GST Changes and Impact Assessment - SI
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While on the face of it the GST rate rise seems faily straightforward, many businesses are just beginning to assess the impact of this rate change on their systems. Held in Christchurch on 12 August and Dundedin on 18 August.
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GST Changes and Impact Assessment - SI
- 1. GST system readiness Derek Lamb & Aaron Thorn August 2010
- 2. Introductions Pricing Time of supply GST rate change issues Types of systems impacted Requirements of systems Impact on specific transactions What should you be doing Q&A Agenda
- 3. Objective Intergen team Derek Lamb Tax expert Aaron Thorn Tax Partner Deloitte Introduction
- 4. GST It was New Zealand’s worst kept secret…. GST is increasing to 15% from 1 October 2010
- 5. 2010 Total Tax Revenue $14.4b $8.9b $23.5b $1.7b $5.4b 5
- 6. = More IRD audit attention on GST
- 9. GST exclusive contracts (“ price + GST”)
- 12. The fixes ... Subrogation payments received by Insurers Successive supplies e.g. phone line rental Layby sales Private training establishments
- 14. Accounts Payable: processing invoices at both rates. Incorrect Tax Invoices
- 15. Accounts Receivable: issuing credit/debit notes at both rates
- 16. Multiple billing dates within a month.
- 17. Don’t assume that the system will be updated by your provider
- 20. Rebates / incentives / refunds / cash-backs
- 21. Deferred Payments Scheme account limit
- 23. Bad debts write offs and recoveries
- 25. Change in use adjustments
- 26. Exception testing after the rate change
- 27. Update reconciliation spreadsheets and templates
- 28. Budgeting and cash flow projections
- 30. Return period straddles 1 October - Special GST returns
- 32. Aaron Thorn Partner | TaxDeloitteDirect: +64 (0) 3 363 3813 athorn@deloitte.co.nz
- 33. Systems impact
- 34. Types of Systems impacted Web sites Point of Sales systems (POS) Supplier catalogues Reporting systems Project management and accounting sub-ledgers Customer price list data feeds Estimation and quoting systems Employee expense forms Customer relationship management (CRM) Procurement and Purchasing systems Enterprise Resource Planning (ERP) Manual spreadsheets (Cashflow)
- 35. System Requirements Able to change GST rate Hold two GST rates Update GST rates on master records such as products Update recurring transactions Update outstanding transactions Prepayments GST labels on documents Ability to perform interim GST returns (depending on customers tax settlement periods)
- 36. Impact on different transaction types
- 37. What should business be doing? Take a strategic view Embark on GST transition project Appoint internal team Engage with technology suppliers Create remedial action plan Implementing system changes Internal communications Mock GST cut-over Communicating strategy/changes to customers
- 41. Update GST values in live (AX only)
- 43. Finalise remedial action plan for all systems
- 46. six-monthly return with the period ending:
- 47. 31 October 2010
- 48. 30 November 2010
- 49. 31 December 2010
- 50. 31 January 2011
- 52. Questions
- 53. Thank You
Editor's Notes
- Our objective is to provide you with some insight into what you need to be thinking about with the impending GST change and hopefully answer some of your specific questions.We’ve teamed up with our tax partner because we’re not tax specialists, we’re system specialists and can help you implement the strategies that you and your tax experts have come up with.
- Up from 22% in 2009 and 20% in 2008
- Do I have to pass on the GST increase to customers by increasing my prices?commercial decision for you to make, 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. Where a business primarily contracts with other GST-registered businesses, we would expect it to be much more likely that the GST rate rise will simply be passed on to the business customers.Will the rate increase affect consumer spending?The last GST rate increase from 10% to 12.5% in 1989 saw some consumer spending increase before the rate increase. peak in demand for goods in the lead-up to the 1989 GST increase, particularly big ticket items such as whiteware and cars - spending on appliances was 35 per cent higher in the month before the increase than it had been a year earlier, difficulties again predicting how much stock to purchase prior to that peakLarge increase in July 2010 spending on “durables” - category which covers big-ticket items such as furniture, hardware and appliancesWhat if I’ve already pre-printed all of my marketing material?Prices in brochures, signage, and websites will need to be updated. The shelf-price of thousands of items may potentially need to be manually changed overnight. The Fair Trading Act also needs to be considered. Possibility of running, displaying two rates for the changeover period.Can I encourage customers to make an early payment?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.Some customers may be prepared to make a prepayment before 1 October 2010Where 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.
