How 15% GST affects excessive arrangements

PricewaterhouseCoopers (PwC) has released some business guidelines for the transition of GST from 12.5% to 15% with less than four months to go before the change comes into force.

GST partner in Auckland, Eugen Trombitas says businesses need to form a project team and set a timeline to manage the process to ensure a smooth transition and mitigate any pitfalls.

He says the main aspects of the transition to 15% are: pricing, contracts/documents, systems, transitional rules and opportunities created by the change. The rate change also brings GST and accounting for GST into sharper focus.

PwC says for excessive arrangements, time of supply determines what rate of GST should apply and some businesses may bring forward invoicing solely to lock in the old lower rate.

Inland Revenue has indicated that in excessive situations the general anti-avoidance rules could be used if it is clearly evident that businesses are restructuring practices to bring forward a material number of transactions.

PwC gives this example of how the GST rate increase works in practice:

John Smith buys a computer for $2,000 (including GST) on 20 September 2010. Under the terms of sale, during the first 30 days John is entitled to return the computer and receive a refund for the total amount paid or use the refund for another computer equal to the original price.

The supplier issues a tax invoice to John on 20 September, 2010 and accounts for output tax of $222.22 (1/9th of $2,000).

John returns the computer on 30 September

John returns the computer on 30 September and replaces it with a computer of equal price but of another brand.

The supplier should issue a credit note for the previous tax invoice at the 12.5% rate and issue a new tax invoice for $2,000 (also at the 12.5% rate).

The supplier is GST neutral.

John returns the computer on 1 October

John returns the computer on 1 October and replaces it with a computer of equal price but of another brand.

The supplier should issue a credit note for the previous tax invoice at the 12.5% rate and issue a new tax invoice at the 15% rate as a new supply takes place on 1 October.

In limited cases there would not be a new supply if the terms reflect a conditional sale or the goods were taken on trial.

In the scenario above, the supplier will be out of pocket to the extent of the GST rate increase. To illustrate:

The Government has also made a number of positive changes to the transitional rules to assist taxpayers with the transition.

A "GST inclusive" price can be grossed up

The GST Act gives suppliers a limited right to gross up prices to take into account a new higher rate of GST.

The rules have been clarified to allow a "GST inclusive" price to be grossed up. However, this gross-up right only exists for contracts entered into before 1 January, 2011.

The gross up right does not apply if the contract expressly precludes the increase or other legal constraints exist.

Businesses need to consider and communicate pricing decisions before 1 October to avoid any doubts.

Remission of interest and penalties

New rules allow for the remission of "use of money" interest and late filing / payment penalties if a GST error arises prior to 31 December, 2010 and is due to the transition to the 15% rate.

However, taxpayers will not be eligible for remission where the error also leads to shortfall penalties.

Payments basis adjustments

Payments basis adjustments that result in a negative amount can now be refunded or offset against other tax liabilities (to the extent the credit cannot be used to offset the GST payable for the relevant month).

Under the previous rules, the credit could only be carried forward and offset against future GST payable.

Change-in-use adjustments

Clarification has been provided for change-in-use adjustments that occur before 1 October.

Input tax adjustments are required to be made at 12.5% if a change in use from exempt to taxable occurs before 1 October, 2010.

However, for output tax adjustments (i.e. where there has been a change from taxable to exempt use), taxpayers will have a choice of whether to apply the old or the new rate.

GST on non-deductible entertainment expenditure

For the 2010-11 income tax year, taxpayers can use the normal time of supply rule for entertainment expenditure (when the income tax return is due or filed) or treat entertainment expenditure incurred before 1 October, 2010 as being supplied on 30 September, 2010. This ensures that GST can be accounted for at 12.5%.

Comments from our readers

No comments yet

Add your comment:

Your name:
Your email:	Not displayed to the public
Comment:
Comments to NetProphet go through an approval process. Comments which are defamatory, abusive or in some way deemed inappropriate will not be approved. It is allowable to use some form of non-de-plume for your name, however we recommend real email addresses are used. Comments from free email addresses such as Gmail, Yahoo, Hotmail, etc may not be approved.

Anti-spam verification:

Type the text you see in the image into the field below. You are asked to do this in order to verify that this enquiry is not being performed by an automated process.

Email Updates Sign up now

RSS Feeds View the list

Twitter Read our tweets