GST Rate Change

[Apex 693]

The consumer looses.

[*Glenn* 854]

That's a much clearer explaination Mike (mtk540)... just makes me a Govt tax collector.

On a side note: Now all my running expenses (overheads) are going to increase by an extra 2.5%, to maintain the same level off profit, should I increase my charge out rate to cover this ?

Edit: Just worked it out.. to cover the increase of Gst on overheads I would need to increase my hourly rate by $1.56 to maintain the same level of profit

Edited August 26, 2010 by *Glenn*

[bravo 35]

Only as a percentage Glenn. You should be working it out as Mike says - all without GST. you're paying more on your outgoings, but you're collecting more on your hourly rate because you charge GST on it.

If you work everything out exclusive of GST, and then just add the new GST rate, you won't have to change your prices.

I work as a dept. manager in a professional services business. Nothing is changing for us. Everything we do is excl. GST, and GST just gets added on at the end. Our prices won't change. Yes, the client will end up paying 2.2% more at the bottom line of the invoice, but a $2,000 excl. GST job will still be a $2,000 excl GST job.

For us, the issues surrounding the change are all administrative. We have pre-printed invoices with the old GST rate, so need to get new stationery. We have internal spreadsheets for pricing and so on, these will all need to be updated. We also manage large construction contracts, so we need to ensure that all of our contractors submit progress claims and these are processed by the cut-off date so our clients don't end up paying more on services provided before 30 sept.

Glenn, I would think for your business, if you made sure you got all of your sept. invoices out on time (so your customers get to pay the old rate where possible), you change your spreadsheets, invoices, and accounting software to the new rate, and you talk to your accountant about your GST returns, you'll be pretty much sorted and shouldn't have to change your GST excl. prices.

[*Glenn* 854]

I understand all that Graham our software does all that automaticly. Gst paid to the IRD is selling price Gst minus purchase cost Gst. Overheads like rent, power, water etc will all go up by an extra 2.5%. These costs don't get passed onto the consummer unless you allow for them. Therefore I need to increase my charge out rate to maintain the same level of profitibility, because all my fixed costs (overheads) will be increasing by the new Gst rate. The percentage profit on parts will stay at the same rates given to me by suppliers but all my running costs (overheads) will be going up.

Edited August 26, 2010 by *Glenn*

[zenetti 0]

The consumer looses.

In our business the consumer is defitnitely going to be the winner. We have pricepoints which we target. For example a tyre at $199 incl. We can't simply add the extra GST to make it $203.40 as it just doesn't work. We could put it up to $209 but then we will probably miss sales as our competitors will be charging $199.

We will have to wear the additional cost so over 100 tyres we lose $350 profit. Multiply this by the fact that we sell over 5000 tyres a year and that is over $15000!

[*Glenn* 854]

Allot of businesses that sell Gst inclusive will be in the same position Johno because of the competitive nature of retail. It will be interesting to see what happens in these areas.

[*Glenn* 854]

Spoke to my daughter who is a chartered auditing accountant this morning. She informs me that most retail are going to go up 2% + Gst which will be shown & sold as Gst inclusive. I've also read this this morning:

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.

Back to top

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

Back to top

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. Back to top

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. Back to top

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. Back to top

Documentation

•

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. Back to top

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. Back to top

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%. Back to top

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. Back to top

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.

[bravo 35]

Overheads like rent, power, water etc will all go up by an extra 2.5%. These costs don't get passed onto the consummer unless you allow for them.

Don't you claim back the GST on all of these in your return so it's a non issue?

[*Glenn* 854]

Don't you claim back the GST on all of these in your return so it's a non issue?

I think your right Graham

[mtk540 3]

Shelley (M325iS) - sorry, I did leave that one a bit open. The profit on the widget is still $100 (the markup) as it's sale price is still $200. we are just changing the rate of GST. The consumer now pays GST of $30 rather than $25. Glenn simply collects and passes it on. He's already claimed the GST on the purchase as you correctly point out.

