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Taxation (Budget Measures) Act 2010: GST rate increase
Sections 8, 10, 12, 21CB, 21F, 21I(4B), 46, 78 and 78B of the GST Act 1985; sections MD 3, ME 1, MF 4B, MF 4C, MF 4D, MF 4E of the Income Tax Act 2007; sections 13 and 183AA of the Tax Administration Act 1994
The rate of goods and services tax (GST) will increase from 12.5% to 15% from 1 October 2010, as part of a switch in the tax mix from income tax to consumption tax announced in Budget 2010. The GST rate was last increased in 1989.
New Zealand relies heavily on income taxes in order to fund expenditure. Income taxes may, however, be harmful for efficiency and growth. Taxes on consumption, such as GST, tend to be less harmful to growth as, unlike income taxes, they do not apply to savings and, therefore, do not discourage this activity. A switch from income tax towards GST can, therefore, boost incentives to save and encourage economic growth.
The merits of changing the tax mix were discussed in the report of Victoria University of Wellington's Tax Working Group, A Tax System for New Zealand's Future released in January this year.
How will it be calculated?
Businesses and organisations registered for GST will be required to account for GST at the new rate of 15% from 1 October 2010. The rate of increase will also apply to goods imported on or after 1 October 2010.
The new tax fraction (the tax rate divided by the sum of 100 plus the tax rate) used to calculate GST will be 3/23. This fraction can be applied to the price of goods or services to see how much GST is included in the price. For example, if the cost of a fridge is $2,000 inclusive of GST, the GST included in the price will be $260.871
($2,000 x 3) ÷ 23
Altering systems and prices
Businesses will need to alter their systems to incorporate the new rate. They may also need to alter the prices they charge for the goods and services they supply to cover the increased GST liability. This may affect businesses' current stocks and transactions as well as forward orders or deferred supplies.
There are rules within the GST Act to deal with transitional matters arising from a rate change. These rules provide for prices in existing contracts to be increased by the amount of GST in certain circumstances, and fees and other charges set by Act or regulation are automatically increased by the amount of the GST rate increase.
The legislation ensures that government grants and subsidies are not automatically increased when there is a change in the GST rate. Instead, the relevant administering public authorities will be considering the implications for grant recipients on a case-by-case basis over the coming months.
Compensation for price increases
The increase in GST will affect everyone due to a rise in most prices. Statistics New Zealand has estimated that overall prices will increase by about 2.0%. To illustrate this - a $100 item (before GST) will increase in price from $112.50 (current rate of GST) to $115 (the new rate). This is an increase of 2.22%. However, 9% of spending is on items that do not incur GST. When these items are taken into account the overall price impact drops back to 2.02%. Items that are exempt from GST include rent for private premises, mortgage payments, school donations and some credit service charges.
Compensation for price increases has been provided in a range of cases, including in relation to tax credits. Immediate compensation is being provided to people receiving Working for Families tax credits. The Family Tax Credit and the Minimum Family Tax Credit will increase by 2.02% from 1 October 2010. After this increase, the automatic indexation of the Family Tax Credit will continue. That is, if the cumulative increase in the CPI since the last adjustment to the Family Tax Credit (in October 2008) is greater than 5% in December 2010, the credit will be adjusted for the movement in the CPI since that time. However, this adjustment for inflation will exclude the 2.02% increase already provided on 1 October 2010.
As happened in 1989 when GST was last increased, there will be an effect on businesses' return filing. In particular, registered persons will continue to file GST returns at their normal times, but if the return period straddles 1 October 2010 the return will need to be split into two parts - the first covering the period up to 30 September and the second covering the remainder of the return period from 1 October. A special return will be provided for this purpose.
To simplify the accounting for those who return GST on either a payments or hybrid basis, the new 15% rate will apply to all payments made or received from 1 October. An adjustment based on the registered person's creditors and debtors as at 30 September 2010 will ensure that supplies provided before 1 October but which have not been paid for by that date will in effect be subject to the old lower rate. A similar adjustment mechanism applied in 1989.
If a taxpayer's GST taxable period spans the GST rate change and the taxpayer is required to make a combined GST and provisional tax payment, the transitional return will provide guidance on how to make the combined payment. Advice will also be provided on how to account for the GST on FBT, entertainment tax and other deemed supplies during the transition.
