Which industries will be most or least effected by the increase in GST and how so?
The impact of the GST increase will vary across industry sectors.
The least affected industries are those “zero rated” industries that are not required to charge GST, but are able to claim back from the IRD any GST increases on their expenses. Industries included in this group include exporters and to a lesser degree banks and finance companies.
Business sectors that are currently “exempt” from GST, such as residential accommodation, will face increases in GST on their costs, but are not required to charge GST on supplies to customers.
While those operating in industries that are not zero rated or exempt will need to increase prices by 2.2% in order to maintain profits, where residential rents can be increased by the same amount the landlord gets to keep a big slice of the gain.
As for existing rental stock the GST costs faced by landlords are minimal, the biggest cost being interest, the GST increase will have little impact on costs. However, the rate increase will have a greater impact on landlords acquiring new rental housing stock as the construction of houses is subject to GST.
Perhaps the worst affected industry will be inbound tour operators. Inbound tour operators are the only export industry that is subject to GST on products and services consumed outside of New Zealand. The industry is unique in that it is competing with offshore providers who will not face the same cost increase. The GST rate change further penalises the industry which has only recently become subject to GST on sales.
What would happen if GST was exempted from 'healthy' foods - why it doesn't make sense from a tax perspective.
Recently we have had some proposals to exempt “healthy food” from GST.
While there can often be good policy arguments to provide exemptions or reductions in GST rates for particular goods and services (for example, to encourage healthy eating or to reduce household spending on basic food items), overseas experience shows that a narrower base of goods and services to which GST applies does not necessarily result in a fairer system and will certainly add complexity to the system.
For example, a recent study in Australia showed that more than one-third of the $5 billion exemption for GST-free food benefits households in the highest 20 per cent of the income distribution.
In addition, the removal of GST on goods and services like food adds significant complexity for businesses and the costs of compliance will ultimately be passed on to consumers in the form of increased prices.
What costs will businesses face to bring their systems into line?
All accounting and IT systems will need to be considered and system changes made where necessary. For some businesses, the changes required to their systems may be relatively minor. Other businesses, who may use a range of IT systems, will need to consider the particular impact of a GST rate change on each of these systems.
There will be a large number of issues that need to be considered that include whether the system can handle more than one GST rate; whether the cut-off date for a GST rate change can be specified; and how will the system generate sales invoices (including at point of sale) using the new GST rate.
Most businesses will need to consider how their systems will handle transactions that are outside of the norm. This may include the impact on multiple/successive supplies; buyer created tax invoices; agency agreements; reverse charge transactions; and land transactions.
Businesses will need to ensure that all advertising, websites, brochures and other documents displaying prices will need to be updated to reflect post-1 October prices. Stores displaying shelf prices of goods will need to be manually changed.
In addition, where prices are going to rise, thought will need to be given to how this price rise is communicated to customers. Particular care will need to be taken with contracts entered into prior to 1 October 2010 that involve a periodic or successive supply of goods or services.
Examples may include motor vehicle leases and residential construction contracts (where payment is made by way of instalment). In situations where a consumer will be expecting a GST inclusive price, careful thought will need to be given to whether the increase in GST is passed on to customers and, if so, how this is communicated
Businesses have only a short period of time to consider the impact of the GST rate increase and make sure their systems and processes are able to efficiently and correctly transition to the new rate of GST.
Contact Peter Scott for more information.