Businesses should prepare now for probable GST rise

Today's Business View columnist is Kevin Landrigan , a specialist tax partner with BDO New Plymouth.

Last updated 13:52 27/04/2010

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Column: Business view

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While there is much concern and confusion over the business implications of a GST increase - which seems fairly certain to occur - there is one absolute certainty: businesses must prepare and plan for it now.

The last GST rate rise was in 1989, when it went from 10 per cent to 12.5 per cent. According to the polls, most of the public is opposed to the latest increase. But for business, especially the small and medium enterprise group, the most important response is take action now to not only ensure a smooth transition, but to take advantage of the opportunities.

An increase in GST will create compliance costs for businesses in modifying their paper-based or electronic systems to cater for the GST rate increase, which could be time- consuming and expensive and include staff training costs.

One practical complication is the new GST calculation divisor. To calculate the GST component of a GST- inclusive amount now, you divide by nine. If the GST rate changes to 15 per cent, the new divisor will be 7.6 recurring, a more complicated calculation creating more chance of error.

However, with a GST rate rise likely to apply from October 1, there is a reasonable time frame for GST- registered businesses to get on top of the change, review contractual obligations and amend GST systems as necessary.

Here are some steps that businesses can take now to support a smooth transition:

Accounting systems: Check whether internal systems can cope with adding a new GST rate, as it is likely the old rate will need to be retained to deal with transactions taking place at the old rate during the transitional period. And, as the change will likely occur part-way through the standard financial year, businesses will need to ensure previously entered data will not be affected.

Pricing: For businesses selling to end consumers on a GST inclusive basis, the impact on profit and pricing points needs to be considered. Other businesses should review contracts to determine if they can increase pricing for a GST rate rise.

Consumer activity: This is likely to spike before a GST rate increase, as occurred in 1989, and dip afterwards. Plan ahead to take advantage of this, possibly by encouraging consumers to pay up-front for recurring or continuing goods and services.

Credit notes and debit note procedures: Review procedures for issuing credit and debit notes for old rate sales and purchases. Ensure systems can issue correct tax invoices, as well as credit and debit notes at both the "old" and "new" GST rates, as GST will generally be recovered or paid at the rate applying to the original sale or purchase.

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Contractual obligations: Review long-term contractual obligations, agreements for successive supply, voucher systems, agreements where deposits are paid up-front, agreements that are priced on a GST inclusive basis and agreements which involve receipt of progressive payments such as lease agreements and credit contracts.

GST return periods: If the change occurs part-way through a business' return period, two GST returns may need to be filed.

Land and property transactions: Ensure all agreements are entered into on a "plus GST" basis so the price can be increased to take a new GST rate into account. Private purchasers may want to lock GST in at the lower rate before a rate increase takes effect.

Cost impact: At 15 per cent the GST rate will increase by 20 per cent. Some, especially those in the finance industry and those who are not GST registered will face a 20 per cent rise in GST costs. This increase should be budgeted for.

We wait with interest for details of the full tax reform package that will be made public in the 2010 Budget on May 20. In the meantime, businesses should start planning for a GST rate increase.

- Taranaki Daily News

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