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.