The real cost of a GST increase for small business

If the federal government follows through on its very public musings on raising the GST to 15 per cent and broadening its tax base every small business in Australia will be affected.

Of course, the Coalition will try to offset the impact of a rise in GST by offering reduction in personal income and company tax, but that won't stop the immediate impact it upon the vast majority of industries – even those seeking love.

"Whilst the 5 per cent increase might only seem like a small hike, if you take into account say moving office, the additional expense in rent, the increase in cost of utilities such as phone, internet, even outsourcing services such as marketing, advertising, hiring a venue, printing and designing, it all adds up," Samantha Jayne, founder of upmarket dating agency Blue Label Life, says.

"We offer a holistic service and have incredible experts in their field which we include in our packages such as photographers, stylists, nutritionists and various others, which would mean that our premium membership would cost us so much more to operate."

Jayne, who founded Blue Label Life back in 2005, and now turns over in excess of $1 million a year, says that finding the perfect match may come at a cost that's too high for some people.

"For a certain percentage of individuals there may be a deterrent who measure love in monetary terms, however, individuals who genuinely want to meet someone see the bigger picture," she says.

An additional $130 billion

A GST raise to 15 per cent could see the federal government raise an additional $130 billion in 2017-18 according to figures from the Parliamentary Budget Office and could go some way to ending funding disputes between the federal government and the states.

This is something the federal government is keen to emphasise.

"The government has been in discussions with state and territory governments around their tax bases, whether or not they have got their tax system right and whether it is doing what it is meant to do which is also about encouraging Australians to work, save, and invest more," the Minister for Small Business, Kelly O'Dwyer, says.

"Let's not forget the GST is a tax where the money goes directly to the states and the government is not looking to increase taxes and chase ever increasing spending."

Currently, Australia has one of the lowest consumption taxes in the world, and expanding the GST to cover food, health and education amongst all other goods and services currently exempt would mean 100 per cent of goods and services would be taxed, rather than the current rate of 47 per cent.

A critical decision

But the potential rise in GST presents many problems for small businesses in Australia.

"The extra 5 per cent GST would cause us to make a critical decision," says Rik Schnabel, owner of Life Beyond Limits. "Do we lift our rates and risk missing out on business or relinquish $50,000 plus from our profits before tax?"

Life Beyond Limits is a training company where accredited trainers of Neuro-Linguistic Programming and life coaching offer a range of courses and turns over in excess of $1 million a year.

"Our products are valued at around $2975," Schnabel says. "This means we would have to move into the critical $3000 plus mark or lose profits. It is a big decision."

Schnabel has an alternative solution to raising the GST.

"How about reducing the number of politicians in this over-governed country?"

Exporters and importers

And even exporting or importing goods will have an effect on local businesses.

"I run a yacht importing business specialising in luxury cruising catamarans worth between $500,000 and $3 million," Brent Vaughan, director of Multihull Central says. "These boats are all built overseas, as are most of this type, so some of our customers take delivery internationally to avoid paying duty and GST already."

Multihull Central turned over $16 million last financial year and expects that a rise in GST may have an impact not only on his business, but on local businesses as well.

"By increasing the GST this will provide a larger disincentive to take delivery in Australia, which means the local trades and support services in Australia don't get the value or pass on the multiplier effect of these purchases," Vaughan says.

"This is a shame, as the local businesses involved in the industry are family businesses and small businesses who could benefit from this activity."

Labor opposes any hike

With a federal election looming in 2016, the federal opposition have been quick to seize on the opportunity to attack the federal government increasing the tax burden on ordinary Australians.

"The Labor Party is opposed to raising the GST and it will be a massive hit to confidence and a massive hit to small businesses that need people in their businesses and spending," The shadow small business minister Michelle Rowland says.

"Labor is committed to working in a bipartisan way to reduce the amount of tax paid by small business.

"Labor also wants to make it easier for small business to incorporate. This will allow them to gain the legal protection of limited liability, promote asset protection, retain profits for working capital, succession planning and income distribution without having to deal with unnecessary red tape."

Added complexity

There are pro and cons to all businesses that pay GST as Ernst & Young indirect tax leader Brad Miller explains.

"Small businesses dealing in B2B may have the added complexity of contracts that lock in pricing, effectively preventing the passing on of a GST rate increase and potentially lowering real turnover as a result," Young says. "Adequate transitional provisions to protect such small businesses would be crucial.

"The impact of a 5 per cent GST rate increase on cash flow for small business is much more complex, since cash flow is a function of payment cycles on both inputs and outputs and is also a function of the overall impact on turnover.

"For small businesses dealing with B2C a GST rate increase should be broadly cash flow positive, provided they are actually in a position to increase the price by the full 5 per cent without losing sales."

Young also says small businesses with long payment cycles or poor billing practices could be disadvantaged but points out that there is also the added benefit of reducing the tax bill of those non-incorporated small businesses. Any reduction in the corporate tax rate will assist those small businesses operating as companies.

"Small businesses would need to have an even stronger than usual focus on cash flow management when dealing with a GST rate increase," he says.

Tips if GST does increase

1) Instead of raising invoices on the last day of the month, move them to the first day of the next month, which may delay the need to pay the GST included in those invoices to the ATO by a month.

2) Similarly, processing expense invoices into an accounts payable system earlier may allow the earlier recovery of GST included within those expenses, without necessarily paying creditors any earlier.

3) Outside of pro-actively managing the processing of invoices (both accounts payable and accounts receivable), small businesses should review their credit terms and in particular the days they allow before payment is due.

4) Small businesses should also consider introducing prompt payment discounts or incentives to encourage earlier payment by customers.