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The Change in GST Rate from 12.5% to 15%

As to whether GST is chargeable at 12.5% or at 15% is dependent upon the time of supply as set out in the GST Legislation.  There will be changes made to the current GST Legislation prior to 30 September 2010.

Contents:

1. General Time of Supply Rule
2. Contracts of Agreements with Periodic Payments
3. Prebilling of Work
4. Progress Claims under Construction Projects
5. Fixed Price Contracts
6. Examples
7. September GST Return on a Payments or Hybrid Basis

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General Time of Supply

The general rule for time of supply is the earlier of the date of issue of invoice or the date of any payment in relation to the supply.  Some services require preregistration and prepayment – seminars, for example.  If an October course is prebooked in September and an invoice is issued dated prior to 30 September then GST will be charged at 12.5%.  This is notwithstanding that the services will be delivered in October and payment might not be made until October. Date of issue is the date that the invoice is raised, not the date that is on the invoice.  Often invoices will be raised in the first few days after month end for services provided during the previous month.  In those circumstances, the date of issue of the invoice will be October and therefore GST at a rate of 15% would properly be chargeable.

However, legislation will be introduced to allow invoices for services provided prior to 30 September where the invoice is also dated prior to 30 September to be raised (issued) up to 11 October 2010.  In those cases, GST at a rate of 12.5% can be used. 

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Contracts or Agreements with Periodic Payments

Where services are supplied under any agreement (whether a formal written agreement exists or not), which provides for periodic payments, then the time of supply is usually the earlier of when a payment is due or payment is received.  An important point to note is that the date the invoice is issued or dated or the date that the services are provided is not relevant. “Periodic payment” implies that each payment is made at regular intervals, which further suggests there has to be at least 3 payments so that a period can be determined.  However, periodic payments do not have to be for the same amount each time. 

An architect who may be providing services such as concept design, developed design, documentation or contract administration, and those services are billed on a monthly basis as work progresses would therefore find that the September invoice would have to charge GST at the 15% rate if payment was not due until 20 October 2010.  Taken together with other adjustments that are required for the September GST return, this could conceivably cause administrative problems.

To simplify the issue there will be a change to the GST legislation.  Where goods and services are provided before 1 October 2010 and an invoice is dated on or before 30 September 2010 is issued by 11 October 2010 and payment is due within 60 days of the invoice date, then GST will be charged at the old rate.

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Prebilling of Work

Generally transactions between two GST registered businesses will not be affected by the GST rate increase, except for a short-term cash timing impact.  However, if an architect is undertaking work for a non-GST registered client, for example a residential home design, then the client will have increased costs which they will not be able to recover.   As a result, some clients may request work to be prebilled.

Provided that an invoice is dated September or earlier, is raised by 11 October 2010 and is payable within 60 days of the invoice date, then GST can be charged at 12.5%.

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Progress Claims under Construction Contracts

There are also specific time of supply rules for goods and services supplied directly in the construction, major reconstruction, manufacture or extension of a building or an engineering work under a contract or agreement which provides for instalment , progress, or periodic payments in relation to the progressive nature of that construction, manufacture or extension.

In these cases, the goods and services are deemed to successively supplied and each of those successive supplies is deemed to take place at the earlier of issue of invoice or the date that payment becomes due or the date that payment is received for each of those supplies.  In other words, if the work is invoiced on a monthly basis, then GST at the old rate would apply on invoices for work done in September and invoiced with a September date, provided that the invoice was raised by 11 October 2010.  The new rate would apply for all work done in October and invoiced with an October date.

Generally we would not expect these specific rules to affect architects, engineers or other building consultants because the services supplied by such professionals are not supplied directly in the construction of a building.  Rather, the professional services are supplied in relation to the construction of a building, not in the construction process itself. 

These rules would apply more to the provision of building, plumbing, electrical or other services directly in the construction of a building and may impact upon design & build practices. 

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Fixed Price Contracts

If you have entered into a fixed price contract then you will normally be able to increase your fees to cover the increase in GST rates.  The only exception to this is if the contract specifically mentions that GST will be charged at the specific rate of 12.5%.  Normally we would expect contracts to be stated at a fixed price plus GST, without mentioning the relevant GST rate.  If the contract does not mention GST, then it is assumed that the contract price is inclusive of GST. 

