Businesses need to prepare for GST on late payment fees
[07 June 2012]
The Finance and Expenditure Committee has reported back on the Taxation (Annual Rates, Returns filing, and Remedial Matters) Bill.
It recommends making amendments to the GST treatment of fees for the late payment of an account (late fees), meaning late fees will be subject to GST.
PwC Partner and GST expert Eugen Trombitas says, “If passed by Parliament, this would be a significant change and is effectively a new tax.”
Traditionally, late fees have not been subject to GST as they are not part of the price of a good or service – instead they are a payment for a breach of contract or compensation for damages.
Mr Trombitas says, "No goods or services are received in return for the late fee. By making late fees subject to GST the GST base is shifting away from a value added tax (on goods and services) to a cashflow tax. This will undermine New Zealand GST model's "best in class" reputation, and will be out of line with best practice overseas."
Once passed, the law will apply retrospectively from 1 April 2003. This is to prevent back claims from Inland Revenue of any previous payments of GST on late fees. However, businesses which currently do not account for GST on late fees under their regular practice will be given until 1 January 2013 to make the necessary changes. The six month window is welcomed by PwC as it will give businesses time to review and update their systems and pricing models. Decisions have to be made on whether to pass the cost on to customers.
There are some exclusions from the new tax. GST on late fees will apply if the underlying transaction is subject to 15% GST, but not otherwise. Penalty or default interest will also be excluded. Business systems will need to cope with the new rules and exclusions.
Mr Trombitas says, “While businesses have time to prepare, one question remains. The Government is trying to combat falling tax revenues. Granted it’s a tough balancing act but is extending the GST base this way, the best way to achieve this goal?”