GOODS AND SERVICES TAX (GST) INCREASE
From 1 October 2010 the rate of GST will increase to 15%. The change in the rate of GST has wide ranging effects on all GST registered persons and consumers. Businesses will be required to implement systems to deal with the rate increase and also ensure that GST is calculated correctly on all supplies.
Effects of GST Rise on Consumption
Historically it can be seen that consumer spending has risen prior to an increase in GST:
- In 1986 retail sales increased 8% in the quarter prior to the introduction of GST and retail sales dropped off substantially after the increase. Consumer spending on durable goods such as cars rose 30% when compared with the previous year’s levels;
- In 1989 when the rate was increased from 10% to 12.5%, the quarter prior to the GST increase had a 2.4% increase when compared with prior quarter’s sales.
These figures suggest that consumers bring forward their expenditure when facing a rise in the rate of GST, especially in large ticket items such as cars where even a small change in the tax rate can mean a big saving by bringing forward that expenditure.
Effects of GST Rise on Businesses
The rise in the rate of GST should not have any effect on profits for most businesses as GST is a value-added tax which is levied on consumption. Businesses may therefore feel a small impact in their cash flow in the short term while the change makes its way through the economy. However, there are some GST registered persons to whom the change in the rate of GST will have a real effect such as:
- Where the increase cannot be passed on to the consumer, for example, where the contract specifically precludes an alternation in the consideration due to a change in the GST rate or due to market conditions (e.g. property developers);
- Where assets are being introduced or taken out of a taxable activity.
We comment on these situations further below.
The biggest impact on businesses will be in relation to administrative requirements and the systems they need to have in place to ensure GST is calculated correctly and GST returns are correctly completed.
All businesses will need to:
- be aware of the Time of Supply rules, which impact whether GST applies to a particular transaction at 15% (supplies on or after 1 October 2010) or at 12.5% (supplies on or before 30 September 2010);
- update the rate of GST in their computer packages;
- take particular care when processing payments or creditors invoices in the months following 30 September 2010;
- take particular care when issuing credit notes invoices after 30 September 2010.
For businesses who prepare GST returns on a payments basis, special calculations will be required for 30 September 2010. These are detailed below.
Time of Supply
The standard time of supply rule is set out in Section 9(1) and it states that a supply of goods and services shall be deemed to take place at the earlier of the time an invoice is issued by the supplier or the recipient or the time any payment is received by the supplier.
There are additional provisions which determine the Time of Supply for particular types of supplies, including periodic supplies, delayed settlements and lay-by sales.
- Periodic Supplies
Section 9(3) states that where services are supplied under any agreement which provides for periodic payments, they shall be deemed to be successively supplied for successive parts of the period of the agreement or the enactment, and each of the successive supplies shall be deemed to take place when a payment becomes due or is received, whichever is the earlier.
Therefore, for construction contracts and building contracts there are deemed to be multiple supplies and the standard time of supply rule applies to each supply, i.e. the earlier of an invoice being issued or a deposit being paid for that supply.
- Delayed Settlement
Where a delayed settlement has occurred it is crucial that the standard time of supply rule is considered to determine whether the time of supply occurs before or after 1 October 2010. We note that where a payment is received and is held beneficially for the vendor, this can constitute the receipt of a payment and, consequently, represents the time of the supply.
- Lay-By Sales
Lay-by sales are subject to their own time of supply rule in Section 5(5) and are deemed to take place when the property is transferred to the buyer. Accordingly, if taxpayers don’t pay for sale goods in full prior to 1 October they will find that they are faced with paying a further 2.22%.
Persons on a Payments Basis – Transitional Return
Where a taxpayer is on a payments basis a special return will be required for the period ending
30 September 2010. In that return an adjustment is required for all GST on accounts payable / accounts receivable as at 30 September 2010. If the amount is a credit (because debtors exceed creditors) it is offset against any GST payable and, if there is still a credit, it is carried forward to the next GST period.
Where a GST return spans the 1 October 2010 change, a taxpayer is required to submit two
GST returns – one up to 30 September 2010 accounting for supplies at 12.5% and one from
1 October 2010 to the end of their period accounting for supplies at 15%.
Situations where the GST Increase may impact Businesses
- Ability of Supplier to Increase Amount Charged – Contracts
Section 78(2) of the Goods and Services Tax Act allows taxpayers to increase the amount of GST charged under a contract unless the contract specifies otherwise. If quoting on a contract, the price should be the GST exclusive price with “plus GST”.
- Ability of Supplier to Increase Amount Charged – Market Conditions
In some cases market conditions may mean the supplier cannot adjust their prices to pass on the GST to their customers, resulting in a real loss of GST to the supplier.
For example, the GST rate increase is unlikely to directly affect residential property prices: a property will be worth the same to a potential purchaser on 30 September and on 1 October. Similarly for some consumer goods there may be “price points” which the market will be reluctant to exceed.
For a property developer part-way through developing a property when the GST rate is increased, the impact will be substantial: For example, on a $600,000 house, where the increased GST cannot be passed onto the consumer, the situation will be as follows:
|Example 1||Example 2|
|Sale PriceGST @ 12.5% on sale
GST @ 15% on sale
Therefore, should the property developer complete the property and sell it before 1 October
2010 (the date of the GST rise), there would be $11,594 less GST to pay. The 12.5% GST rate applies to supplies made on or before 30 September 2010. The developer would either need to settle the sale before 1 October 2010 or receive a deposit for the sale prior to 1 October 2010. If a contract for sale and purchase was entered into before 1 October but did not go unconditional until after 1 October, the developer could pass the increased GST cost onto the purchaser even if the contract was inclusive of GST.
- Deregistration and Change of Use
When assets are no longer used for business purposes, there is a deemed sale and GST is payable based on the market value at that time. After the GST increase, the business would be liable to account to the IRD at the 15% GST rate as opposed to the 12.5% rate which they were originally refunded by the IRD.
For example, a home stay operation has claimed GST on their residential property because they are offering short stay accommodation to the public. When this ceases GST is payable.
Accordingly, taxpayers who are voluntarily registered should consider whether they wish to deregister prior to 30 September. Whilst there is provision in the legislation to make change of use adjustments in GST periods commencing after 1 October at the old rate, only taxpayers making output tax adjustments are likely to want to avail themselves of this provision and can expect to be required by the IRD to provide proof that the change of use actually occurred prior to 1 October.