Monash Magazine

Here comes the GST

July is crunch time for Australian business when the controversial goods and services tax comes into effect. As Sandra Bucovaz reports, opinion is divided on its likely impact -- and success.

Small businesses and retailers -- the backbone of Australia's economy -- are facing the biggest litmus test to their ongoing viability with the pending implementation of the controversial goods and services tax (GST) on 1 July.

The cold reality is that these enterprises either will be able to cope with the added burdens of compliance and administering the highly complex system -- which for some means coming to terms with new technology for the first time -- or become a casualty.

"The evidence suggests that business failures tended to increase in the year or two after GST was introduced."

It is the smaller operators who are being pushed to their limits to become GST-savvy. In relative terms, their costs are much higher than those of their larger competitors who have a bigger slice of the market to absorb the added expenses, and also the resources to employ specialist accounting and information technology staff.

A survey by Ernst and Young estimated that it could cost some small businesses up to $20,000 each to implement the GST and that they would need to devote between 173 hours and 740 hours of work to meet the 1 July deadline.

At the same time, the landscape keeps changing, with hundreds of amendments to the GST legislation so far. Other factors adding to a general uneasiness and anti-GST sentiment include exposure of loopholes and grey areas, the question of exemptions and the risk of price exploitation, and suggestions of a rollback by the federal Opposition -- all with only a matter of weeks until implementation.

Professor Claudio Romano is confident family businesses will rise to the GST challenge.

Despite this, Professor Claudio Romano, foundation director of the AXA Australia Family Business Research Unit at Monash, is confident that family enterprises, which account for the majority of small businesses and retailers in Australia, will rise to the challenge.

Representing an estimated $1.2 trillion in terms of wealth in Australia, "family enterprises are willing to embrace any sort of change related to business," he said. "They are very big on innovation and change. That is one of the reasons they are so successful."

The Pitcher Partners Family Business Index, conducted with Professor Romano's research unit and focusing on family businesses with turnovers of between $1 million and more than $100 million, has found that while respondents have been generally sceptical about the GST, they are forging ahead with the necessary preparations.

The number of businesses who claim they are 'fully prepared' for the GST is rising -- but so too is the number who believe the GST will not be good for business and will create more paperwork. Many also believe the GST will fail to lower selling prices or cut business costs.

Professor Romano noted that there was still an enormous amount of ignorance in the marketplace but believed that once the GST was better understood, enterprises would probably agree that it would be good for business."But that could take 12 months to two years," he said.

The GST is part of a major overhaul of the Australian tax system under the Ralph Reforms, which are considered to represent the most fundamental changes since the 1930s.

It is a broad-based consumption tax of up to 10 per cent on most goods and services and replaces the wholesale sales tax system. The current system is administered by about 75,000 businesses, whereas an estimated 1.8 million businesses will be caught in the web of collecting GST on behalf of the government.

Professor Alan Treadgold: opinion is divided on the GST's impact.

Dr Alan Treadgold, executive director of the Australian Centre for Retail Studies at Monash, believes that the widely held view is that the GST and tax reform are necessary.

"The equally held view is that compliance is very complicated and the time frame is far too short," he said.

He also noted that based on the post-GST experiences in Canada and New Zealand, a percentage of smaller operators were expected to fail after GST implementation.

Additional burden

"The evidence suggests that business failures tended to increase in the year or two after a GST was introduced," Dr Treadgold said. "These operators were not so much forced out by the cost of implementation but by the additional burden on the business once the GST was introduced. However, the big question was whether or not these businesses were viable beforehand."

According to Mr Roger Sayers, GST national project manager for the Australian Retailers' Association, cash flow was going to become even more important. It would be essential for businesses to have systems in place to be able to track their input tax credits to minimise the impact on their cash flow.

"Everyone agrees the tax system needed to be changed. We would have liked the New Zealand model with 10 per cent on everything. However, the GST we have in Australia has a degree of complexity because of the price exemptions necessary for it to be passed in both Houses of Parliament," Mr Sayers added.

Professor Peter Dixon, director of the Centre of Policy Studies at Monash that was commissioned by the Senate Committee to do economic modelling on the GST, said the overwhelming evidence was against GST.

"In Australia, we already have quite a comprehensive consumer tax -- the wholesale sales tax," Professor Dixon said. "There are a lot of ridiculous anomalies but they can be fixed." His modelling showed there was not a strong case for change, he said, plus the GST would reduce economic welfare.

For details of research and study programs offered by the Australian Centre for Retail Studies, call +61 3 9903 2455.