Where the seller maintains his price as Johnno is, the loser here unfortunately, is Johnno. He is subsidising the rate increase through a lower profit margin - again, go back to NET OF GST. He realises he has to sell more units to maintain the same level of profit so support your local BS sponsor !!! Gutsy, Johnno.

Glenn - no need to put up your charge rates unless your GST exclusive costs go up, so keep an eye on what your suppliers are doing to you. Compare the GST exclusive cost of any stock you buy after Oct with what is was in Sept. You may find that some suppliers will add a bit and hope the customer doesn't notice.

Chris W (wom) - no not me mate, unless you work for Marsh who currently administer our staff group plan with Sov.

So, for those of you with businesses:

- make sure you are prepared with your advertising ready to go e.g. prices on websites updated, newspapers, sign boards, menus, shelf price tickets etc.

- check with your software suppliers for updated software. Most are providing updates that will globally change GST rates on GL (general ledger) codes rather than you having to go into each item and change the rate manually.

- those providing quotes prior to 30 Sept should also ensure that the GST rate change is noted e.g. quote the GST Exclusive price and add the words "plus GST".

[*Glenn* 854]

Thanks for that Mike & others. Up untill this thread started I hadn't thought about it too much, however I knew that change was coming up. Now, having read different articles and discussed it with people, I have a clearer understanding of the process.

What I will be watching is stock item costs from my suppliers. My software program flags increases, which is a good thing. Talking to several people I'm getting the message that alot of wholesalers and retailers are going to take advantage of the situation and increase their pre Gst prices because everybody is expecting increases and they might not notice the pre Gst increase. eg: Pre Gst selling price + 2% + 15% Gst = $100 + $2 = $117.30 incl Gst. This example is more obvious... but this isn't to the average person without a calculator $1,256.78 + $25.14 + Gst = $1,474.21 incl Gst.

Edited August 27, 2010 by *Glenn*

[master garion 1]

Hey guys, interesting thread to read to get an insight on ppl's understanding of GST. Like Mike K, I too am an accountant and deal with GST almost on a daily basis. Most of the important points have been raised by Mike K already and I want to summarise and possibly add a little of my own thoughts.

In general, GST should not affect a business's profit margins. A business should only think in "net" terms, or in other words "gst-exclusive" figures. The gst you pay on your supplies are claimed back so whether it's 12.5% or 15% or 80%, your costs do not increase at all.

As for sales, a business should be thinking in "net" terms as well. The GST component being simply added onto whatever net price you want to receive for your goods/services.

When you're selling a service like Glenn, the increase of GST to your customers is simple to implement by updating your invoicing software which then automatically adds on 15% instead of 12.5%. You're not likely to lose customers as a result. But in Jono's example of increasing a tyre price from 199 to 209, all I can say is that your competitors will all have to return 15% GST on their goods sold.

In simple terms, if every seller maintained their margins, then prices will increase exactly 2.22% across the economy. Some sellers will increase their prices and some will not. That's the nature of business competition - some businesses are more efficient and have lower cost structures, some businesses pay more for the same good compared to others etc. Prices can fluctuate for a million different reasons.

If perfect competition existed, then a specific tyre will cost exactly the same regardless of who you buy it from e.g. if the RE001 in 215/45/17 was $250 in one shop, it would be $250 in any other shop. But we know that's not true. In fact, the variation in prices is far greater than potential increase of 2.22% caused by GST.

But it's safe to say that as an end consumer, the increase of GST WILL make things more expensive on average for you. Whether you will notice is a different matter.

[mtk540 3]

Look at the time !!! - Glenn, don't you sleep mate ???

[Wom 0]

Chris W (wom) - no not me mate, unless you work for Marsh who currently administer our staff group plan with Sov.

yep that's the team I work in

small world

[*Glenn* 854]

Look at the time !!! - Glenn, don't you sleep mate ???

Sorry... I slept in