Therefore any invoices dated after 30 September 2010 will have GST at the new rate of 15%. 

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Examples

Examples of possible scenarios to see if they fall under the general rule or whether the specific time of supply rules.

Periodic Supply

If you raise an invoice on 30 September, dated 30 September, with payment due by 14 October, then GST will be at 12.5%.
 
If you raise an invoice before 11 October, dated 30 September or earlier, with payment due within 60 days, then GST will be at 12.5%.  This will include any prebillings of work.

All invoices dated 1 October or later will have GST charged at 15%.

Separate Supply

If you are completing a one-off project in September, e.g. a scoping exercise for your client, then general time of supply rules apply, i.e. the earlier of invoice date (provided that September invoices are all raised by 11 October) and date of payment.  This will also apply to any work that your client asks you to prebill by 30 September.

SCC Payment Schedules

Consider the following in determining the relevant rate of GST to apply to a payment schedule.  Please note that all invoices must be dated 30 September or prior, be raised by 11 October 2010 and be payable within 60 days of the invoice date in order to have GST at a rate of 12.5%.  Any invoice dated after 30 September will automatically have GST at a rate of 15%.

• The contractor issues a claim.  This claim must be certified by the architect within 7 days of receipt and a provisional payment schedule issued.
• The provisional payment schedule is provisional for 5 days.
• If there are no amendments by the principal, the provisional payment schedule becomes the payment schedule and is payable by the principal within 12 working days.
• If the principal amends or makes deductions to the certified amount it must be notified within 3 days.
• If the principal amends the provisional payment schedule, the architect must issue an amended payment schedule within 2 days.
• The contractor will raise an invoice to the client on receipt of the payment schedule.

In order for the contractor to be able to raise an invoice dated 30 September by 11 October 2010 the time frame must be:

27/09/10                     Contractors claim received

04/10/10                     Provisional payment schedule issued

07/10/10                     Principal amendments to provisional payment schedule made

11/10/10                     Payment schedule becomes final

11/10/10                     Contractor raises a tax invoice

If the construction project is being undertaken for a non-GST registered person, then the client may wish to pay for September work early, regardless of any agreed payment schedule.  In that case, the contractors will need to prepare and issue their claims for September before the end of the month and in accordance with the above time line.

Some GST registered clients may also wish to pay GST at the lower rate for September work to minimise the initial cash impact.  However, because there is also a one-off adjustment made in the September 2010 GST return, any cash benefit received by GST registered clients will be minimal. 

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September 2010 GST Return on a Payments or Hybrid Basis

Businesses with less than $1.5M in gross fees per annum can elect to return GST on either a payments basis or the hybrid basis.  This will include many smaller architectural firms.

Under the payments basis GST on fees is only included when payment has been received and GST on costs is only included when payment has been made to the supplier.

Under the hybrid basis, GST on fees is returned when an invoice is raised and GST on costs is only included when payment has been made to the supplier.

Rather than continue to file two GST returns using the two different rates until all pre-October invoices have been paid, a one-off adjustment is required in the September GST return.  This one-off adjustment will mean that all cash received after 1 October will be accounted for on the GST returns at the new rate, even though you may have charged for the work at the old (12.5%) rate. 

IRD will include a GST transitional adjustment form with the 30 September GST return.  You will need to calculate the value of your debtors and creditors at 30 September 2010.  You then deduct the value of your debtors from the value of your creditors and multiply the difference by 0.019324 (which is the difference between the old and new rates).  If your debtors exceed your creditors, a GST credit will arise and that can be used to reduce the GST payable on your September return.  If your creditors exceed your debtors, an additional amount of GST will be payable on your September return.

If you file your GST returns electronically, then care will need to be taken with November and later GST returns that the correct amount of GST inclusive fees is recorded on the return.  Rather than ticking the option “I know GST on sales and need to work out total sales” it is preferable to tick the option “I know total sales and need to work out GST collected.” 

On 27 May 2010 IRD advised that if a business had taken reasonable efforts to comply with the new GST rate, but made an error that could be reasonable attributed to the change, late payment penalties, late filing penalties and use of money interest would be remitted.  

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Disclaimer: This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact Stephenson Thorner Limited to discuss these matters in the context of your particular circumstances.  Stephenson Thorner Limited, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.