As noted in previous articles on the Budget announcements, taxpayers registered for GST on a payments basis will face unique challenges with the increase in the rate of GST to 15% from 1 October 2010.

Taxpayers who are registered on a payments basis will need to make transitional adjustments in their GST return for the period ending on 30 September 2010. If the period straddles the GST rate change, they will be required to effectively file two returns; one to 30 September and one for the remaining part of the period.

The adjustment to be made will take into account supplies where the time of supply has been triggered, but payment is yet to be made or received.  An adjustment is required because in later return periods when a payment is received or made, those payments must be dealt with at a GST rate of 15%, even though GST was charged on those supplies at 12.5%.  The adjustment in the period ending 30 September 2010 will ensure that any amount that would be subsequently overpaid or over claimed is dealt with by way of an adjustment in one GST period.

Completion of the adjustment will ensure that payments basis taxpayers are not required to continue to make adjustments for supplies at 12.5% in later return periods.

To illustrate this, a business registered for GST on a payments basis sells a bike for $1,125 including GST on 5 September 2010.

Payment is not received until 10 November 2010. When payment is eventually received GST of $146.74 is required to be returned, instead of $125.00 had the payment been made before 30 September. Accordingly, an adjustment is required in the special GST return for the period ending 30 September 2010, whereby a GST input credit of $21.74 is allowed. This puts the taxpayer back into the same position that they would have been had payment been received before 30 September.

If no adjustment is made, then the taxpayer will ultimately be out of pocket when they are forced to return GST at the rate of 15% on the eventual receipt. Taxpayers registered on a payments basis will need to make adjustments with respect to debtors and creditors that exist as at 1 October 2010. Taxpayers with poor or incomplete records will likely incur additional GST costs as a result of the transition.

We suggest that you consult with your software provider prior to 30 September 2010 to ensure that any computerised accounting system can easily manage the transition.

Should you require any assistance or advice in managing these changes please contact us.