- What happens if I have contracts that span 1 October?The GST Act 1985 provisions apply to modify existing contracts so that the price increases in line with any increased 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 GST 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.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 “GST inclusive” contracts entered into after the budget announcement. The practical and commercial ability to increase the priceunder a “GST inclusive” contract should also be considered, i.e even if the price can legally be increased is it commercially practical to do so
- The issuing of tax invoices for pre-October supplies Current date of the “issue” of invoice, rather than the date on the invoice, so an invoice dated 30 September but issued in October would technically have the 15% applyingProposed Change so time of supply is date of invoice (rather than date of issue)Requirementsgoods or services provided before 1 October 2010; and invoice dated on or before 30 September 2010 is issued on or before 11 October; andpayment is due within 60 days of the date of invoice. Ongoing contractsCurrent – Some instalments under old rate and some under new. Service provided after 1 October should be charged at 15%. Customer will request new invoice at 15% to claim a creditProposed – Supplier (e.g. Insurer) can elect to charge GST at 12.5% on remaining amount to review dateRequirements - Services supplied under an agmt which provides for periodic paytTerm of agmt straddles 1 OctoberConsideration set or reviewed for periods of 1 year or less during termSupply is treated as being made on 30 September i.e. Supplier returns GST at 12.5% on remaining amount to review date in September GST return Finance leasesCurrentGST is applied to the supply of the good in question (a motor vehicle, for example) but not to the finance component Interest and principal components calculated actuarially but GST payments are able to be based on a straight-line approach over the term of the lease.A square-up adjustment is normally only done when the lease terminates, to reflect any difference between the actual and expected residual value of the leased asset.With a rate change occurring during the contract term, the new rate would apply to the remaining payments under the finance lease contract. Reconciliation on these existing contracts becomes complex and substantial systems changes would be required to accommodate it. Proposedallows finance leases to be able to be accounted for at the 12.5% rateRequirementsSupply of personal property under agmt to hireentered into before 1 October 2010 for a maximum term of five years,GST-registered lessees are advised by the lessors claim input tax at12.5% on payments made after 1 October 2010. elective, at the option of the supplier.Replacement invoices General rule - a supplier cannot issue two tax invoices for the same supply, credit or debit notes issued to correct • Change allows replacement invoice rather than debit/credit note where incorrect rate charged
- Subrogation paymentrecovery income received by an insurer for the damages caused by a third party to their insured party. 12.5% for subrogation payments received on or after 1 October 2010 provided the underlying claims agreed and settled before 1 October 2010. Successive supplies ruleCurrent time of supply rule GST rate is determined by when the payment is due or received (rather than when the invoice is issued). Proposed change gives suppliers the choice of using either the invoice or the “payment due or received” rule providedRequirementsSuccessive supplyRequirements goods or services provided before 1 October 2010; and invoice dated on or before 30 September 2010 is issued on or before 11 October; andpayment is due within 60 days of the date of invoice. Layby salesCurrent - time of supply for layby is when the goods are delivered i.e. Collect after 1 October and pay 15% on full amount. ProposedSupplier election to apply 12.5% to payments received before 1 October Requirements - binding layby sales contracts in place on 20 May 2010 (Budget night) that span the GST rate change date in effect an apportionment rule, payments made from 1 October 2010 at 15%.Private Training EstablishmentsCurrent – PTEs and are required to use a trust arrangement when students pay their course fees in full. As the courses are delivered, the trustee pays out the funds to the PTE. Therefore any payments released by the trust to the PTE after 1 October 2010 would be at the 15% rate even when students paid before 1 October 2010. Proposed – PTEs have the option of making an adjustment in their 30 September GST returns that would give them a credit to cover the additional GST that would be payable. The credit would be based on the amount held in trust for the PTE as at 30 September 2010.
