Spring is in the air! To complement the arrival of this long awaited spring weather, we have redesigned the look and feel of our e-newsletter.

This is a “bumper” issue predominantly covering the upcoming GST rate change from 12.5% to 15%. We will share with you its impact on businesses; land transactions and commercial property investors. Transition for this rate change is huge as the old rates had been in place for over 20 years since 1989.

We will also remind you about the drop in personal income tax rates as well as the ongoing issue with chattels & building fitout depreciation.

On a lighter note, we are pleased to announce the promotion of David Han and Maria Yu to senior accountant position. Both David and Maria have been with us for nearly five years.

We also want to take the opportunity to welcome Richard Matson as one of our new Senior Accountants. Richard brought with him a wealth of knowledge from his earlier years as IRD investigator to being a manager in a longstanding mid tier accounting firm. As well as the usual tax and business advisory experience, Richard is particularly strong in IFRS reporting.

It all depends on when the goods or services are supplied.

1. Goods or services are provided prior to 1 October, AND
2. Tax invoice is dated 30 September 2010 or earlier, AND
3. Payment is due within 60 days from invoice date, AND
4. Tax Invoice issued (ie posted to customers) by 11 October 2010

Otherwise, you have to charge 15% for any goods or services provided outside the above parameters.

NOTE for Annual or Successive Contracts:
If your business provides services over a term and receives regular payments (e.g. security and alarm monitoring services) both before and after 1 October 2010, your business can also lock in to pay the GST rate at 12.5% if:

• You satisfied all Points 1 to 4 listed above, AND
• The contracts are entered into before 1 October 2010, AND
• The contracts are for one year term or less, AND
• Your customer has the option to pay annually, AND
• You will pay all the GST on the TOTAL amount payable under the entire 12 month contract for GST period ended 30 September 2010, AND
• You have notified your customers that they can only claim 12.5% GST

You must accurately record your debtors and creditors lists at 30 September 2010.

Not only do you need to record the balances, but you actually need to know the invoice date and amounts invoiced for each individual debtor and creditor.

You will need this information to complete your 30 September 2010 GST return.

You need to take special care when filing your GST return for the period ended 30 September 2010, particularly if you are registered on Payments Basis for GST.

Invoice Basis:
If you are registered on an invoice basis (i.e. you pay GST based on invoices issued rather than cash collected), then you simply continue with your usual GST return preparation. You only need adjustment if you purchase any secondhand goods.

Payments Basis:
If you are registered on a payments basis (i.e. you only pay GST when you receive the payment rather than when you issue invoices), then you need to make a “one off” GST rate change Adjustment (calculated using GST 105 Form). This adjustment has to be made in the GST return covering 30 September 2010

You need to make this special adjustment because you have to account for GST for all payments made and received from 1 October 2010 onwards using the new 3/23 fraction (i.e. 15%) regardless of what GST rate was originally applied when the goods or services were supplied and invoiced.

Special Adjustment = (Total Creditors – Total Debtors) x (Old GST rate fraction – New GST rate Fraction)

If the calculation results in a negative amount, then it is treated as a GST Tax credit to you to be claimed or refunded.

For example:

Debtors Total as at 30 Sep 2010 is: $45,000.00
Creditors Total as at 30 Sep 2010 is: $9,000.00

($9,000-$45,000) x (1/9 – 3/23)
= negative $36,000 x 4/207
= negative $695.65

In this example, this taxpayer can claim an extra $695.65 GST credit by putting the same figure in Box 13 in their 30 September 2010 GST return.

NOTE: you do not need to file this GST 105 GST adjustment calculation sheet with IRD. Keep it for your records and send us a copy at year end.

As you can see from the example, this Payments Basis Adjustment could offer a cashflow opportunity for businesses which habitually have debtors in excess of creditors.

However, the exact opposite could also apply if your business is a cash business (e.g. restaurants, retailers) because your creditors will exceed your debtors (which could be nil).

In this situation, you are expected to pay (Box 9 in the GST return) and effectively fund the extra 2.5% GST in the 30 September 2010 GST return even though the creditors are not due for payment until after 1 October.

The reason for this is that you will be claiming 15% when you pay the creditors.

