GST – Have you got it Sorted?
Well it’s the 10th of September and there’s 20 days (make that 15 business days) till GST increases to 15%. The purpose of this communication is to ensure that your business is prepared & has a plan for the GST cut over on 1st of October.
Pricing
Probably the easiest illustration of the dilemma of pricing is your local coffee shop. A $4 cup of coffee becomes $4.09. Naturally that won’t work. So businesses need to decide if where they will move their pricing, they may decide to absorb the increase. There is a word of warning with this strategy; absorbing 2.5% at the top line can seriously affect your bottom line.
Let’s take an example, I have assumed GST net sales of $500,000 and the business owner decides to absorb the GST increase and I have taken the liberty of assuming that there will be a relatively small increase in overheads due to ETS, ACC, rates, insurance etc. From the numbers below you can see that 2.5% absorbed at the top line with a relatively modest increase in overheads creates a decrease in profits of 15.87% at the bottom line.
| 12.5% GST | 15% GST | |
| Sales (GST inclusive) | 562,500 | 562,500 |
| Sales (Nett of GST) | 500,000 | 489,130 |
| Cost of Sales | 250,000 | 250,000 |
| Gross Margin | 250,000 | 239,130 |
| Overheads | 150,000 | 155,000 |
| Nett | 100,000 | 84,130 |
What to do? As business owners we need to consider the effect of the GST increase in relation to pricing. For business to business transactions this is less of an issue as the increase can be passed on and claimed as a GST input in the purchasing entity. For retailers and organisations with sales to non GST registered entities pricing needs to be given careful thought.
To an extent there is some conditioning that clients will expect price increases due to the GST increase. You may have some products where the price point does not work to increase the price and others that it does, so it may be a case of altering pricing between products.
Past experience tells us that there may be a surge in demand (particularly for large ticket items) pre 30th September and a drop in retail activity after this date.
Communication
Your organisation will need to review standard terms and conditions, contracts, price lists, advertising material, web sites etc to consider how and who you need to communicate any price increases.
If your prices are going to move on 1st October and you are in retail then you will need to plan for a relabeling of prices on all affected stock.
It may be beneficial in a retail environment to provide staff with training on what to say if there are complaints about price increases.
Systems
If you have a computerised system for producing invoices, quotes, credit notes etc I strongly recommend that you test key transactions before the 30th September so that you are confident that your computer system / point of sale system is geared up to handle the changes.
Your staff may also need to be trained to ensure that say credit notes are issued with the correct rate. For example a credit note should be at 12.5% if the invoice was originally created before then end of Sep 30th.
Timing
GST is triggered by the earlier of issue of an invoice or receipt of payment. Therefore an invoice issued after 30th September must have GST @ 15% even if the goods / service was provided before 1st October.
There is an allowance over this cut over period to allow 11 days after the 30th of September to issue invoices (that is send them out the door) @ the 12.5% rate.
If your organization typically struggles with the invoicing process in a timely manner I would recommend closing off early to ensure that the invoices are issued promptly. If you find that invoicing in a timely manner is an issue then I suggest that you contact me to review how we can make systems and process changes to sharpen and shorten the process.
GST over the transition period
Where clients use Payments Basis for preparing their GST returns it is important that you prepare a list of clients who owe your company money and suppliers that your company owes money to at 30th September 2010, as this will form a basis of an adjustment over the transition period.
Those clients preparing GST Returns on an Invoice Basis will need to have the ability to cope with 12.5% and 15% GST simultaneously. For example purchases @ 12.5% may be claimed after the rate increase, along with other purchases that are subject to 15%.
What to do?
The key message is that your organization needs to have a plan for this change in terms of pricing and the mechanics of implementing the new GST rate.
There may be issues relating to this change that are specific to your business or industry. If you need any assistance with these changes then please feel free to contact me directly
