Marnie King ~ gst clinic
Those in the channel expecting a sales boost as a result of the new tax system should keep an eye out for hidden pitfallsWhile the computer industry is busy trying to profit from the introduction of the GST, it should be aware of the sting in its tail.
The introduction of a GST in New Zealand was the death knell for many computer resellers in that country. It will certainly level the playing field between those resellers in this country avoiding their sales tax obligations and those that are not. Organisations that have only been competitive on the basis of unfair sales tax practices will need to re-engineer their marketing approach or go out of business.
Those resellers holding large stock inventories at the end of this financial year will be eligible for a cash flow boost. The value of sales tax contained in stock on hand at the end of June will be credited by the government to the owner.
However, this carries with it the first sting. Those that have understated their stock at the end of previous years face a dilemma. Should they bring that stock to account for the benefit of claiming the sales tax involved? If they don't they will forfeit the sales tax credit. If they do, the resulting profit previously understated will be brought to account fully in this financial year. Depending on the size of this adjustment it might also attract the unwanted attention of the Taxation Department.
All work in progress will need to be carefully valued to determine the amount of GST payable on work still to be completed. Take for example a $100,000 contract. Assume a deposit of $10,000 was paid and that the first progress payment of $50,000 is payable on completion of 50 per cent of the project. On the 30th of June, the actual work completed is 40 per cent. The first progress payment will be invoiced at $50,000 plus GST of $2000. The remaining monies of $40,000 will attract a total of $4000 GST.
A further area of concern is the correct handling of stock bought by a customer before the 30th June, which is still being held by the reseller. This stock would be subject to GST because the liability occurs at the point of delivery, not payment. Who then applies for the sales tax rebate, the reseller or the customer?
Resellers need to be mindful of all implications when entering contracts nearing the 30th June changeover. Both proposals and contracts need to clearly state that GST will be charged on all goods and services provided after 30th June. Resellers would do well to have these additional clauses reviewed by their solicitors.
Warranties are another area for consideration. If a warranty is part of a contract completed before 30th June, then no GST is payable on work done under the warranty post GST. However, if the warranty is covered by a separate agreement, such as through a third party, then that part of the contract covered by the period after July 1 will be subject to GST.
Resellers also need to be mindful of their current liability for GST. Where they are, for instance, entering into annual maintenance contracts, then such contracts are in part subject to GST. For example, where a contract is issued in January for $1200 for 12 months, $60 GST will be payable. This should be collected by the reseller and remitted to the Tax Department in the first quarter's return after GST is introduced. This means it would be remitted by 21st Oct this year.
Herein lies the biggest risk to smaller resellers. Unless they adopt strict cash flow procedures over GST inflows, they may well be caught short when it comes time to make the first payment on 21st October. Take for example, a reseller with an annual turnover of $1.2 million. Let us assume that the majority of their business is services and that only 40 per cent of their purchases attract GST. With collections prior to the GST, it is possible that they will be required to remit almost $20,000 at the end of the first quarter. Add to this their current quarterly tax instalments and the new pay-as-you-go income tax remittance and they could find themselves quickly in an insolvent position.
The stings of GST could be painful, but careful planning between now and GST implementation should see you clear into the new tax order.
Marnie King is international business development manager of Solomon Software.
Contact her on (02) 9498 5777, or email@example.com