Further changes to help businesses transition to the new GST rate
2010 legislation covering changes to help businesses transition to the new GST rate of 15%.
The Government has made a number of amendments as part of the Taxation (Annual Rates, Trans-Tasman Savings Portability, KiwiSaver, and Remedial Matters) Act 2010, designed to further help businesses transition to the new GST rate of 15%. These amendments follow from recommendations made by the GST Advisory Panel. They supplement the transitional rules already provided in the GST Act, including those that were introduced in Budget night legislation and outlined in the August 2010 Tax Information Bulletin Vol. 22, No. 7. Further background on the GST rate increase is provided in that Tax Information Bulletin.
The amendments refer generically to the "rate change day" and the "original rate" (see section 78AA(1)) being, in the case of the recent GST rate increase to 15%, respectively 1 October 2010 and 12.5%. The explanation below primarily focuses on the impact of the amendments in relation to the 1 October 2010 increase.
A subrogation payment is the recovery income received by an insurer for the damages caused by a third party to their insured party. The GST Act deems the time of supply to be the day on which the insurer receives the payment. This would have meant subrogation payments received on or after 1 October 2010 would have been, in the absence of the transitional provision, subject to the 15% GST rate, even when the underlying claim to which the payment related was at 12.5%.
New sections 78AA(2) and (3) therefore allow the rate of GST to remain at 12.5% for subrogation payments received on or after 1 October 2010 to the extent that before 1 October 2010 the insurer has accepted the underlying claim and has paid the claim and/or agreed the recovered amount unconditionally.
In agreements to hire that are finance leases, GST is applied to the supply of the goods in question (a motor vehicle, for example) but not to the finance component of the transaction as financial services are GST-exempt. In such leases the interest and principal components may be calculated actuarially but, to ease compliance, GST can be accounted for on a straight-line approach over the term of the lease. This means that more GST is payable on the earlier lease payments than is actually required. A square-up adjustment is normally only done when the lease terminates, to reflect any difference between the actual and expected residual value of the leased asset.
With a rate change occurring during the contract term, and in the absence of the transitional provision, the new rate would have applied to the remaining payments under the finance lease contract. The subsequent reconciliation would have been complex, requiring systems changes to accommodate it. Most contracts are with GST-registered businesses who would be able to claim back the GST anyway.
New sections 78AA(4) and (5) allow certain finance leases to continue being accounted for at the 12.5% rate, if the lessor so elects. The lease agreements must be for a maximum term of five years and that term must have begun before 1 October 2010. A further requirement is that the lessor must advise GST-registered lessees within 30 days after the rate change day that their payments after the rate change day include GST at the original rate. This is intended to help ensure that lessees claim input tax at the 12.5% rate on such payments.
Only lease agreements for which part of the payment is consideration for the provision of credit under a credit contract, and for which that part payment decreases for each successive payment, qualify for the option.
For GST purposes, a layby sale (to which the Layby Sales Act 1971 applies) is recognised as taking place only when the goods are delivered, which is normally after the last instalment payment. Goods uplifted after 30September 2010, therefore, would normally attract the new 15% GST rate.
Although payment of all of the layby instalments and collecting the layby item before 1October would preserve the 12.5% GST rate, this may not always be possible because of the costs involved or the goods simply not being able to be delivered before that date. Transitional relief has therefore been provided.
New sections 78AA(6) and (7) apply to layby sales agreements made before the day on which the rate change was announced (20 May 2010). They allow suppliers to elect to apply the old 12.5% GST rate to any payments under the agreement that were received before 1 October 2010. Under this option, a supplier must account for these payments in their GST return that includes September 2010 as these payments are treated as a separate supply on 30 September. The balance of the agreement is treated as a further separate supply to which the normal layby time of supply rules apply, which means that the new 15% rate applies to payments made from 1 October 2010.
Aligning legislation and practice
There are several instances where further legislative flexibility has been needed so that GST practices adopted through systems or other commercial imperatives are not unduly affected by the rate increase.
The issuing of invoices dated on or before 30 September 2010
The first issue relates to goods or services for which an invoice is normally dated on or before the end of the month but for which an invoice may not be formally issued until early in the following month. Under the GST Act, it is the date when the invoice is issued that is relevant for determining the time of the supply, so in the absence of the transitional provision, invoices issued in early October 2010 but dated on or before 30 September 2010 could technically be considered to be subject to the higher rate.
