Alan Smolak, Partner, Taxation Services, Coopers & Lybrand, was closely involved in the development and implementation of a consumption tax in Canada. In this article he outlines what the introduction of a GST in Australia would mean for your business.
Hardly a day goes by without one interest group or another declaring Australia's tax regime is well beyond its 'use by' date. In many cases such declarations are accompanied by support for the introduction of a broadly based consumption tax such as a value added type goods and services tax (GST). This is hardly surprising. There are only two continents without a GST. One is Australia, the other is Antarctica. The focus is typically on the big picture equity issues associated with a GST. There are, however, a series of practical commercial issues which Australian business should consider. These issues become increasingly important as the 'transitional' period advances.
A properly designed GST may be expected to provide a number of advantages for Australian businesses. First, GST will not generally represent a cost to business. By claiming credits of GST incurred on business purchases or 'inputs', the tax becomes a flow through to business. GST is therefore ultimately borne by the non-business consumer or household. This is different from our existing regime which heavily taxes business inputs by way of sales tax, payroll tax and other imposts. A reform which eliminates business input taxes in favour of a GST will reduce the operating costs of Australian business. This provides latitude for enhanced competitiveness and better performance particularly in export markets. Secondly, a broadly based GST would apply to virtually everything at a single rate of tax. While it is true that more businesses would be required to register and account for GST than are currently registered for sales tax, the overall level of administrative burden could be reduced by eliminating the cumbersome and antiquated repertoire of existing federal and state taxes.
Internal Systems for a GST
In order to take full advantage of a reform package which includes GST, it is important that businesses take a strategic approach to transition and ultimate implementation. The mechanics of a GST require that internal systems be set up to account for tax on both purchases (inputs) and sales (supplies). In general terms, 'input' GST is incurred on all small business-related purchases while a parallel obligation exists to account for 'output' GST on all sales or supplies. However, GST does not stick as a cost because the business will claim a credit of input tax incurred on purchases by deducting it from output tax collected on sales. Only the 'net liability' (output tax less input tax) is remitted to the taxation authority. Once systems that accurately track both input and output tax are bedded down, business should be able to prepare and lodge a GST return in less than ten minutes. If it takes longer, a business's preparation has been inadequate.
Cash flow implications
It is important to note that while a GST does not generally represent a cost, the requirement to pay tax on inputs and then claim it back gives rise to cash flow implications. Many businesses will enjoy positive cash flow while other suffer adverse cash flow implications. Factors affecting cash flow include trading terms, the level of imports and exports, lodgement period and grouping options. Every business must seek to optimise its cash flow position. In addition to developing the internal systems necessary to account for GST and optimising cash flow, businesses may encounter any number of one-time transitional issues. These issues must be considered in the course of setting implementation strategy.
The first transitional issues to emerge is that of long-term contracts which may straddle a GST's implementation. Real property leases, outsourcing contracts, supply contracts and the like should include provisions which address pricing, cash flow and compliance issues associated with the GST. Many Australian businesses already include specific provisions in long-term contracts on the basis that the contracts are expected to straddle an implementation. Other important transitional issues include the impact on pricing, impact on product demand, whether to accelerate or defer the acquisition of fixed assets as well as impact on inventory levels. While these issues are critical to a successful implementation, they are one-time issues and will not result in ongoing administrative burden. In the meantime, we can only speculate on how long Australia's antiquated regime will remain 'intact'. Sales tax is crumbling under the burden of rampant fraud and administrative complexity. The base for payroll taxes is being eroded by contractors and an expanding small business sector. Electronic money and the networked economy are also expected to negate traditional revenue sources. It seems more and more like GST means Get Started Today.%$% (Source: CEDA Bulletin, Committee for Economic Development of Australia, March 1997, page 28)%$%
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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