Bracing for the Effects of a GST Change
June 2010
Brace yourselves. The biggest change in GST for over twenty years is upon us and will create a number of important issues that businesses need to be aware of.
Can you (and will you) adjust your pricing?
Agreements should be reviewed for whether they allow an increase in GST to be passed on to the customer. If allowed, strategic decisions must be made as to whether this should be done. For example, a retailer selling a product for $29.95 (including GST) may lose the perception of good value if the price is increased above $30. Competition and cash flow will be important considerations when making this decision. Are you able to increase the price of some products to compensate for the reduced margin on others? Could this in fact be an opportunity to increase your overall margin? Can you invoice your customers earlier to make the most of the lower GST rate?
Are you able to update the price of your goods overnight?
For retail businesses, this will be a time consuming exercise. For products which will include an increase in GST, you will need to update price tags, prices shown on your website, as well as fliers and signage.
Will your GST return period cross the cut off date?
Businesses with two monthly periods ending in even months (such as August or October) will need to file two GST returns for the period ended in October to allow for the two different rates.
Is your business prepared for spikes or falls in demand?
The last time the GST rate was increased in 1989, there was a pre-change surge in consumer spending, especially for more expensive items. Once the rate had increased, there was a corresponding decrease. We recommend that businesses plan ahead so you can take advantage of increased demand, while avoiding being left with excess stock or cash flow issues if demand falls after the change.
Have you entered into long term contracts?
Particularly for large sales or purchases, it will be important to plan ahead if a transaction (or series of transactions, such as lease payments) will traverse the rate change.
Can your accounting system handle the change?
It is not only important that the rate of GST in your accounting system can be changed, but that changing it part way through a financial year will not affect any data entered before the change. You also need to make sure that after your system is enabled to handle the 15% rate, it can still handle late invoices received or issued at the 12.5% rate. Likewise, if you issue credit notes after 1 October against sales invoices prior to October, you will need to use the same rate as that used in the original invoice.
Given the short timeframe between now and the 1 October introduction, we recommend that businesses confirm this as soon as possible. If your existing system can't be changed, it may be a good time to consider a new system to minimise any headaches with the GST increase.
As a change to GST is likely to result in increased focus by the IRD, it will be important to avoid any system errors that could result in costly interest and penalties.
Please feel free to contact us if you would like help in addressing any of these issues.
Important: Items contained in this newsletter are general comments only and do not constitute advice. Changes in legislation may occur quickly and clients are recommended to seek our formal advice before acting in any of these areas.
