Information in regard to upcoming GST Changes.
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In this newsletter:

Background 

As we are sure you are aware, in the 2010 Budget, the Government announced that the GST rate is to increase to 15% on 1 October 2010. While this newsletter is largely aimed at clients in business that are registered for GST, some of the changes will affect you whether or not you are in business, therefore we decided we should send this to all our clients.

If you are not the person responsible for preparing the GST returns for your business, please ensure that a copy of this newsletter is forwarded on.

We have already received notification from MYOB, Exonet, Xero and Cash Manager that they will be releasing upgrades to their software to take into account those changes. We would expect that other software companies will also do the same. If you are not using a mainstream software package, we would suggest that you approach your software supplier sooner rather than later as to what approach/changes they will be making to your software to handle the changes. As always, our staff will be available to assist you with the software upgrades or any other questions that you may have in regard to the transition. Please do not hesitate to contact us.

However, apart from the accounting aspect of the GST change, there are a number of other issues that you should be starting to consider now.
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How will it be calculated?

Many of you will well be aware of the shortcuts to calculating GST at the current 12.5% rate. These shortcuts change with the new rate. The only accurate way to calculate this will be with the following formulae – using decimal places will not give you the correct result.

To calculate the GST content of an amount, the new fraction is 3/23. For example if a television costs $2000, the GST content is $260.87.

 ($2000 x 3)
          23
To work out the GST exclusive value from a GST inclusive amount, you need to multiply by 20 and divide by 23. For example the television costing $2000 inclusive of GST is $1739.13 excluding GST.
 ($2000 x 20)
         23
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Pricing 

Businesses will need to consider if they are going to increase their pricing or if they are going to absorb the increase. An increase in pricing may involve a large amount of work. Items to think about are:

•  Stock on display will need to have the shelf pricing changed pretty much overnight.
•  Websites will need to be updated to reflect the new pricing.
•  Brochures showing prices will need to be updated.
•  Point of sale software systems will need to be updated for the new prices.
•  Consider a mail out to customers now advising of the pending price increase.
•  If providing a service to a non registered purchaser, consider invoicing them prior to 30 September.

It may be that this provides for an opportunity for you to look at your profit margins and improve these in some cases, although care would need to be taken in this area. We are able to help you with this exercise if required.
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Quotes 

Businesses should ensure that if they are preparing quotations for work that might not be completed until after 1 October that the GST issue is covered. We would recommend that you quote prices as “plus GST” as the new legislation will then cover this and the rate will be the new rate as provided by the Act.

Should you have existing quotes with clients, you may need to consider these, although in most cases the quotes would probably include a clause making the quote valid only for a period of time.
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Contracts and existing fixed price arrangements 

There are already rules within the GST Act which provide that any existing contracts will be increased by the amount of the GST increase. This will apply to businesses that have fixed monthly amounts that they charge their customers. However, it will also affect amounts that you might be paying to your suppliers, for example, rent and insurance. These suppliers will automatically be able to just increase the amount they are deducting from your account where direct debit arrangements are in place.

This will also mean that you need to obtain/issue new tax invoices for any such fixed monthly amounts where perhaps the invoice is only normally issued once a year.

Care should be taken when entering into any new contracts now. You may like to consider adding a clause stating that the price inclusive of GST will rise on 1 October to take into account the GST increase.
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 Documentation
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 Invoices
As mentioned above, where you receive a monthly amount from a customer (e.g. for rent), you will need to issue a new invoice to that customer from 1 October for the new monthly amount.

Similarly, you will need to ensure that you have valid GST invoices for any amounts paid by you monthly. If you are issued with an invoice dated after 1 October with GST at 12.5%, then this is not a valid tax invoice and you are not able to claim any GST. It is up to you to contact the issuer of that invoice and obtain a correct GST invoice.
   •  Credit Notes 
   If a credit is given for goods/services supplied before the GST change, then the credit note should be based on the original GST rate. You will need to ensure that your accounting/point of sale software is capable of handling two GST rates, and that the relevant staff members know how to handle this.
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Time of Supply

The change in GST will also have some affect in regard to the rules surrounding time of supply for GST purposes.

•   Lay-by accounts where the final payment is made on or after 1 October will attract the higher GST
     rate of 15%.
•   Operating leases/finance leases each payment is deemed to be a separate time of supply and
     therefore payments made on or after 1 October will be subject to the higher GST rate.

If you have any concerns on this area of the GST rules, please contact us.
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Filing of returns 

GST returns will continue to be filed as normal. Where a business’s GST straddles 1 October 2010 the return will need to be split into two parts and a special return (a GST104A or GST104B) will be provided for this purpose.

Businesses utilising payments basis or the hybrid method of GST will need to make an adjustment for receivables and payables balances at the transition date. IRD have created a form (a GST105) for this purpose. Any receipts or payments after 1 October are returned at the new rate of 15%.
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Errors and Penalties 

IRD have announced that interest, late filing and late payment penalties can be remitted if the GST error is due to the transition to the new GST rate and arises prior to 31 December 2010. However, the circumstances where this applies may be limited.
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A few other items to consider

•  Progress claims submitted around 1 October will need to be considered.
•  Subsidiary systems may need to be considered as well as your main accounting system, such
   as job costing systems or internal spreadsheets that you may use.
•  Clients with deferred payment schemes for Customs GST may need to consider increasing
   their limit, (as Customs GST will increase by 20%).
•  Staff will need to be trained on the new rules, particularly front counter staff that may be dealing
   with returns of goods.
•  If new brochures, signs or menu boards need to be printed, consider this now – apparently
   there is already a large backlog of people wanting menu boards etc printed at the moment.
•  There is potential for increased demand prior to the rate increase and a drop off in demand in
   the months after the increase. What effect will this have on your business?
•  For some businesses, a price increase for existing customers may be an administration
   nightmare. Would it be an option to leave existing customers on their current pricing and run a
   promotion to increase sales to make up the margin lost on the customers whose prices you are
   not going to increase?
•  If you are not on a support plan with your accounting software supplier, you may not receive an
   automatic upgrade of your software and you will need to consider purchasing an upgrade to
   handle the changes.

As you may gather, the GST change is not as simple as it may seem. There are a number of issues that need to be thought through and planned for. We recommend that you start to address some of these now as some of the changes required may take time to implement.

Should you require any assistance on how the changes will affect specifically your business, please do not hesitate to contact us. 
 
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