Accordingly, for the GST rate transition, section 78AA(8) allows suppliers to treat invoices issued on or before 11 October 2010 as having been issued on the date of the invoice. This is provided that:
- the invoice is dated on or before 30 September; and
- the invoice is issued consistently with the supplier's practice of issuing invoices for such supplies; and
- payment for the supply is due no later than 60 days after the invoice date.
The cut-off date of 11 October was chosen to provide two weekends to send out such invoices.
Option of general time of supply or successive supplies rule
The second instance arises because some suppliers of what are arguably successive supplies account for GST when the invoice is issued rather than when payment is due or received. Under section 9(3)(a) of the GST Act, the GST rate on a successive supply involving goods under an agreement to hire or services provided under any agreement that involves periodic payment, should be determined by when the payment is due or received rather than when the invoice is issued.
As an example, telecommunications companies will usually bill for calls made (a service provided by the company), and a line rental fee (a charge for a successive supply of access to the company's telephone lines). Technically the calls could be subject to a different time of supply rule than the line rental so a company may take a pragmatic approach and treat the date of the issue of the invoice as the time of supply, even though this may have advanced the date of payment of the GST in respect of the line rental.
Under normal circumstances this would make no difference, but the rate change has generated some uncertainty about whether a September invoice, for example, would need to be charged at 12.5% or at 15% as this could be dependent on whether the customer paid or was required to pay before 1 October.
To address this issue, suppliers may choose to use the transitional option provided in sections 78AA(8) and (9) that enables the supply to be recognised on the date of the invoice if they meet the requirements of that option, even though section 9(3)(a) might otherwise apply.
The third issue concerns the use of replacement tax invoices. Under the GST legislation, a supplier cannot issue two tax invoices for the same supply and should instead issue credit or debit notes when, for example, goods are returned or additional GST is due as a result of the GST rate increase. For the GST rate transition period the following options are available.
- As an alternative to issuing a debit note, replacement tax invoices can be issued to replace pre-1 October 2010 invoiced supplies. This is envisaged to be primarily relevant to the case of successively supplied goods and services, to cover the amended GST payable on the remaining services provided from 1 October.
- There is an option of issuing a new invoice at the previous GST rate of 12.5% if it relates to revising an invoice issued before 1October 2010, as an alternative to issuing a credit note. This is to ensure that the issuing of the replacement invoice instead of a credit note does not alter the applicable GST rate, as an invoice would alter the time of supply.
Certain contracts involving successive supplies
Many contracts, particularly in the general and health insurance area, are for a period of around one year or are at least reviewed annually. In some cases, the customer pays the premium in one upfront payment while in other cases it is paid progressively, say by monthly instalments. Most of these instalment arrangements straddle the GST rate change date of 1October 2010 so that, in the absence of legislative change, some instalments would have been at the new GST rate and some at the old.
Businesses may be able to seek additional payment from customers to cover the additional GST, but in many cases the compliance cost to them of doing so would be excessive relative to the amounts of GST involved, particularly when the contract has very little time to run.
New sections 78AA(10) and (11) allow insurers and others the option of applying the 12.5% rate for the rest of the relevant period provided certain criteria are satisfied.
- The term of the agreement has to have commenced before 1 October 2010.
- The relevant period is determined by the period for which the consideration for a supply under the agreement is set or reviewed. The period cannot be more than 396 days and it must include 30 September 2010. In practice, in some cases this period will run to the end of the contract, while in others it will run to the next review date. The maximum period extends to 396 days (one year and one month) to cover a small number of general insurance policies that extend slightly beyond one year.
- The remaining GST has to be accounted for in the return period that includes 30 September 2010 as under the option this is the time of supply for the remaining supplies during the period. The supplier is also treated as issuing a tax invoice on that day. This will assist the recipient in claiming a deduction at that time if they return GST on an invoice basis, or need to make a section 78 transitional adjustment if returning GST on a payments basis.
- Within 30 days of the rate change day, the supplier is required to provide a GST-registered recipient with notice that payments by the recipient made after the rate change day include GST at the 12.5% rate. This will ensure that input tax is claimed at the 12.5% rate.
- If an insurance policy or other contract subject to the transitional rule is cancelled and, therefore the supply is not fully provided, businesses need to issue credit notes at 12.5% to adjust for the change in consideration and the GST incorrectly paid.
