What are the transitional rules for the GST rate increase if I account for GST on a payments basis?
What are the transitional rules for moving to the 15% GST rate in New Zealand from 1 October 2010 if you account for GST on a payments basis? The transition rules applying to those on a payments basis are arguably the most complex part of the change to the GST rate. This article helps explain these specific aspects of the transitional rules.
What are the transitional rules for?
Whenever there is a GST rate change the Government will try to make sure all supplies before the date the rate changes have GST at the old rate, and all supplies after that date have GST at the new rate. The amount of GST paid should match the rate payable at the time of supply. However, as you know, when you account for GST on a payments basis, the time of supply is usually not directly connected with when you have to account for GST. The transitional rules aim to ensure that a special return is made so that you apply the correct GST rate even if the time of supply is before the rate change, but you only account for it to IRD after the rate change.
How do the rules work?
The GST transitional rules require those on a payments basis to make one-off adjustment on the day before GST comes in where the time of supply has been triggered but no payment has been made or received. It then requires all supplies on or after that date to be accounted for at the new rate. There are three basic steps:
- On 30 September 2010 there will be an end to your GST period, whether or not it falls normally at that time. If not, then you have to file another GST return for the remaining time in your normal GST return cycle
- In the return for the period ending 30 September 2010 a special adjustment is made to offset anticipated later overpaid or over claimed GST. This adjustment applies in addition to accounting for GST as normal on supplies and purchases during that period. Below I give an example of how the special adjustment is calculated.
- When you account for GST after 1 October 2010, you need to charge GST at the new rate and return that to the IRD, and similarly, when you claim input tax credits, you claim these at the new rate.
Generally speaking once these steps are completed, you will have accounted for GST at the old rate on all supplies where the time of supply was triggered before 1 October 2010, and at the new rate where the time of supply is triggered on or after 1 October 2010.
A supplier, on a payments basis, makes a supply of shoes for $112.50 (including GST) on 20 September 2010, but only gets paid for them on 20 October 2010.
Under the old rate of 12.5%, only $12.50 GST would have been returned to the IRD. However, because payment was received after 1 October 2010 the GST to be returned is actually $112.50 divided by 7.6 repeating. Therefore, GST of $14.67 should be returned. If the matter ended there the supplier would be $2.17 out of pocket.
(I can hear you say, but what about the impact of section 78(2), which allows the price to be increased where there is a rate change. I don’t think that section applies, because it only applies where the tax is increased. The effect of the adjustment is to keep the tax the same, so there is no place for section 78(2)).
The special GST return for the period to 30 September 2010 provides that the $2.17 will be refunded to the supplier though a special adjustment. The total GST paid is therefore $12.50, which accords with the policy intention, and is also consistent with accounting for GST on an invoice basis over the transitional period. The adjustment works the same way for inputs, and the outputs and inputs adjustments are offset against each other.
Here I have to make a correction in relation to a point I made in the budget day podcast published on www.talktax.co.nz. There I said that you would face a one-off GST cost if your outputs were bigger than your inputs. Well, actually, it is the other way around, because the special return attempts to refund to you early the GST that you will have to pay later. It does the opposite for inputs, and therefore the outputs and inputs are offset against each other. So if your inputs were greater than your outputs you could face a one-off GST hit.
What are the practical implications?
- If your supplies do not fluctuate much from month to month, and you pay some GST, then you should get a small GST refund as a result of the transition (although you may still be in an overall payment position). Most taxpayers with profitable businesses should be in this position.
- However, you might have cashflow issues if you are going to have a big expense where the time of supply is triggered before the rate change and you will only pay for after the rate change. This is because your return for the period ending 30 September 2010 will include a large transitional adjustment that you have to pay to the IRD. This will be offset by the credit you receive when you actually pay for the item, but in the meantime you will have to cover the adjustment from your own funds.
- Also, if you are on a payments basis you do not always account for GST when the payment is made or received. For example, where you have an associated supply you may have to account for GST earlier. These costs won’t be taken into account in the return adjusting the GST if they are triggered before the rate change, as it should have already been accounted for.
- You will need to keep a list of debtors and creditors as at 1 October 2010. This is so that you can justify the transitional adjustment you are making.
- There may be other complicating factors if there are bad debt reversals after the rate change, or credit/debit notes are issued, and these were taken into account when doing the transitional adjustment. Good records will need to be kept to ensure that these rules are complied with.
- Although the above is rather complex, and it is expected that most taxpayers on the payments basis will not be sophisticated nor have access to expensive advice, the IRD will likely publish a form that makes this very easy to comply with.
Parry Field Lawyers provide legal advice on a range of tax matters and are able to assist you with any tax questions that you might have. Please contact Kris Morrison at Parry Field’s Christchurch office (348 8480) for help with tax matters. Please note that this is only a high level overview of the rules, and there may be specific situations where a different outcome is reached. Therefore, please don’t rely on this as legal advice.