Time of supply rules
The GST Act contains rules that determine the point in time when a GST-registered person must recognise a supply of goods and services that give rise to an output tax liability. In most cases this will be when the supplier issues an invoice or receives payment. The rules attempt to approximate when a transaction has been concluded and economic control of the goods and services has passed from the supplier to the recipient.2
In general, the normal time of supply rules will apply over the transition period. Reliance on the normal time of supply rules may allow businesses to bring forward invoicing so they can take advantage of the old lower GST rate. In excessive cases the general anti-avoidance provision in the GST Act may be applicable if it is clearly evident that businesses are restructuring their business practices to bring forward a material number of transactions.
Inland Revenue will be providing explanatory material to taxpayers on the changed requirements and transition arrangements.
Some minor legislative changes have been made to the transitional provisions to remove interpretative ambiguity, to cover deemed supplies and to simplify the Act's return filing and record-keeping requirements for returns that straddle the rate-change date. There are also changes to the penalties rules to provide remission of late payment and late filing penalties and use-of-money interest in certain circumstances. These changes, which were included in the Taxation (Budget Measures) Act 2010, are explained below.
- The rate of GST will increase to 15% from 1 October 2010. All other key aspects of the GST rules are unaffected. The goods and services subject to GST are not being altered.
- The transitional rules that applied in 1989 will, with some minor modification, apply to this latest rate change.
All changes apply from 1 October 2010.
The minor legislative changes to the GST transitional provisions are:
The rate specified in the GST Act has been amended so that businesses and organisations registered for GST are required to account for GST at the new rate of 15% from 1 October 2010. This also applies to goods imported on or after 1 October 2010. Accordingly, the rate references in sections 8(1) and 12(1) have been changed from "12.5" to "15". The rate reference in section 10(6), which sets the GST rate charged on goods and services provided to individuals in long-term commercial accommodation, has also been changed, from "7.5" to "9".
Some commentators suggested that there was interpretative uncertainty over whether contract prices expressed as "inclusive of GST" could be increased by the amount of the GST rate increase. Given that many contracts are expressed on a GST-inclusive basis, this issue has been put beyond doubt by amending the relevant section of the GST Act. The policy intent is clear that contract prices expressed as GST-inclusive should be able to be adjusted.
The uncertainty arises from the words in section 78(2) of the GST Act "or where the alteration in the law has been taken into account". Accordingly, these words have been removed.
The GST Act deems supplies to take place in certain situations, such as when there is a fringe benefit, entertainment expenditure and change of use. Since the last GST rate increase in 1989, a number of changes have been made to these time of supply rules, aimed at reducing compliance costs by enabling taxpayers to file less frequently.
In the absence of further legislative change, an unintentional result would have been that when the GST rate was increased, some transactions that took place before the rate-change date would have been subject to the new higher rate, in effect applying the rate change in advance of 1 October 2010. Accordingly, additional transitional provisions ensure that the old rate applies in these cases, so that registered persons are neither disadvantaged nor advantaged by the rate change. These changes are outlined below.
This issue does not arise for FBT as under the FBT time of supply rule the supply is treated as taking place at the time the fringe benefit is or is deemed to be provided or granted. This means that the GST on fringe benefits provided before 1 October will be charged at 12.5%.
In the absence of the additional transitional provisions, that part of entertainment expenditure that was precluded from being deducted would have been subject to the higher rate of GST as the supply would normally have been recognised on the date the registered person furnished their income tax return for the tax year, irrespective of when within the year the entertainment took place.
New section 21I(4B) of the GST Act provides a registered person with the option, for the 2010-11 tax year, of using the normal time of supply rule applicable to the deemed supply, or treating the entertainment expenditure incurred before 1 October 2010 as being supplied on 30 September 2010. The expenses incurred over the rest of the tax year would be recognised on the date the registered person furnishes their income tax return for the 2010-11 tax year.
Supplies are deemed to occur when there is a change of use. Goods and services intended originally for business purposes may be used for making non-taxable supplies (that is, for exempt or private purposes). In this case output tax is payable. Conversely, goods and services intended originally for exempt or private purposes may be used in the registered person's business. In this case there is a deduction from output tax (calculated as the tax fraction applied to the lower of the market value or cost price of the good or service).
