The correct rate of GST to be used will depend on the time of supply. If the time of supply is on 30th September or earlier, the 12.5% GST rate will apply, if the time of supply is on 1 October or later, the new 15% GST rate will apply.

How do I determine which GST rate to use, 12.5% or 15% over the transition period?

The correct rate of GST to be used will depend on the time of supply. If the time of supply is on 30th September or earlier, the 12.5% GST rate will apply, if the time of supply is on 1 October or later, the new 15% GST rate will apply.

General rule

The general time of supply rule is found in s.9(1) of the GST Act.

In general the 'time of supply' for goods and services, will be the earlier of the time of a payment, or the date an invoice is issued. This means if you issue an invoice on or before 30th September, or a payment is received on or before 30th September, the GST rate applying will be 12.5%. Note however that the payment must be in respect of "that supply" for the payment to constitute a time of supply for the supply of any goods and services. This means that you cannot prepay for goods and services you intend to acquire at some future time and hope that because payment has been made that the old GST rate will apply.

If the invoice is dated on or after 1 October and a payment in respect of the supply is not made until 1 October or later then the GST rate will be 15%. This will be the case even if the invoice is for goods or services provided before 1 October.

Some businesses invoice monthly in arrears for the services they provide. If the invoice is dated on or after 1 October GST must be applied at the 15% rate to the entire invoice, even though the services were received by the customer before 1 October.

One issue that has been raised with the GST Advisory panel is the actual date invoices are prepared [issued]. In many cases the invoice for goods and services supplied in one month are not actually prepared until early in the following month. In the past this has not created any problems as people are in effect advancing, in some cases, the date the GST is payable. A problem will occur however in respect of supplies actually made in September but billed in October even if the invoice is dated September. Technically the new GST rate, 15%, should be applied to those invoices.

The Government addressed this issue and made a legislative change that enables people to prepare the invoices for September supplies in the first 11 days of October, provided the invoice is dated on or before 30 September and is issued consistently with the registered person’s practice of issuing invoices for such supplies, and payment for the supply is due no later than 60 days from the invoice date.

Continuous supplies

The general time of supply rule as set out above in section 9(1) however is modified by the provisions in section (9)(3) of the GST Act.

In this case where goods are supplied under an agreement to hire, or where services are supplied under any agreement which provides for periodic payments, they shall be deemed to be successively supplied for successive parts of the period of the agreement, and each of the successive supplies shall be deemed to take place when a payment becomes due or is received, whichever is the earlier.

It is important to note that the issue of an invoice does not trigger the time of supply for agreements to hire, or for services provided over a period of time with periodic payments.

The rule in s.(9)(3)(a) as set out above varies from the general time of supply rule by providing that where services are successively supplied, then each such successive supply shall be deemed to take place when any payment becomes due or is received, which ever is the earlier.

This recognises that where services are supplied over time, and are paid by way of instalments, it is more appropriate to recognise the time of supply for GST purposes as the earlier of the date when each payment is either due, it is paid.

This can raise problems. Take a telecommunications company for example. In most cases these companies will bill for calls made, (a service provided by the company), and a line rental fee, (a charge for a successive supply of access to the company's telephone lines).

In this example there are s.9(1) supplies, the toll calls, where the time of supply is effectively the date of the invoice for those tolls. There is also, however, a section 9(3)(a) supply, that is the agreement to access the company's lines, for which a monthly rental is charged in advance by the telecommunications company. The time of supply for this is, effectively, the date the rental charge is due for payment.

Needless to say the two "times of supply" on the one account will not always be the same. To address this problem many companies in this type of situation have taken a pragmatic approach, and treated the date of the issue of the invoice as the time of supply, even though this may have advanced the date of payment of the GST in respect of the S.(9((3) supplies.

This is fine until there is a GST rate change. Take a September 2010 telephone account; the toll calls were made last month (August). The time of supply is the date of the invoice, say 30th September, GST is payable at the rate of 12.5%, the line charge however is due and payable next month (October) so the GST rate here is at 15%. This is just too hard. As a consequence the Government has agreed to a modification of the law for the GST transition.

Suppliers, who arguably may be subject to section 9(3) on at least some of their supplies, have been allowed the option referred to earlier as treating the supply as being made on the date of the invoice provided they meet the requirements of that option.

Example
Jims Hire Service agrees to hire a truck to Highway Deliveries. The lease is for four months from 1 September 2010, to 30 December 2010.

If the transaction is invoiced prior to 1 October 2010, (say 1st September) and is payable, in full, on or before a date 60 days after the invoice date, (the 30th of October) the GST will be at 12.5%,

If the agreement provides that payments will be made on the first day of each month in advance, that is 1st September, 1st October, 1st November, and 1st December, the GST on the first payment 1st September 2010 would be at 12.5% and the following months would be at 15%, unless, Highway Deliveries actually paid the following months instalments prior to 1 October 2010.

The successive supply rule covers for example everything from the hire of a truck to an insurance premium. In broad terms the time of supply is the earlier of the time at which each successive payment falls due or is paid. In some cases such as a contract of insurance for a twelve month period, the premiums may be paid annually, three monthly, or monthly. A strict application of the provisions in section (9)(3)(a) would mean that the Insurance company would be required to increase the rate of GST in respect of all instalments due and paid after 1 October 2010. This clearly would have had significant compliance costs for both the insurance company and the customer often when only small amounts of extra GST is payable.

To address this issue the GST Advisory Panel suggested that the Government make a legislative change to avoid this situation. The change provides:-

A grand-parenting option for s 9(3)(s) successive supply contracts in place before 1 October 2010 where the consideration for a supply is set or reviewed with a maximum period of 396 days, under which GST would be payable at 12.5% for the remaining part of the contract provided:

• All remaining GST for the period is accounted for by the supplier in the return period that includes 30 September 2010;
• GST-registered customers can only claim back GST at 12.5% and are notified of this by their insurer within 30 days of the GST rate change.

This measure will remove the substantial compliance costs for most health and general insurance providers of having to adjust the GST by amounts that are exceeded by the cost of contacting the customer to change the amount of the payment. It would also ensure that customers who paid on an instalment basis were not disadvantaged by having taken up this option rather than the option of paying annually in one lump sum. It should be noted however that the insurance customer is only allowed to claim back the GST at the 12.5% rate.

There are further time of supply rules regarding successive supplies in S.9(3)(aa). Where goods are supplied progressively or periodically pursuant to any agreement and the agreement provides for the consideration for that supply to be paid in instalments or periodically in relation to the periodic or progressive supply of those goods, those goods shall be deemed to be successively supplied, and each such successive supply shall be deemed to take place whenever any payment in respect of any supply becomes due, is received, or any invoice relating only to that payment is issued, whichever is the earlier.

Where goods and services are supplied directly in the construction, major reconstruction, manufacture, or extension of a building or an engineering work, and are supplied pursuant to any agreement which provides for the consideration for that supply to become due and payable in instalments or periodically in relation to the progressive nature of that construction, manufacture, or extension, those goods and services shall be deemed to be successively supplied, and each such successive supply shall be deemed to take place whenever any payment in respect of any supply becomes due, is received, or any invoice relating only to that payment is issued, whichever is the earlier.