- How will the GST rate increase affect our accounting systems?ERP systems, billing systems, purchasing systems, expenses systems, and accounting systems will all be affected by the GST increase.The changes you need to make to your systems will depend on what system you currently operate. We recommend you review your systems now to ensure that there will not be any unnecessary downtime.Any changes to your systems will need to be thoroughly tested before actual implementation.Invoicing templates, GST return templates, and reconciliation spreadsheets will need to be updated to reflect the new GST rate.Staff will also need adequate training to process invoices correctly and identify common errors that can occur during GST rate changes.Don’t expect that your software provider will be updating the system, check that this is the case, you may run into issues if you are running old versions of softwareWhat about my cash register systems?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.
- What if I charge my customer the wrong amountof 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%.What happens if I get a tax invoice with the wrong GST rate or GST amount?You will need to request a corrected tax invoice as input tax will technically be unable to be recovered without a valid tax invoice.Customers may consider refusing to pay unless they hold a valid tax invoice,
- DPS and ImportsBusinesses using the Deferred Payment Scheme (“DPS”) for imported goods should consider whether the account limit with NZ Customs should be increased to reflect the increased rate. Given there is a 20% increase in the GST rate we recommend importers increase their DPS limits by at least 20% to avoid having goods being delayed in the Customs process.The low value exemption threshold will also decrease from $400 to $333. How do I deal with refunds and exchanges i.e. goods sold before the rate change but returned afterwards?Credit notes need to use the same GST rate as GST rate used on the original tax invoice. If you give a refund on or after 1 October 2010 for a sale you made before 1 October, then the credit note will be for 12.5%.How do I account for deposits or prepayments? If deposit is not a %age of total you may wish to increase the amount of a deposit you request to avoid adverse cash flow impacts The normal time of supply rules apply so you should account for GST at the rate in force when you receive the payment (other than a “stakeholder capacity”).I receive a deposit of $1,000 on 20 September 2010 for a car that retails for $10,000. The balance of $9,000 is paid when the car is delivered on 12 October 2010. What rate ofGST applies?The deposit is received before 1 October 2010 so GST of 12.5% is due on the whole amount as the time of supply has been triggered prior to 1 October where you are registered on the invoice basis.VouchersGift vouchers and loyalty schemes may also be affected.Consumers may have less buying power if a voucher purchased before the rate increase is redeemed after the rate increase.
- Coin-operated machinesSpecial rules apply to vending and gaming machines.Generally, the time of supply is when the takings are removed from the machine.This is an incentive to clear all vending machines of cash before 1 October 2010.Can your systems cope with bad debts written off after the rate change? You can only claim GST that was originally accounted for but the debt being written off may be made up of sales at both GST rates.Any write off for bad debts must be accounted for using the same GST rate as that used for the sales i.e. 12.5% for bad debts on sales before 1 October 2010 and 15% for sales after 1 October 2010.Entertainment expenditure Once a year GST adjustments for business entertainment expenses you’ve incurred that are only 50% deductible. As this adjustment is made once a year when the income tax return is prepared, the general rule is that the GST adjustment will be adding back a higheramount of GST than was actually incurred. taxpayers have the option of using the 12.5% rate for expenditure incurred before 1 October 2010, and 15% for later expenditure. Alternatively, taxpayers can simply use the 15% rate for the entire entertainment adjustment.If you make GST “change of use” adjustments, are your systems able to cope with the new legislative provisions? option to use either the 12.5% or 15% rate for assets acquired before 1 October 2010 that are principally used for making GST taxable supplies, but are also used to make exempt supplies. assets principally used to make exempt supplies, there is now a need to track the original acquisition date to determine the GST rate to useIs the GST rate hardcoded anywhere in your system, including custom developed reports?Can you perform exception testing after the rate change? Any changes to reporting systems will need to be tested before actual implementation.Do your staff need guidelines and/or training?Your staff will need to be up to speed to identify potential issues.
