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Kevin’s BAS break – cutting the small business red tape tangle

Cutting the red tape tangle for small business

In an effort to appeal to the small business sector Prime Minister Kevin Rudd today announced that if he is re-elected he would move to cut the red tape associated with GST reporting for small businesses. Under this proposal any business with an annual turnover of $20 million or less would only have to file their Business Activity Statements (BAS) once a year. This change would commence from 1 July 2014.

Business Activity Statements the current state of play

The BAS is a reporting system lodged to the Australian Taxation Office (ATO) by businesses of all sizes. Encompassed in the statement is a record of the firm’s income and the amount of GST (Goods and Services Tax) collected and paid, plus any other tax related activities during the period under review. This can include PAYG withholding tax for employees as well as any GST-free sales, capital purchases and non-capital purchases, fringe benefits tax (FBT), luxury car tax, wine equalisation tax and fuel tax credits.

The BAS process essentially involves a self-assessment by the business of their own indirect taxes (e.g. GST), and the payment and claim for GST payments made is a key part of its purpose. Currently the only firms that need to register for GST are those that have an annual turnover of $75,000 or more. This is $150,000 for non-profit organisations. However, taxi owners must register for GST regardless of their annual turnover.

Reporting for BAS can be undertaken on a monthly, quarterly or annual basis. According to the ATO most businesses choose to pay their GST quarterly. The statement offers several options for BAS lodgement depending on the firm’s annual turnover.

For businesses with annual turnovers of $20 million or more the frequency of GST reporting is monthly. This should also generally be done via the ATO’s online payment system.

For businesses that have annual turnovers of $20 million or less, the requirement is for GST to be calculated quarterly but reported annually. This effectively separates the GST reporting from the PAYG and other tax payments which can be done annually with the firm’s tax return.

In the case of small firms with $2 million or less in annual turnover there is the option of a quarterly GST payment. This is assessed by the ATO and varied by the business, with an annual report submitted of the actual GST collected or paid.

So how important is this proposed change?

Reducing the need to report to the tax office on a quarterly basis will be welcome by many small business owners as it will alleviate some of the time that must be spent on preparing and submitting the BAS. However, the overall need to continuously track GST collections and payments, plus the firm’s own PAYG company tax liabilities and any PAYG payments for employees will not disappear.

One of the most significant problems facing small business owners is their ability to manage cash flow. I have written about this in earlier articles in The Conversation. It is very important that small business owner-managers learn how to manage their cash flow. Failing to keep track of the timing of accounts payable and receivable often results in the business getting caught in an unpleasant cash flow crisis.

An often overlooked benefit of the GST, and the need for firms to regularly report it to the ATO, is that it enforces a discipline on the business owners to monitor their cash flow. Reporting and paying GST and other company or PAYG taxes on wages and salaries requires the small business owner to review their firm’s financial performance on a regular basis.

Modern accounting software packages make the BAS reporting process highly efficient and easy to manage. Even micro firms without employees other than the owner can manage these systems without undue time or complexity if they are appropriately configured.

The benefit of a quarterly BAS reporting cycle for small businesses is that they can track their profit and loss over the year, pay their GST, and receive any GST credits and make PAYG company and employee tax instalments as they go. For many this will continue to be a better option than leaving everything to the end of the financial year.

As a principle the idea that government can take steps to reduce the compliance costs or “red tape” burden on small businesses is a positive one. However, the discipline of making regular BAS reports and thereby helping to keep track of the cash flow and financial performance of the firm remains important.

According to the Australian Bureau of Statistics (ABS) in 2012 there were around 2.1 million businesses operating in Australia. Of these firms, only 6% had annual turnovers greater than $2 million. Even fewer firms would have more than $20 million in annual turnover thereby allowing the vast majority of businesses to opt out of regular BAS reporting.

By removing the requirement for all firms with annual turnovers of $20 million or less, the consequences could be interesting. First, the collection of GST revenues would potentially slow down if the majority of firms adopted this annual reporting cycle. Second, there is the risk of softening the financial reporting discipline of Australia’s small business sector with the potential for undesired consequences on cash flow management.

Note: Tim Mazzarol is President of the Small Enterprise Association of Australia and New Zealand (SEAANZ).

SEAANZ is a not-for-profit organisation founded in 1987. It is dedicated to the advancement of research, education, policy and practice in small to medium enterprises.

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11 Comments sorted by

  1. Garry Baker

    researcher

    Very good article Tim, it shows some insight into how small business operates - save for a presumption the corner store has a book keeping software package, and uses it.

