Between a rock and a tax break

Between a rock and a tax break

After finally beating Y2K into submission, Prime Minister John Howard's GST will rear its ugly head on July 1, 2000. Following its difficult birth within Canberra's political walls, the Goods and Services Tax is hailed as the most significant tax reform to take place within Australia for the last 30 years.

The Goods and Services Tax is more than just a new tax system. It represents a whole new business paradigm with changes that will cut deep into Australia's economic infrastructure.

But IT channel companies are yet to seriously grapple with exactly what changes will be required in this new tax environment. Small business operators such as computer retailers and consultancies stand directly in the firing line as the industry's highest "at risk" grouping. Surprisingly, however, both retailers and large companies do not appear too worried about having to cope with the new system, despite some obvious threats.

A recent study by Ernst & Young titled Preparing for the GST - An Australian Survey found 27 per cent of over 320 major listed companies were yet to address specific GST issues.

The report states that 15 per cent of companies still had no procedures in place to begin preparations for the GST, while many were generally pessimistic about its introduction. The study also found that 38 per cent of companies expected the GST to have a negative impact on their businesses, while a further 20 per cent remain unsure about its impact.

Don Sparks, computer products manager at electrical retailer Clive Peeters, appeared less than concerned about the GST's impact on his business. "We're having discussions and meetings at the moment," he said of Clive Peeters own compliance levels. Sparks indicated the company will not have too much trouble adopting to the changes given the time available before next year's GST D-day of July 1.

However, given the complexities of meeting Y2K criteria and short-term business goals, it's easy to predict that some companies will be caught short.

"Typically, implementation of these [projects] is left to the last minute," Sparks conceded.

And that's exactly the attitude that bothers Graham Willis, director of consulting and technology development at Computer Sciences Corporation (CSC). "You actually can't start soon enough," Willis explained.

Most companies need between six and nine months to completely re-engineer their business around the GST system, Willis added.

Adding weight to that argument is Ron Read, northern region sales manager for Systems Union, who told IDG recently the bulk of GST compliance work will centre around businesses processes. Read believes even companies with the right GST accounting software will need up to a man-month of work to phase in the changeover.

"We have sensed the business community is confronting the fact that the GST is less than 12 months away from becoming a reality they have to live with," Read said.

One of the difficulties, according to Willis, is the GST must be uniformly applied to all aspects of a company's operations.

This includes core business processes, information systems, customer service, staff training, and GST transaction interfaces such as procurement, supply distribution, sales and finance reporting.

The most immediate challenge facing businesses with annual sales of over $20 million is the requirement to lodge a tax return every month. Aside from the administration hassles, businesses must also move quickly to recover debts from customers to avoid falling into a cash-flow crisis come tax time. "Somebody, somewhere is going to have to pay the tax each month," Willis said.

Management Control Systems' Ashley Chapman is one reseller who is more "comfortable" about the GST's introduction. As an accredited Navision reseller, he is confident in the company's ability to customise its accounting software for the Australian market.

But Chapman is worried about the transition period, particularly when it comes to contracts spanning the July 1, 2000 introduction date.

"It's still unclear what the rules will be for that transition period," he said. "Just because July 1 comes around, it doesn't mean you have left the old world completely behind," he said.

Chapman added that companies will need a detailed understanding of the GST to reconcile business transactions over this period.

The complexity of such tasks, particularly when large contracts are involved, is proving a veritable breeding ground for new tax consulting business.

In addition to offering consulting services, large outsourcing and services companies such as CSC, Ernst & Young, PricewaterhouseCoopers and Deloitte Touche Tohmatsu are treading the boards of the seminar circuit. Chapman has attended some of the seminars, describing them as "useful".

However, it is the resellers who will have to play a much greater role in the future. "Most people will look to their existing supplier to have the answer," he said. And that puts the onus squarely on resellers to have the knowledge and systems in place to cope with growing demand.

One of the first ports of call for most companies will be to adjust finance and accounting packages. But Arno Franz, CSC's NSW regional consulting and technology manager, warns: "Please don't assume it's a trivial table change in [an accounting software] system."

Accounting software provider Solution 6 believes its products will have few difficulties operating under the GST after years of operation in New Zealand.

Richard McLean, Solution 6's marketing manager, said the trick is not so much with the software, but the company accountant. "The accounting industry is very clever when it comes to the GST," he quipped. "Every business, including resellers, had better see their accountants," he said.

Reg King, executive chairman of Solomon Software in Australia, offers a similar sentiment. He also claims Solomon is ready for the change after experience in the New Zealand market.

"If anyone can write a program for sales tax, they should find writing a GST program a comparable breeze," he said.

Of more interest, King believes, are issues such as regulation, coping with the cash economy and Internet-based transactions. Cash flow in the so-called "black economy" is still going to be difficult to regulate, despite the Government's claims, King says. He added that any cash transactions will be difficult to recover until people in the black economy next spend their earnings and pay GST.

"When it is perceived as too complicated or unfair to certain elements, you are always going to have tax avoidance," he said.

The Government is also facing an uphill battle to control Internet transactions. In King's opinion, there are a couple of options. The ISP could evolve to become a tax collector for online transactions, but he concedes that becomes difficult given the existence of strong Internet privacy sentiments.

Another option is to implement worldwide tax sourcing under a global economic agreement. Under this model, the merchant would look to recover GST from a customer in his or her country of origin.

But realistically, any moves towards a global currency are years away, King concedes. "Maybe they should just have lowered sales tax," he quipped.

So what expectations are realistic for the channel? King believes the GST has the potential to retard the distribution business as each link in the manufacturing and service chain accounts for GST costs.

"It will put more of an imposition on time," he said, while the cost to companies of collecting the GST will be "real".

For all the Government's promises of cutting the red tape, he believes small businesses will be hit hard by administration worries. "What the Government has done in one fell swoop is double administration time," he said.

Andrew Cheung, joint managing director at Web developer xIBA agrees.

"The GST is just an extra thing people will have to worry about on top of making money. It's annoying administration. Accountants will have a field day," he said.

However, according to Ernst & Young's GST study, comprehension of the GST remains sketchy in many Australian companies.

Only 14 per cent of companies are confident they have a complete understanding of how the GST will operate, while retailers are the best informed with 35 per cent claiming a complete understanding.

Clearly, the Government's recently announced education campaign on the GST will not be easy.

King remains philosophical about the exercise and its potential outcomes. The only way to change attitudes about tax is to make it fair, he said.

"When tax is percieved to be reasonable people will [more willingly] pay."

How does the GST work?

The Goods and Services Tax is applied to almost every stage of the production and distribution chain. Registered suppliers of goods and services are entitled to claim an input tax credit from the Australian Taxation Office (ATO) for GST paid on purchases. This is offset against the GST collected from customers. A company's GST liability is calculated by totalling the GST collected from outputs, or customer sales, less the GST paid on inputs, or goods and services purchased by the company.

When a company's output tax exceeds the input tax, payment of the excess output tax is sent to the ATO with a monthly or quarterly return. Monthly returns are required for businesses with annual sales over $20 million. When the input tax exceeds the output tax, the registered business will receive a refund from the ATO.

Source: Deloitte Touche Tohmatsu

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