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Business struggles with GST compliance

Business struggles with GST compliance

Last week IT analyst GartnerGroup revealed Australian businesses will not only struggle to become GST compliant by the 1st of July 2000 but are still uncertain as to what the new tax system means to their businesses.

The lack of detail so far determined in the legislation, the GST's complexity and the Federal Government's negligence in educating the Australian community, has resulted in companies floundering in uncertainty, a dangerous state of affairs with only nine months to go to the GST's inception.

Bruce McCabe, research director, GartnerGroup Asia Pacific, expects the changeover to cost Australian busi-nesses $500 million in the first year through incorrect input and output calculations, lack of staff training and non-compliant systems.

"Two thirds of large enterprises hadn't done anything by July 1999 and if you hadn't started by then you ain't going to make it," prophesied McCabe. In July this year 95 per cent of Australian businesses were only 2-3 weeks into a compliance process Gartner estimated would take between 38 and 59 weeks.

Although not predicting the collapse of those businesses, McCabe guarantees they will experience problems that have the potential to get out of control. "They won't be able to collect their inputs or charge correctly on outputs. They will lose money." And once the first monthly remittance deadline is missed McCabe warns the work will pile up exponentially.

Businesses who initially thought it would simply be a matter of upgrading their accounting systems or switching on an existing GST module are finding their GST compliance projects ballooning out of control, if they have even started them at all. Overall, Gartner is estimating GST compliance will cost Australian business $2.6 billion.

A survey of 18 medium-to-large enterprises placed the mean estimated cost of becoming GST compliant at $8.7 million. One trouble area is expected to be telecommunications, which will be exposed on a number of issues but will simply throw a lot of money at the problem.

"Telstra will spend between $60 and $100 million on becoming GST compliant," said McCabe. The retail industry is also very vulnerable and is affected by seasonal issues as well. "Retailers don't want to do anything about this just yet because Christmas is their peak trading time," said McCabe.

However, GartnerGroup surveys identified retail as one of the few sectors that had begun preparation early. Small businesses will have little trouble with deadlines but the percentage of their income they need to spend becoming compliant represents a much more significant cost than it will for large enterprises.

The millennium bug is an additional complication, according to McCabe, with businesses already spending $12 billion on Y2K compliance. "It is definitely unfortunate timing but the deadline won't be moved back," said McCabe. "Y2K staff can't be thrown at GST either. Y2K skills deal mostly with data fields while GST requires financial skills and a good understanding of the tax," explained McCabe.

The number of exemptions in Australia's proposed GST is also causing a lot of organisations grief.

The bottom line is that a lot of companies are in crisis mode, with one Queensland university insisting "there was no way in hell they were going to be ready by July 1". Instead they have to minimise their financial exposure and prioritise, said McCabe.

The good news is that McCabe expects the Government to be lenient in general in the first year of operations. However, businesses need to be aware that the Australian Taxation Office will attempt to be stringent about businesses passing on the tax to the consumers. "You will need to demonstrate how you calculated your price and profit margins before and after GST," said McCabe.

He also recommends that businesses unhappy, or uncertain, of their positions under the new tax system should lobby the Government. "The legislation is incomplete, it lacks a lot of detail. So for the next 12 months lobbying is a valuable approach."

And for the IT sector the GST represents a lot of opportunity. Businesses of all sizes will need to automate the entire tax process. For example, a retail chain will need a database connected to its point-of-sale equipment that identifies which goods are GST-free, food and medicine, and which goods are taxed.

And of course the sheer size of the compliance operations means that a lot of IT skills will be in demand, most obviously the combination of financial and software knowledge.

Yet compliancy is relatively useless without an understanding of GST, a comprehension McCabe has found lacking.

"GST is a consumer tax. Enterprises don't pay GST. Instead they become the tax collectors, paying GST on purchases but claiming it back," he said. McCabe envisages some companies experiencing short-term cash flow problems, but no long-term detrimental effects under the GST.

And people need to be aware that the GST is only one aspect of the entire new tax system. Payroll tax changes are obvious. Excise duties, new depreciation rules, new PAYE tax rates and changes to the Capital Gains Tax laws are all scheduled to come into effect on July 1 2000.

In terms of the ramifications it will have on the IT industry in particular, McCabe outlined changes to taxes on hardware, software and services. The previous 22 per cent tax on hardware will be abolished, replaced by a 10 per cent GST. Software and services, which have never been taxed before, will also have the 10 per cent GST applied to them. However, the situation in real terms is not as simple.

"Enterprises can claim the 10 per cent tax back so basically it means hardware goes from 22 per cent to zero, software from zero to zero and services from zero to zero, except if you are a bank," said McCabe. Financial services will be input taxed instead, said McCabe, meaning projects banks had previously outsourced could be more viable if brought in house.

Consequently, McCabe is predicting most businesses, but more significantly consumers who bear the brunt of the tax, to delay purchasing hardware. Input taxed organisations and consumers will accelerate software and services buying patterns. "It would be mad for businesses if they don't delay hardware spending, although not by nine months," said McCabe, who expects the transition period from April to September next year to be a reversal of the usual trends. "Plan for market volatility," warned McCabe. "Instead of a June peak in demand it will run down into a trough."

McCabe was pessimistic in his assessment of companies understanding this scenario, stating that "no supp-lier will get this right". Instead vendors will either end up with a lot of inven-tory or there will be substantial delays in receiving products.

Yet merely concentrating on the changeover period is a mistake many organisations are making, with the effects of the new tax system already being felt. "Leasing is a bit of a trap and people need to be careful going into any long-term contracts because they will be based on wholesale tax. But when GST is implemented they will need to pay that," said McCabe, who warned that companies forgetful of this fact would have to pay the GST out of their own bottom line. ISPs are one example of an industry that will need to pay close attention to the GST now.

GST checklist

Make sure you include all business departments in compliance operations, not just the IT and accounting units.

Obtain commitments from packaged software suppliers about upgrade availability dates.

Don't ignore the business side of GST compliance. Train, train, train because a lot of the changes will be business-flow oriented rather than technological.

Coordinate with members within your industry to present a uniform front to the Government and lobby for changes (remember a lot of the detail has yet to be finalised).

Leverage New Zealand and Canadian GST experience.

Start your GST projects NOW!


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