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Operational Impacts of the GST Increase

By John Ritchie, July 2010

With the country’s GST rate set to rise on October 1st 2010, it’s important for small business owners to start thinking about the effects the change will have across all areas of their business.

From what I’ve observed, a number of small businesses are largely unprepared for the rate rise, which could cause headaches down the track if left too late.

For automotive workshops, there are a number of areas of the business requiring attention before October. While the GST increase may from the outset appear to be a simple matter of increasing the GST value in your software, there are several key requirements from an accounting and administration perspective which will need to be considered.

Businesses trading in GST inclusive prices will need to make some fundamental decisions regarding their price points at the time of the increase. Will you retain the appealing $20 GST inclusive price tag, with the higher rate of GST eating away at your margins or will you simply add the extra GST to your existing prices? To make this decision, you need to consider how much of your business is coming by way of your attractive price points and if risking this business is as important as retaining your current margins. Consideration should also be given to any quotes that are provided prior to October 1st 2010 that may be actioned after the GST rate increase.

What you also need to plan for is the effort and expense of changing prices on your signage, WOF and service reminder letters, websites, advertisements, pricelists and other marketing collateral, as well as any computer programs or software you use on a daily basis.

Most software will adjust GST inclusive prices accordingly when the GST rate is increased – however, if you wish to retain your GST inclusive price point, you will need to plan how you will accommodate this.

If you have customers paying recurring invoices or contracted services by direct debit or automatic payment, you may need to review the relative contracts and payment plans – and you may need to contact your customers to ensure the arrangements are in place to increase the payment amounts where appropriate.

In terms of transaction processing, here are a few things to think about:

  • Credit Notes – You will need to retain the ability to process credit notes at 12.5% for some time after the October 1st increase, for example when crediting a product sold in September at 12.5% GST.
  • Future Dated Transactions – If your accounting system allows the entry or preparation of future dated transactions (e.g. allows you to create October invoices, when still in September or before month end roll-over) you will need to ensure you are applying the correct rate of GST based on the invoice date.
  • Accounts Payable Invoices – Many supplier invoices for September will arrive to you in October, these will need to be processed at the 12.5% GST rate as will be shown on your supplier invoice.
  • GST Returns – If you are processing 2 or 6 monthly GST returns and the GST Rate increase happens during your GST Return period, you may need to process two separate GST returns.
  • Payments Based GST – Businesses operating on ‘Payment Based GST’ that do not allocate these receipts to specific transactions need to be mindful of correctly accounting for the GST content of this payment where it may relate to sales before and after the GST increase.

Correctly accounting for and processing the above is essential. The IRD will release guidelines and documentation to help businesses facilitate the GST transition.

It may seem like a lot of effort to begin with, but businesses that start thinking about and planning for the GST rise now will be better positioned when the changes come into effect in October.

Synergy would like to thank Warwick Watts, Director, Duns Limited - Business Consultants, Chartered Accountants - www.duns.co.nz for contributing to this article.