If you file two monthly GST returns for the period ended 31 October OR six monthly GST returns for the period ended 28 February 2011, then you need to use the GST transitional return (GST 104A or 104B) to separately deal with transactions that occurred at 12.5% before 1 October and subsequent 15% transactions post 1 October 2010.

To ensure you are not out of pocket, you are allowed to issue a new tax invoice using the 12.5% old rate after 1 October IF you are offering a credit by reversing the original tax invoice for a sale completed before 1 October.

Therefore it is crucial that you keep a full debtors list with individual debtors showing invoice dates and amount owed as at 30 September 2010. You need to keep track of this list when refunding, exchanging goods or even writing off bad debts to ensure you are not “over” refunding 15% GST when the goods were supplied at 12.5% GST.

If your business relies on a computer system or point of sale system to generate invoices, you need to contact your software supplier immediately for upgrade information.

Your system needs to be able to differentiate:

• Invoices generated using the old rate
• New invoices using the new rate
• Refund or credits given post 1 October for goods sold under the old GST rate

If your business has ceased operation but still has unsold assets, you should complete the deregistration before 30 September otherwise any assets sold or retained after 1 October deregistration will attract 15% GST even though you only claimed 12.5% previously.

1. If you use and rely on the [TAX%] button on your calculator or till register to work out your final sale price, remember to change the % from 12.5% to 15% (find that manual.....each calculator or till register is different).
2. Remember to send and post your September invoices (particularly if you are tradesman who issue invoices after the job is done) to your customer BEFORE 11 October to ensure you can use the 12.5% rate.
3. Contact us before the 28 October due date for your 30 September GST return:
   
   • If you want assistance to complete a GST deregistration or us to check your calculations
   • If you have difficulty filing the 30 September 2010 caused by these GST changes. We can contact IRD to possibly arrange an extension of time to file the GST return.

This is a technical term that dictates when you have the obligation to pay GST.

Using the general rule, Time of Supply is triggered at the earlier of an invoice being issued and any payment being received in respect of that supply. For land transactions though, Time of Supply usually happens when a payment is applied to the vendor’s benefit. Therefore be very careful when you issue the Tax Invoice.

Unconditional date is the critical factor that dictates when the vendor can gain access to a paid deposit.

Time of Supply will usually trigger when the Sale & Purchase Agreement goes unconditional and a deposit is released or used to pay the agents commission.

This means that if the contract goes unconditional on or before 30 September but settlement takes place after 1 October then the old 12.5% GST rate can still apply to the transaction provided you have issued the tax invoice to the purchaser OR you as vendor are entitled to the deposit.

If the contract remains conditional OR no deposit has been paid to the vendor prior to 1 October, then the vendor has to use the new 15% GST rate.

Section 78 of the GST Act expressly provides the vendor the right to vary the agreed price for the GST liable to be charged. Provided the Sale & Purchase Agreement does not preclude it, the vendor has the right to increase the agreed price and the purchaser is bound to accept the GST rate increases.

1. Check your Sale & Purchase Agreement to ensure there are no clauses prohibiting you to vary the GST rate.
2. When asking for a deposit, try to ask for at least 12.5% or 15% of the price to cover your GST liability so that you will not be out of pocket.
3. Take care with transactions that will go unconditional on or before 30 September but will not settle until after 1 October.
4. Consider timing when issuing GST Tax invoices for supplies before 30 September 2010.
5. Preparing the GST return for September 2010 will be tricky. Please contact us to assist you to calculate the correct GST adjustments if in doubt.

The rate change may not have a significant impact on commercial landlords because commercial landlords will usually rent their properties on a “net lease” basis i.e. the rent charged is on a plus GST basis and Operating expenses are borne by the tenant.

However, there will be other practical implications (e.g. documentation) as well as direct impact on landlords whose lease is on a “gross” basis i.e. rent is on a GST inclusive basis which may also include paying Operating Expenses for the tenants.

Rather than issuing monthly Tax Invoices to tenants for the same monthly amount, many commercial landlords issue a single GST tax invoice that covers the entire lease period.

With the GST rate changes, all these “single GST invoices” have to be changed as the amount charged was based on the old 12.5% GST rate.

Instead of rendering a credit note, commercial landlords should issue a replacement invoice to their tenants using the new 15% GST rate for lease periods starting or continuing from 1 October 2010 until the end of their respective lease term.

