GST (Goods and Services Tax) and Australian Small Business

        Opinion by Michael Paine.  June 1999. Updated April 2001.

        I have been publicly opposed to the GST since the disastrous Fightback package launched by the Liberal/National parties (then in Opposition) in the early 1990s. It was shortly after I had established my engineering consultancy and became aware of the burden of paperwork on small businesses. See my letter to Engineers Australia.

        The media attention has focused on the effects of a GST on the shopping trolley.
        Now, as many small businesses look at the administrative burden associated with a GST, the alarm bells are ringing:

        • 23 Aug 01: With the global economy sinking, Australian small business has probably never been in worse shape to weather a recession. The tax safety valve has gone!
        • 9 Jul 01 SMH: GST blamed for bankruptcy boom. A 78.5 per cent surge in business bankruptcies in the June quarter was a result of the GST's impact on small business owners and sole traders...
        • 7 May 01 SMH: Black economy out of control because people feel cheated

          •   by GST.
        • 23 Apr 01 SMH: Keep it simple: ditch the GST.
        • 26 Feb 01 SMH: Minister admits BAS has ruined small businesses.
        • 6 Feb 01 ABC: Beazley reveals Labor's GST rollback plan.
        • 6 Feb 01 SMH: Backdown on BAS...
        • 30 Jan 01 SMH: GST pushes struggling businesses to the wall.

        A extra 'tax' to keep track of
        (April 2000)

        The 'Guide to Pay as You Go for business' booklet has a few surprises. See page 29 about 'Witholding'. In effect if you make a payment to another business that doesn't quote an Australian Business Number then you must withold 48% of the amount and forward it to the Tax Office with your next return.
        As far as I can tell this means that businesses must have an accounting system that is able to separately identify witheld amounts.
        With confusion over the first few months (years?) it is inevitable that many businesses will be obliged to withold amounts. It is also likely that cases will occur where a debtor witholds payment from a business due to a misunderstanding over the ABN. In other words, be prepared to deal with invoice payments to your company that have an amount witheld so you can claim the amount in your next 'Business Activity Statement'.
        (May 2000)
        On the subject of the dreaded  'business activity statement' , be warned that it doesn't seem to provide for:

        • The pre-GST component of 'acquisitions'. That is,  purchases ('acquistions' in the new confusing tax speak) made before 1 July 2000 that include GST for 'services' provided after that date - such as membership subscriptions.
        • Due to the inevitable mix-ups over ABNs, a valued client inadvertently deducts the 48% witholding tax from payment for one of your invoices. Such deductions need to be claimed as a credit - somehow!


        In many ways this monster appears to be more difficult to complete than the old annual tax return and yet it has to be done 4 times a year. And the times all align with school holidays making it even harder for small businesses to take a break.


        Who's going to pay for my tax collection services?

        I intend to keep track of the time I spend 'collecting' small amounts of tax for the government. It is very tempting to invoice the Tax Office for this time, at my professional rate. Not much hope of being paid but it would be satisfying to wipe the Tax Office off as a bad debtor each year! On the other hand, writing off bad debts will probably make GST calculations very messy - more unnecessary work for small businesses.

        While I'm at it, I should check with an accountant whether all payments to the Tax Office should have an amount of 48% witheld since they don't appear to be quoting an Australian Business Number!


        Sixty Minutes' Paul Lyneham had this dig at the GST, with a little research help from me.

        The Economic Safety Valve is gone

        On 2 June 1999 the Treasurer, Peter Costello was gloating (justifiably) that Australia had one of the highest economic growth rates amongst developed nations.

        Over the past 20 years Australia has moved towards a service and skills based economy. Taxation of this sector has been profit based - a company only pays high taxes if it is doing well. I consider that this has been a major factor in Australia's ability to weather the Asian economic crisis - Australian small business is resilient and can take the knocks because the taxation system provides a safety valve. The Australian economy comprises an extraordinarily high number of small businesses. This is partly due to the nature of the taxation system which has, in effect, encouraged the formation of small companies.

        The fundamental change with a GST is that the service (and associated skills) are taxed. This will make Australian small businesses much more vulnerable to global economic downturns.

        Yes, there are loopholes in the current system that allow large companies to get away with paying little tax but it a naive to think that a GST will fix this problem. In fact, there will be greater incentive for "cash payment" jobs. There are many commendable features of the government's tax package but a GST is not one of them!

