5 YEAR OLD CONTRACTS NEED URGENT ATTENTION
2 November 2004
GST exemption for long term contracts to end on 1 July 2005.
TaxEd Plus Members are urged to contact all business and departmental units and ask for details of any long term contracts that fit the following time frame. If GST hasn't been taken into account during a review opportunity within these contracts you need to establish an action plan to address this issue.
Please lodge any queries via your personal account page (the logon box is to the left of this article). For non-members, we hope the following information is helpful and that you consider joining TaxEd Plus in the near future.
Government agencies, councils, departments and other government-related entities may have to renegotiate all contracts more than five years old. This follows the Federal Government's confirmation last Friday that the GST exemption for these contracts would come to an end on 1 July 2005.
Although any implementation of this policy may not necessarily cause
financial loss to contracting parties, entities are facing a substantial
administrative burden negotiating thousands of contracts including lease
contracts, grant funding programmes and service contracts. It is estimated
that there are hundreds of thousands of these contracts in existence in the
public sector alone.
The new rules are in draft form at present, but there is extensive lobbying
to have the draft rules amended so that hardship is minimised.
The presently existing exemption applies to contracts entered into before
either 2 December 1998 or 8 July 1999, depending on the ability of the
recipient to claim input tax credits. For such contracts there has been a
five year sunset clause. This ends on 1 July 2005.
Under the proposed new rules, recipients of contract services that do not
agree to pay the full GST, or to renegotiate their contracts, will be forced
to a special arbitration process. This process will be both time consuming
and expensive. In addition, the internal administrative costs will be
immense and place added burdens on already stretched resources.
The proposed new rules give entities three options:
- the customer can offer to pay the additional 10% upfront;
- the supplier can agree to absorb the GST out of its own pocket;
- the two parties can seek assistance from a special government-appointed
arbitrator.
If the agreement goes to arbitration and customers refuse to accept the
decision, they will be hit with the full 10% GST. It is estimated that the
arbitration process will take three months to complete. This means that all
entities should be addressing this issue now.