- What do you do if the rate increase occurs during your GST return period? You will need to file two GST returns. The 12.5% rate will apply to supplies made before 1 October 2010 and the 15% rate will apply to supplies made after this date.What penalties apply if your October 2010 GST return is filed late? While the normal late filing, late payment, and interest provisions do apply, the Budget Night legislation introduced provisions providing for a 100% reduction of these penalties in certain circumstances. these remission provisions do not remove the liability for shortfall penalties if the wrong amount of GST is paid. In addition, if the taxpayer has not acted reasonably in trying to comply with their GST obligations, no remission will be available.
- Basically there are more than just ERP systems which need to be thought about in regards to this GST change, you need to review each and every system that either is used for transactions, or reporting to make sure the GST rate is not hard coded.
- As obvious as it sounds there will be plenty of systems where the rate is hard coded, changing it may not be as easy as you would expect. How many places does it need to be changed.You will need to hold two rates for at least three months after October 1 to deal with returns or other transactions that are rated at 12.5Many systems have default rates held against products, resources or other things that are sold, these would need to be updated. Some other systems may hold the rate against customers or Vendors, again these would need to be updated.Recurring transactions such as rent etc. will need to be updated, potentially new invoices will need to be generated for customersOutstanding transactions will need to be updated, this is potentially the most complicated piece. There will be regulatory impacts, such as whether the transaction shodl be 12.5 or 15% but then potential commercial decision such as shuold you pass the price increase onto your customers, potentiallty this will nto be a single answer as you may need to chack contracts etc to see if GST is stipulated.Microsoft have identified this as a unique New Zealand requirement at least for the Dynamics NAV space. This is definitely an area that needs a tax specialist but the system needs to be able to deal with how to process invoices prepaid or where deposits are held.
- Quotes not invoiced before October 1 will need to have their GST rate changed, whether or not the Gross price increases would be an internal business decision. So as far as the system is concerned it’s not as simple as adding 2.5%.Similarly Orders not invoiced will need to have their GST rate changed. The difference with orders is that it may have been partially shipped or received or invoiced. What rate should be changed is . But outstanding lines will need to be adjusted, your options here would be to close out that line of the quantity invoiced with the old GST rate and create a new line for the outstanding quantity with the new GST rate. You could also look at closing all orders and recreating them with outstanding amounts and the new GST rate. Your choice of method could depend on how many open orders you have.Purchase Invoices – if you’re receiving purchase invoices from suppliers for November with the incorrect GST rate you are probably best sending it back to them and asking for a correct one.Prepayments – definitely one for the accountants, there seems to be a bit of a grey area, as prepayments can allow the rate to be based on the old rate but there is also a clause that you can’t be doing it just to avoid paying tax.Any recurring transactions will need to be looked at, for contracts each one may need to be reviewed to see if price changes are allowed, either way the GST will need to be adjusted, it just may affect your profit. It will require you to provide your Customers with a new tax invoice, for rent for example, or asking your suppliers for the same.
- There are potential decision to be made, it’s not black and white about simply adding 2.5%. Will you endorse quotations? Will your vendors? What about partially delivered orders? What about the potential for a rush of orders before October 1, will you have enough inventory, can you provide the services in time? Can you offer prepayments to customers?Will you need new supplier catalogues, will you need to provide your suppliers new catalogues? ……..When can you begin implementing these changes, do you have a test environment ready to test changes, wouldn’t suggest doing this in a live system without testing no matter how simple you think you are.Internal communications, how will staff handle customer queries, will they know how to handle credits that relate to pre OctoberConduct a mock GST cut over and acceptance testing processSome of your customers may not be as knowledgeable about the GST rules so outlining your strategy around price updates, but also giving them the option of receiving/paying for goods before October 1.