GST:
• Can your accounting system cope with the change?
The best guess is any announcement in the May budget is likely to take effect on 1 October 2010, leaving little time to prepare. Not only do you need assurance that the rate of GST in your accounting and point of sale systems can be changed, but that changing it part way through a financial year will not affect any data entered before the change.
The degree of difficulty in updating a system will vary from business to business. If you have a system which can't be changed, it's an opportune time to start looking at a new system to support your business moving forward.
•Does your GST return period cross the cut off date?
Managing the change will be especially important if it comes into effect part way through your GST return period. For instance, if your GST return period starts on a date other than that of the rate change, you will need to make sure the 12.5 per cent transactions are clearly split from the 15 per cent transactions when completing your GST return.
•Is your business prepared for fluctuations in demand?
This is not the first time New Zealand has experienced an increase in GST. An equivalent hike in 1989 saw a pre change spike in the demand for goods, especially for those bigger ticket items. Once the rate increased, demand tapered off. It is important to plan ahead so your business can take advantage of increased demand, while avoiding being left with excess inventory or cash flow issues once that demand tapers off.
• Will you adjust your pricing?
Not every business will simply inflate their prices by 2.5 per cent. Will you pass the increase onto your customers, or can your business afford to absorb the GST increase? Competition, cash flow and profitability will need to be considered when making this decision.
•Are you able to update the price of your goods overnight?
For those retail businesses with large inventories, this will be a time consuming exercise. You will need to update any prices shown on your website, as well as any fliers or signage.
•Have you entered into long term contracts?
It will pay to check that pricing in major customer contracts has been agreed on a GST exclusive basis, to avoid holding an unexpected 2.5 per cent shortfall in net revenue.