    I for one, think its doubtful with a huge number of small operations. Rather, they simply hand a shoebox full of papers to a book keeper when the due date nears. Though a freedom to report every 12 months is a good one, insofar as it frees up time and energy for a small show - However, intuition tells me a quarterly BAS payment…

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    1. Garry Baker

      researcher

      In reply to Garry Baker

      Oh, one more thing that should have been added - especially since a few lazy thinking GST revisionists have reared their ugly heads in recent times.

      Small business is the very foundation of personal interaction, and if a GST hike begins to hurt - Guess where the cash economy really kicks in. Numerically, the so-called tax cheats multiply rapidly - aided and abetted by the public. Ergo, a nation of tax cheats is bred because of non thinking top-down policies.

      Say reflecting Italy or Greece, where payments to the government are optional.

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    2. Chris Harper

      Engineer

      In reply to Garry Baker

      I don't think there are many shoebox accounting systems left. Accounting packages are so cheap, and so ubiquitous these days that we can assume that pretty much every business large enough to be GSTable uses them.

      Preparing the GST form is about 5 minutes work, and I don't see this change as contributing much to anyone.

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    3. wilma western

      logged in via email @bigpond.com

      In reply to Chris Harper

      Glad to see an examination of policy relating to implementation and consequences rather than facile guesses about political popularity.

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  2. Gerard Dean

    Managing Director

    Tim

    Another good read that prompts my agreement about the advantages of a quarterly BAS reporting.

    One interesting point about BAS statement frequency concerns exporters. Our company exports over 95% of production therefore we do not receive GST payments,hence our preference for frequent BAS statements so that the GST we pay on supplies is refunded.

    The drawback is that the ATO's red light flashes when our statement is submitted. If the BAS statement was annualised, we would be fully audited by the ATO every year - not a bad thing, but it does take time away from running the business.

    Annual BAS statements will increase the 'shoebox' method of accounting and reduce compliance among many small businesses. From this small business owner's point of view, quarterly reports are the way to go.

    Gerard Dean

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  3. Peter Hewson

    Citizen

    I have a friend who works in the debt collection area of the ATO. She ranted and raved when she heard of this proposal as she sees all those small businesses (and sole traders) who cannot pay their quarterly BAS, let alone retain enough cash to pay at years end.

    Wither the 23yo brickie and his love for new motorcycles but who has a wad of cash in the bank.

    She put it this way: imagine you or as I salary earners receiving our pay fortnightly but paying all our expenses at the end of the year…

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    1. Tim Mazzarol

      Winthrop Professor, Entrepreneurship, Innovation, Marketing and Strategy at University of Western Australia

      In reply to Peter Hewson

      Hi Peter

      Thank you for this interesting post. I agree that there is a very real risk that some small business owners will not have the required discipline to keep sufficient cash at bank to pay their GST and PAYG liabilities.

      Whatever "red tape" compliance time that is saved in the short term is likely to come back to bite them in the longer term.

      This is why small business policy development should be based on a good understanding of the way the sector operates and not something done on the run to grab a few headlines.

      Best wishes.

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  4. Marie O'Dea

    logged in via Facebook

    The advantages of quarterly reporting as outlined by various comments far outweigh supposed disadvantages. Introduction of GST in agriculture was great for sorting out shoeboxes and people making decisions about their future - for some it was a good time to go. As farmers with sporadic pay checks we are keen to get our dollars back.
    As for brilliant red tape reduction ideas. I am still dirty on John Howard for his reduction in red tape that wiped out annual ag census and immediately saved 120 000 hours of small business time, but lost a great resource.

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  5. Eric Meijer

    logged in via Facebook

    Pandering to the small business vote, in practice a disaster. A retail microbusiness can easily reach $1 million in turnover in a year. That means collecting $100,000 GST from sales and claiming back whatever GST was paid in stock and costs. Most very small business would be in perpetual arrears.

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    1. Chris Hannon
      Chris Hannon is a Friend of The Conversation.

      logged in via email @gmail.com

      In reply to Eric Meijer

      Quarterly GST reporting certainly imposes some much needed discipline on small business but on the other hand Howard recruited 2 million businesses to collect and forward a tax to the government at great cost to small business without the slightest compensation. Our bookkeeping and accounting fees tripled with the introduction of the GST and to this day I marvel at the way small business rolled over and accepted this cost without complaint. Yearly GST could = unemployed accountants? lol

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  6. Peter Redshaw

    Retired

    Tim, I have to agree. I generally support most of labor's policies on say the NBN, health and education etc. But this one has some risk for small businesses attached to it. As it is one of the things that gets most small businesses into trouble is cash flow to pay not only their bills but also their tax liability. For that reason I have questions over this policy because even though the money may be handy at the time leaving it a full year to do their GST statement has the potential to catch…

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