Going UP

We all know GST is about to rise, but will the small increase make a big difference for consumers and businesses?

Let’s face it, nobody likes paying tax, yet we all have high expectations of what the Government should be doing to improve our standard of living. Governments can only spend if they have income, and Goods and Services Tax (GST) is just another way of bringing in the dollars that will be spent on education, health, transport and many other things that help make our lives better. Without GST, income tax rates would need to increase to maintain Government income and spending.
The good thing about GST is that you only pay it when you spend, so it gives everyone an opportunity to minimise the amount of tax they pay by saving rather than spending. However, GST is not good news for people on lower incomes who need to spend most of their income just to survive.
On 1 October, GST increases from 12.5 percent to 15 percent. This increase is part of a review of tax announced in the 2010 Government Budget. Although GST was increased, income tax rates were dropped and Government benefits were increased. For example, the top rate of tax will now be 33 percent not 38 percent and benefits have been increased by 2.02 percent. Go to www.taxguide.govt.nz to see the net effect of tax changes for you.
There are different implications of the GST increase for consumers and for business owners.
If you are a consumer:
Buying goods and services before 1 October will help you save 2.5 percent on the purchase price, however, bear in mind that spending $100 (ex GST) will only save you $2.50. Retailers will try and tempt you to buy expensive goods that you don’t really need, and if you pay for them by borrowing and paying interest, then you will be worse off, not better off. Don’t spend money you don’t have!
After 1 October, it is up to businesses as to how much of the GST increase they pass on with increased prices. You can still negotiate prices down again if the seller is willing to take a smaller profit on the sale.

How you can win …
Stock up on gift vouchers and prepaid items such as phone cards and postage stamps, because the GST on these will usually be charged when the voucher is purchased, not when it is redeemed.
Buying goods on hire purchase will save you paying extra GST providing the hire purchase agreement is signed before 1 October.
If you have an annual fee for which you make monthly or quarterly payments such as for insurance premiums or property rates, payments made after 1 October will incur an extra 2.5 percent GST. You can avoid paying the extra if you pay the amount owing in a lump sum before 1 October.

Traps to watch out for …
If you have bought goods on lay-by, the GST will be charged at the time when the final payment is made. If that happens to be after 1 October, the GST will be charged at 15 percent on the total price even though it was only 12.5 percent when you put the item on lay-by. You will suddenly find yourself having to pay more after 1 October.
Similarly, if you have a contract such as a gym membership or a car park lease, your payments will be increased after 1 October to reflect the increased GST.
GST on contracts which involve progress payments such as a tradesman to paint your house or a builder to do alterations will depend on when the payments are due, when they are invoiced and when they are paid. To avoid paying GST at the higher rate, you will need to make payment or be invoiced before 1 October.

If you are a business …
One of the biggest problems you will face as a business, especially if you are in retail, is that you will need to re-price all your goods overnight on 30 September. Some retail products made overseas are pre-labelled and the labelled prices will have to take the increase into account or new labels will have to be put on them.
Of course, you can decide not to put your prices up, but this will mean you will need to absorb the GST increase and your profit margins will be reduced. In some cases, you might choose to do this to avoid losing sales. For example, putting a price up from $9.95 to $10.20 may mean you sell less.
Another major problem for businesses will be changing internal systems such as accounting systems to deal with the old and new rates of GST.
With GST at 12.5 percent, the GST component was calculated by dividing the GST-inclusive amount by nine. With GST at 15 percent, it is calculated by multiplying the GST-inclusive amount by the fraction 3/23 (or dividing by 7.66).

How you can win …
History shows that sales always increase just before a GST increase, so make sure you have enough stock on hand or enough capacity in your business to cope with the demand.
You can help your customers by encouraging them to pay a deposit on or before 30 September (thereby triggering the time of supply pre-1 October) for high-priced consumer items.

Traps to watch out for …
Selling more before a GST increase usually means your sales afterward will be flat, so don’t get caught with stock you can’t sell.

Many GST-registered businesses will need to be able to cope with the old and new GST rates together for a period where, for example, goods bought before the change are returned afterwards.

It won’t always be clear what rate of GST should apply to transactions that span 1 October. To determine the correct rate, you will need to identify the ‘time of supply’, which in most cases will be the earlier time an invoice is issued, or a payment is made for the goods or services. If the time of supply is before 1 October, the GST will be 12.5 percent, if it is after 1 October the GST will be 15 percent.

Tips for consumers …
• Don’t buy things you don’t need or for which you don’t have the money
• Stock up on essentials such as groceries
• Consider buying your Christmas presents in advance
• Stock up on pre-paid items such as phone cards, postage stamps, vouchers and gym subscriptions
• Pay off the balance on any annual
fees that you have been paying by monthly or quarterly instalment, such as insurance premiums and property rates.

Tips for business owners …
• Make sure your internal systems will be able to cope with the change.
• Be prepared for a late night on 30 September.
• Decide how much of the GST increase you will pass on to customers and how much you will absorb.
• Have enough stock on hand to cope with higher demand before 1 October and don’t get caught out with surplus stocks in the quieter months that will follow.

Liz Koh
www.moneymaxcoach.com