Additional fee will lift GST rate

The September Tax Bill is proposing to make fees for the late payment of an account subject to GST.

This is a significant development that would broaden the GST base to include fees, which was not previously subject to GST.

Inland Revenue had previously ruled these fees are not part of the price for goods or services, because the defaulter gets nothing in return for paying the late fee.

It is likely that most businesses will pass this new GST cost to consumers.

PricewaterhouseCoopers expects the September Tax Bill to be reinstated by the new Parliament in the near future.

The Finance and Expenditure Committee will hear oral submissions on the Bill in the New Year. At that time, PricewaterhouseCoopers will appear before the Committee to make submissions on the proposed amendment.

If implemented, this change will apply retrospectively from April 1, 2003.

However, businesses that currently do not charge GST on such fees would be grandfathered and would have until April 1, 2012 to implement the necessary systems changes.

The best GST practice around the globe (including countries such as Australia, Canada and UK) is not to impose GST on late payment fees.

The policy issue is a stark one – do we keep GST as a tax on supplies and value added (traditionally this has been the case) or do we expand GST to apply to receipts/turnover, which has not been the case to date?

At a time when European Value Added Tax (VAT) reform is calling for the need to remove tricky boundary issues, this change would open up new interpretation issues such as whether a fee is a late payment fee (proposed to be taxed), default or penalty interest (GST-exempt), or not covered by the proposal.

The EU Plan

On a related note, the European Commission recently accounted a new VAT strategy.

A White Paper on the Future of European VAT, released last month, would be a significant development.

The reform recommendations are to move towards a broad-base/standard rate model similar to the New Zealand GST system widely regarded around the world as the best-in-class consumption taxes model.

According to the Commission, the current VAT model is fragmented and not as efficient (and neutral) for businesses as VAT/GST systems that are less complex.

The White Paper said that a VAT model with “complexity, extra compliance cost and legal uncertainty” affected commercial behaviour.

The European experience should serve as a warning to those who advocate further complexity for the New Zealand GST regime.

It would also promote carve outs from a broad base GST model and introduce further boundary issues (such as late payment fees vs default or penalty interest).

The above was issued by PricewaterhouseCoopers New Zealand.

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