The October 1st tax changes represent one of the biggest updates of the New Zealand tax system in years. Although on the face of it, many of the changes seem simple – with GST , PAYE, company tax and a number of other changes – there’s quite a lot to be across. If your business has not yet started preparing for the tax updates, or if you are wondering whether you have everything under control, the following are some key things you should be looking at now.
What impact will the changes have on your business?
Although the changes coming into force on October 1st are focused on tax, the effects they have will be spread out across your business. For example, if you are a retailer, you will not only have to consider how the increase in GST will change your pricing policy; you will also have to update supplier agreements, consider stock levels and purchases, and – of course – prepare to change all your printed prices, promotional materials and point-of-sale programming.
With some new things to manage – particularly a one-time GST adjustment your business may be required to make for the IRD – if you don’t currently have an accountant, this would be the ideal time to make contact with one. If you are already using an accountant, get in touch with them sooner, rather than later (they’re bound to be busy).
Getting your software ready
From a software perspective, your accounting software provider should be prepared for the change and be able to advise you whether you need to update your systems, or take any steps to manage adjustments to GST , PAYE, rates of pay, ACC levies and employer superannuation contributions. However, they will need to be communicating with you, so it is worthwhile ensuring they have all your latest details up to date.
Accounting sorted? What else will you need to do?
While most business owners are reasonably relaxed about the tax changes, without adequate preparation your business could be under pressure – or worse, out of pocket – come October 1st. To make the transition as easy as possible, here are a few things to consider:
Get your house in order.
Any GST adjustments you will be required to make will be much easier if your outstanding invoices and receipts are accurately recorded and up to date. To make this even more straightforward, you should work to clear up as many outstanding creditors and debtors as possible. This will not only minimise the adjustments you need to make – it also makes good sense from a cash flow perspective.
Review your prices.
For retail businesses in particular, updating prices is likely to mean more than a simple 2.5% increase to GST . You need to consider ahead of time how pricing adjustments will affect your sales, and whether you may wish to absorb some of the increase on some items to maintain a price that will appeal to your customers. Note: regardless of how you choose to increase your prices, and the rounding method you use, you will still need to account for the full 15% GST on goods and services from October 1st. C
ommunicate with your customers.
Once you have made your decisions on pricing, you should update your customers on any changes. It might also be an opportunity to encourage them to ‘beat the price rise’ and buy from you before October 1st. You should also consider what effect the rate change will have on existing quotes or orders, and use the rate change as an opportunity to follow up on any that are outstanding – the prospect of a price increase might be enough to secure those deals now.
In any case, helping making the transition easier for your customers is a great way to build stronger relationships and reinforce the professionalism of your business.
Review supply arrangements.
You should also ensure you are aware how changes to your supplier’s arrangements will affect you, and budget for any additional costs for your business. Any longterm agreements you have will need to be reviewed to ensure they account for the increase in GST . If they don’t, getting in contact with suppliers (and customers) prior to the change will give you more opportunity to negotiate.
Consider stock levels.
Before the prices increase, it might be an opportunity to consider your own stock levels – especially if you are preparing for an increase in demand before October 1st. This should be undertaken carefully, however, as carrying excessive inventory could affect your cash flow.
Any significant and well-publicised change in pricing tends to drive consumer demand – with a peak period of buying prior to the change and a corresponding lull immediately after. Be prepared for any surges and slumps in your business and consider how you can manage both – not only in terms of inventory, but also staffing and logistics. You may also be able to smooth demand somewhat by making contact with your customers early to communicate your pricing policy.
Managing the GST transition When do I use the new rate?
The GST rate you use depends on when your goods or services are supplied; this is the earlier of the dates an invoice is issued or a payment received. Supplies made before October 1st use the 12.5% rate and supplies made after October 1st use the 15% rate.
However, the supply date isn’t always clear-cut. Special timing rules apply to transactions such as lay-bys, where goods are supplied when final payment is received. You need to be aware of how to handle these transactions in your business; your accountant should be able to help.
GST return changes.
You need to use the 15% rate on GST returns for GST periods starting October 1st. If your GST period spans October 1st, you need to file a one-off transitional GST return. This return will include the GST periods before and after October 1st.
If you report GST on a payments (cash) or hybrid basis, you may need to prepare a GST adjustment for unpaid invoices and purchases as at September 30th. This adjustment fixes a timing issue that occurs when GST is charged at the old rate, but is reported on GST returns at the new rate. This can happen when invoices are issued before October 1st, but are paid after this date. It’s important to get this adjustment right, so that your business is not left out of pocket.
Impact on existing and future transactions.
Although the new GST rate is used on supplies after October 1st, some transactions may need to be accounted for at the old rate. This includes sales refunds of a pre-October sale. To handle these transactions in your adjustment, you need to consider:
• Sales returns, refunds, bad debts, etc.
How you handle the GST on adjustment transactions such as sales refunds, depends on the date of the original transaction. If the original supply occurred before October 1st, sales adjustments need to use the old GST rate. You can account for these on your GST return.
• Sales orders and quotes
Quotes and orders are not considered to be supplied until they are invoiced or a payment is received. If provided before October 1st, but supplied after this date, you will need to use the new GST rate.
Of course, the increase in GST is not the only change coming on October 1st. PAYE tax rates, Employer Superannuation Contribution Tax (ESCT ) rates and ACC Earner Levy rates all change on that date. With the introduction of new tax rates, there will be significant focus on the change, and a clear expectation from employees that their new pay will be well managed.
If you are an employer, it is important to update your payroll solutions in time for October 1st. It is also worth communicating the changes to your employees – and perhaps reminding them that although they will have more in their pay packet, they will have to budget for price increases across the board caused by the increase in GST .
Find out more
MYOB has provided a range of information online at www.myob.co.nz/taxchanges including a straightforward checklist for your business, details on pricing, information on the best software for your business, and details on getting help. This resource will be regularly updated as new information is made available by the IRD . It will also offer information from a range of other experts on managing aspects of the change, such as pricing, debtor and creditor management, and payroll. The IRD has also provided details on the tax changes at www.ird.govt.nz/changes.