Some registered persons will be making the respective output tax or deduction from output tax in a period other than the taxable period in which there is a change of use. For example, many registered persons make the tax adjustment after the end of the tax year as part of finalising their annual accounts - the adjustments for 2010 would therefore be made in mid-2011. In this situation, and in the absence of additional transitional provisions, the higher GST rate may have applied even when the change of use took place before 1 October 2010.3
To ensure the old rate applies in such instances, the legislation has been amended, with regard to a deduction from output tax, to require a registered person to identify items that changed to a business use before 1 October 2010 and to apply a rate of 12.5% to them even if the deduction is made on or after 1 October. The legislative change makes it clear that the tax fraction mentioned in section 21F(1) is, in such cases, the tax fraction at the time the goods were acquired by the registered person.
Similarly, when output tax is required to be paid as a result of the change of use, the legislation explicitly provides the registered person with the additional option of identifying items that changed to a private use before 1 October 2010 and applying a rate of 12.5% to them, even if the output tax is attributed on or after 1 October 2010.
These changes are covered by the definition of "COU tax fraction" and new section 21CB.
When there is a rate change, the transitional mechanism in section 78B avoids the need for special time-of-supply rules for registered persons returning GST on a payments or hybrid basis. The adjustment also affects persons on an invoice basis who have purchased second-hand goods for their business which meet the "qualifying supplies" definition. All the amounts that they pay or receive are accounted for at the new rate but with an adjustment to recognise the fact that the time of supply for some of the transactions would have been before the rate change date.
Basically, the adjustment mechanism takes the difference between a registered person's debtors and creditors immediately before the rate change and multiplies it by the difference between the old and new tax fractions. If the result is a positive amount (that is, creditors on hand exceed debtors on hand) it is treated as output tax in the return period. If it is negative (that is, debtors exceed creditors), the amount must be set off against GST liabilities in the preceding return period, with any balance being carried forward for use in the current return period, and so on.
Some minor legislative changes have been made to these rules to simplify the Act's return filing and record-keeping requirements for returns that straddle the rate change date.
The legislative changes are:
- The requirement (in former section 78B(2)(b)) that the registered person furnish the form on which they do their adjustment calculation to the Commissioner, has been being removed. Instead, registered persons only need to retain the form as part of their records, and include the adjustment with any other GST adjustments relevant to that return period. As a consequence of the removal of section 78B(2)(b), section 78B(4) which cross-referred to section 78B(2)(b), has been amended to include the references that were in section 78B(2)(b)(i) and (ii).
- Any excess credits can now be offset against the registered person's other tax liabilities, or even refunded.
Application of penalties and use-of-money interest
New section 183AA of the Tax Administration Act 1994 provides for the automatic remission of late payment and late filing penalties and use-of-money interest in certain circumstances. Those circumstances are:
- that the lateness in filing or paying is reasonably attributable to the change in the GST rate (for example, the required systems changes to accommodate the new rate have not been able to be made in time); and
- the registered person has made reasonable efforts to comply and, therefore, shortfall penalties such as lack of reasonable care, would not be applicable.
If a shortfall penalty is imposed, the registered person is not eligible for the remission of late payment/late filing penalties and use-of-money interest under the proposed new remission provision. The remission is for a limited time, focusing on the transitional return period(s). Inland Revenue's media release of 27 May 2010 provides further detail.
Further legislative changes to section 139B of the Tax Administration Act ensure that the remitted penalties do not affect the late payment penalty grace period. That grace period allows a taxpayer to make an occasional error without the late payment penalty being imposed.
Legislative adjustment of tax credits for price increases
These adjustments are provided through several amendments to the Income Tax Act 2007 - see amended sections MD 3 and ME 1 and new sections MF 4D and MF 4E. Sections MF 4B and MF 4C have been repealed as a consequence.
2 Although the time-of-supply rules determine when GST-registered persons are required to recognise a liability for GST, the accounting basis adopted by the registered person can alter the taxable period in which that liability must be disclosed to Inland Revenue.
3 This means, for example, that when a deduction in output tax is required, the deduction from output tax would be at the rate of 15% even though output tax would have been originally paid at 12.5% when the good or service was purchased.