Australia gets set to carry GST burden

Whatever your opinion on the merits of the GST, the time has come to change all your systems to implement the new regime.

Whatever your opinion on the merits of the GST, the time has come to change all your systems to implement the new regime.

Almost every financial planner is going to have to deal with the Goods and Services Tax (GST) in the next year.

Most will have to start making preparations for the tax within the next couple of months.

That’s how close the planning for the tax really is. After all, it is only nine months away from implementation.

The most immediate problem is that the government hasn’t quite set up the rules as to how the financial services industry will tackle the GST.

In the beginning, the Government made some sweeping statements such as banks can’t charge GST on fees, but financial planners will for advice. Then people started warning Canberra the abnormalities that would exist under the original proposals.

The Government’s response was to release a discussion paper and from that it will then decide the final set of rules for the financial services industry. But this should not be treated as a delay tactic.

As a business, planners will have to register for GST in November if turnover is above $50,000 a year. On completion of registration, the company will be given an Australian Business Number (ABN) to replace the existing ACN numbering system.

Getting an ABN should be a simple process if the business is already a company. The tax office has said it will be scrutinising operations that have a trust structure or any business where the employee leaves one day and immediately starts working as a consultant as a move to avoid PAYE.

There will be a culling session, as the tax office will be using the move to return everybody that should be in the PAYE system back in the fold.

Every business will have a new registration number. This means all stationery will need to be reprinted with the new number. The tax office has deemed invoices will have to be laid out in a standard layout. The tax invoice must have the total cost of the goods or services and then the 10 per cent GST as a separate item. Finally there must be a total price including the GST. Again, this means invoices will have to be reprinted.

There is another catch. Unless the forms meet the tax office requirements, and carry an ABN number, an organisation will not be able to charge or claim GST. If a company is not registered for GST, tax on the business will be charged at 48 per cent.

Another way the GST affects the general side of business is accounting programs. No Australian accounting program can handle GST yet, so this will be an upgrade for larger software packages and probably outright replacement for planners using accounting packages on their desktop systems. The cost of upgrades and replacements will be able to be offset against tax.

The impact of GST on the planner’s principal business of giving advice is even more complicated.

The government’s consultative document on the GST and the financial services focuses on the definition of financial supply and its relationship to Reduced Input Tax Credit (RITC).

According to a KPMG briefing document on the GST, Government has proposed a narrow-focused list of financial supplies to be input-taxed. Those input-taxed supplies are to be limited mainly to margin-related products, such as interest-earning or incurring products.

The government is proposing to limit the RITC to those services that are capable of being outsourced and are perceived to be central to the delivery of financial supplies.

“A major implication of the proposed approach is that a much-greater number of supplies purchased from and sold by financial institutions will be taxable. Systems will therefore have to focus on generating taxable amounts, invoices and claiming back Input Tax Credits (ITCs) or RITCs,” says KPMG.

The consultative document makes a major GST distinction between principals and agents.

Where financial supplies are provided by the principal they will be input-taxed while services provided by agents will usually be taxable. An RITC may be available for those taxable services if they are acquired as an input in making an input-taxed financial supply.

“This approach will allow the Government to remove the arranging provisions from the input- taxed financial supplies definition,” KPMG says.

Planners will be charged GST for a number of services they now receive from product suppliers such as fund managers. These inputs can be offset against the tax they charge clients for advice, as can the GST on everyday business items like office equipment and expenses.

Fund managers will be charging GST on management fees, trustee fees, single responsible entity fees and financial planning fees or commissions. Investment portfolio administration charges will also be taxable and this will include wrap account and master discretionary trust services.

GST will also apply to the purchase of units in a unit trust and the commissions will also attract a 10 per cent tax. Planners buying and selling equities for clients will be taxed and various custody services are regarded as taxable supplies.

The treatment of risk products under the new GST regime is not clarified by the consultative document, KPMG says.

Premiums for investment and death cover will be input-taxed as will premiums for permanent disability. KPMG says the Government has not clarified whether death cover is intended to include endowment and accidental death policies.

Other risk cover — disability income, accident and trauma — sold with such policies will be taxed unless these components fall below a de minimus threshold. If sold as stand-alone products they are likely to be taxable.

“The threshold amount will be important as it may determine whether a life insurance company is required to unbundle its insurance premiums because of differing GST treatment,” KPMG says.

For planners, GST is going to mean considerably more record-keeping of their transactions to enable them to both charge and claim GST.

It would seem from the Government’s consultative document, most of the GST inputs from fees will be able to be offset against the GST charged on giving advice and for transacting services like buying equities.

Perhaps the major change for planners is they have become tax collectors. To create the systems to satisfy the Government that they are doing it well will be expensive.

While there are no figures on how much it will cost the financial services industry to administer GST, a clue comes from the manufacturing industry which estimates that GST will cost about 5 per cent of turnover to administer.

For the government, GST will mean more taxes with less cost in collecting them. Perhaps a clue for this comes from the GST legislation. According to the government, administering GST will cost $35 million in the year 2000-1. The increased tax from better business compliance is hoped to raise $800 million in 2000-01, $1.43 billion in 2001-02 and $1.35 billion in 2002-03.

You can now see why the Government has been so keen to introduce GST.