        Tax on Skills

        Published in Engineers Australia, 27 November 1992 (when a 15% GST was proposed)

        Dear Sir,
        I  am puzzled why engineers and other professionals have not shown some concern about the Goods and Services Tax proposed in the "Fightback" package. By definition, this is a tax on skills - the greater the charge for a service the higher the tax paid, irrespective of expenses and overheads necessary to provide that service.
        The example calculations I have seen so far assume that 15% is simply added to the invoice and therefore the client will  pay for all of the GST. The reality in these harsh economic times is that clients will not tolerate the full 15% increase and I believe that professional fees will be forced down.
        For a small consulting business the administrative burden will also increase. At present I must prepare an annual company tax return and a monthly PAYE tax instalment. Under a GST  I  will need to account for 15% of every invoice that I issue. In addition, with any purchases I make for resale I will need to keep track of both the GST paid to  purchase the item and the GST collected on sale of the item (my current purchases for resale do  not usually involve sales tax exemptions so I am spared the paperwork at  present).
        I am  concerned that many small consulting businesses such as mine will not survive the transition to a GST. It is a little like elective surgery which has become life-threatening due to the current state of health of the patient!
        To allay (or confirm) these concerns, perhaps Engineers Australia could undertake an analysis of the effects of a GST on various fields of the engineering profession.

        Yours faithfully

        Michael Paine  MIEAust

        Note: The Liberal Shadow Minister at the time , Peter Reith, responded by talking about the whole picture and, in essence "trust us"!


        The Editor
        Manly Daily

        5 November 1998
         

        The GST - a delight for small business!?

        To get an idea of how a GST might affect a small business, such as a plumber, here is the sequence of events in the collection of this insidious tax:
         
        • Wholesaler sells tap to retailer for $10 plus GST of $1.
        • Sends $1 to government (albeit as part of a quarterly GST return).
        • Retailer sells tap for $20 plus $2 GST. Calculates the difference between GST collected ($2) and GST paid ($1) and sends $2-$1=$1 off to the government.
        • Plumber installs tap for client. Invoices client for labour $30 plus tap $20 ("cost price" excluding the GST paid to the retailer) = $50 total plus GST $5. Calculates difference between GST collected ($5) and GST paid ($2) and sends $5-$2=$3 to government.
        • Government receives $1 + $1 + 3$ = $5 for the series of transactions, kindly collected by three unpaid tax collectors.
        And this sequence doesn't include mining the ore, producing the brass, manufacturing the tap   etc. - in each step a little bit of tax is collected for "value added". I think that struggling small businesses could do without this burden!
        Regards

        Michael Paine


        The Editor
        Manly Daily

        13 November 1998

        The GST & small business

        Thank you for publishing my letter about the effects of GST on small business (MD 12/11/98). I anticipate you will probably receive some responses pointing out that sales tax already applies to many products in the building trade. My response to that it that sales tax only applies to one transaction in the chain of transactions leading to the consumer. A GST applies to every step in the chain so instead of one business having the burden of collecting the tax everyone involved will be required to do the paperwork. Also I point out that the owner of virtually any business which currently deals with goods that are subject to sales tax would have  established that business in full knowledge  of the paperwork and overheads associated with the collection of sales tax. Many of the small businesses which will now be subject to a GST are having similar paperwork and overheads forced on them for the first time.
        Promised reductions in business tax rates won't compensate for the reduction in productivity resulting from owners and employees doing yet more paperwork for the government. (Note that the proposed Pay-As-You-Go system, which replaces PAYE, PPS and company tax could be implemented without a GST so it should not be considered as compensation for extra GST paperwork).
        I support review of the complicated tax system in Australia. However, the GST just seems to be taking the worse elements of those systems and inflicting them every business.
        Note: this is not intended as a further letter to the editor but as a follow-up in case there is an "official"  response to my original letter. What stirred me to write in the first place was a circular from my accountant outlining the proposed GST implementation timetable. Accountants seem to be the only winners!

        Regards

        Michael Paine

        Links

        • Tax Reform Ltd - some alternatives
        • Democrats - March 1999 (prior to deal with government)
        • Labor - GST Quick Facts.
        • Official government site: The New Tax System. including the paperwork! (Checklist) and, just to prove how simple it is, a list of some 160 government publications related to GST.
        • NSW Government small business advice. The businesses expect to rely heavily on their software providers to ensure the upgrades comply with the GST legislation...Businesses which do not currently have effective accounting systems (!) in place would be expected to incur additional costs in this area.
        • Yahoo links and debate.

         
         

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        Compiled by Michael Paine 3  June 1999