Most tenants pay their rent by Automatic Payment. Please remember to instruct your tenant to change their AP amount to cover the GST increase.

1. Issue replacement GST tax invoice for multiple supplies
2. Send tenants a notification of the new rent amount with the new multiple supplies invoice.
3. Notify tenants (before 27 September) to allow time for them to change their Automatic Payment for 1 October’s rent.
4. Follow up and check your bank statements for October and November to ensure tenants have adhered to all the changes.

As your MYOB Approved Partner, we are able to assist you in ensuring your MYOB Accounting software is up to date and ready for the upcoming GST change.

For MYOB clients who are on the MYOB Business Support plan, you will get your free updates/upgrades shortly.

For those who do not have a MYOB support plan, rather than contacting MYOB directly yourself, please email David Han (davidh@wt.co.nz) or one of our MYOB certified consultants to confirm your upgrade needs. We will take care of it for you!

Please have your serial number handy (you can find this information from the Setup/Company Information tab in your MYOB program).

As your XERO Certified Partner, we are able to assist you with your September GST return filing if necessary. Be assured that the software has already been upgraded by XERO to cater for the upcoming GST changes.

However, for September 2010 GST return, you will need to process all the debtors and creditors in the Accounts Receivables and Payables modules respectively.

Please email Diego Roa (diegor@wt.co.nz) or one of our XERO certified trainers to assist you with the processing.

On May Budget night the Government announced that residential property investors would still be able to depreciate chattels but that more work was being done on commercial fit-outs.

The Government has now released interpretation statement IS10/01 which sets out guidelines for residential investors looking to separately depreciate a property’s chattels.

An official’s issues paper has also been released indicating what is intended for commercial.

Interestingly, and perhaps not surprisingly, the treatment is different for residential and commercial.

The IRD states that this is because the fit-out of commercial buildings constitutes a greater portion of value than the fit-out of residential properties.

Quite why this should necessitate different tax treatments remains a mystery and it seems likely that the real reason is a simple desire to collect more tax from the residential sector.

Residential investors will now need to satisfy the following three stop test if an item is to be separated from the building and depreciated.

Step 1: Determine whether the item is in some way attached or connected to the building. If the item is completed unattached, then it will not form a part of the building. An item will not be considered attached for these purposes, if its only means of attachment is being plugged or wired into an electrical outlet (such as a freestanding oven), or attached to a water or gas outlet. If the item is attached to the building, go to step 2.

Step 2: Determine whether the item is an integral part of the residential rental property such that a residential rental property would be considered incomplete or unable to function without the item. If the item is an integral part of the residential rental property, then the item will be part of the building. If the item is not an integral part of the residential rental property, go to step 3.

Step 3: Determine whether the item is built-in or attached or connected to the building in such a way that it is part of the “fabric” of the building. Consider factors such as the nature and degree of attachment, the difficulty involved in the item’s removal, and whether there would be any significant damage to the item or the building if the item were removed. If the item is part of the fabric of the building, then it is part of the building for depreciation purposes.

This flowchart summarises the tests.

The situation is quite different for commercial.

Commercial investors are to be given the opportunity to depreciate any item that is on the schedule of “Building Fit-out, asset category”. This list contains 90 items including walls, plumbing, electrical wiring, ceilings, carpets, fitted furniture, and air conditioning.

For those commercial investors that haven’t previously separated out their fit-out items, it is being proposed to allow a once only “carve out” of 15% of the building’s depreciated book value at 1 April 2011, to create a “building fit-out pool”.

This will then be depreciable at 2% straight line.

Interestingly, the proposal is that this depreciation will not be subject to recovery on disposal of the building.

We see this as a sensible and welcome new initiative.

These changes will necessitate the introduction of a definition of a dwelling into the tax legislation, this is likely to be defined as a building used predominately as a place of residence or abode for any individual.

Where buildings are mixed use residential and commercial, the outcome will be determined by working out what the dominant purpose of the building is.

Whilst we feel the distinction between residential and commercial fit-outs is somewhat dubious, we are thankful, finally for some clarity around an issue that has been left up in the air for a decade now.

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24-26 Pollen Street | Ponsonby | Auckland 1021

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