A business elects this option by making a tax return on this basis. The election need not cover all supplies. For example, an insurer may elect to include only certain types of insurance products.
A policy for car insurance covers the period 28 April 2010 to 27 April 2011 and the customer chooses to pay by monthly instalments. The insurer normally pays GST when instalments are due or received but elects to apply the transitional rule and returns the remaining GST at 12.5% in its September GST return.
When a GST-registered party receives an insurance payout from their insurer in relation to a loss incurred in the course or furtherance of their taxable activity, they are required to account for GST on that payment. A deemed supply arises on the day the registered person receives the payment, under section 5(13) of the GST Act.
A payment may be made by the insurer in late September 2010 but be received by the insured party in October 2010. This would mean that the recipient has to pay GST at the rate of 15% on the payment, but because the payment by the insurer may only factor in GST at the old rate of 12.5%, the overall payment may not fully cover the loss.
New section 78AA(14) provides some leeway for payments in the pipeline. A payment under a contract of insurance received on or after 1 October 2010 is treated as being received on 30 September 2010 if the payment is made before 1 October 2010 and the registered person receives the payment on or before 11 October 2010.
The old 12.5% rate of GST therefore applies to payments received in these circumstances.
Private training establishments
Private training establishments (PTEs) are registered with the New Zealand Qualifications Authority (NZQA) and are required to use a trust arrangement when students pay their course fees in full. This is to help protect students from the risk that their intended course provider does not deliver the course. As the courses are delivered, the trustee progressively pays out the funds to the PTE.
In the absence of any law change, any payments released by the trust to the PTE after 1October 2010 would be accounted for at the new 15% rate even if students paid the full course fees before 1 October 2010. This is because the services are considered to be supplied when the payments are released to the relevant PTEs. It would be impractical for the PTEs to seek additional payments from the students.
Accordingly, amendments to section 78B(2A) and a new section 78B(2B) allow a registered PTE the option of making an upfront adjustment in its GST return for September 2010 that would give it a credit to cover the additional GST payable when course fees held in trust as at 30 September 2010 are subsequently released to the PTE. This would apply irrespective of whether the PTE returned GST on an invoice, hybrid or payments basis.
The credit is based on the amount held in trust for the PTE as at 30 September 2010.
Extension of penalties and use-of-money interest remission
Budget legislation included an amendment to provide for automatic remission by Inland Revenue of the late payment and late filing penalties and use-of-money interest when:
- the lateness in filing or paying could be reasonably attributed to the change in the GST rate increase; and
- the registered person has made reasonable efforts to comply and, therefore, shortfall penalties such as lack of reasonable care, would not be applicable.
Initially, this relief, which is in section 183AA of the Tax Administration Act, applied only to return periods that included 1 October 2010 and, in some cases, later returns. For example, it covered returns that traverse 1 October 2010. GST return periods ending 30 September 2010 were, however, not covered.
Returns for periods ending 30 September 2010 can also be affected by the GST rate increase because in many cases they will include the section 78B adjustment that avoids the need, over the transition, for special time of supply rules when the GST-registered person is returning GST on a payments basis. Under the adjustment mechanism, all amounts that such registered persons pay or receive on or after 1 October 2010 are accounted for at the new rate but with an adjustment in the return covering 30 September 2010 to recognise the fact that the time of supply for some of the transactions would have been before the rate change day.
As GST returns for periods ending 30 September 2010 are due to be filed by 28 October, some may not, despite their best endeavours, be able to file the return by then, given the need to assemble the required information and calculate the adjustment. This is likely to be a particular issue for tax agents with many small business clients needing to calculate the transitional adjustment.
Accordingly, section 183AA has been extended to include returns ending on 30 September 2010 that include a section 78B transitional adjustment, on the same conditions as for other return periods that qualify - that is, the late filing or payment is reasonably attributable to the GST rate increase and the person has made reasonable efforts to comply.
Given that certain supplies can continue to be subject to a rate of 12.5%, a minor change has been made to section 78B(2A)(e) which relates to the transitional adjustment. The change ensures that such supplies are excluded from the adjustment when a recipient who could have made a section 78B adjustment in respect of those supplies, instead decides to account for the supply when the payment is made or received on or after 1 October at the rate of 12.5%.
The changes apply from the date of Royal assent, being 7 September 2010.