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Fifteen Percent

by fatweb

By Kate Pierson

In New Zealand, Goods and Services Tax (GST) and the figure 12.5 percent have long gone hand in hand — but that’s all about to change.

The 2010 Budget announcement that GST will rise to 15 percent effective from October 1, confirmed the speculatory whispers preceding this legislative adjustment.

And, going by the influx of public protests and the flash of political claws in the democratic arena, this decision spells controversy. But the more pressing question on everyone’s lips is, will the GST rise affect small to medium businesses?

What’s the verdict?

If you are one of the approximately 450,000 small to medium enterprises (affectionately known as SMEs), that make up more than 97 percent of all business in New Zealand, the media spotlight is on you in the wake of this announcement. And, chances are, you’ll be wondering what the GST hike means for your business’ margins, revenue and livelihood.

It’s hard to gauge a definitive verdict on the pros and cons of the GST hike if you’re drawing your conclusions from the noisy media landscape. The resounding ‘woes, nos and what ifs?’ currently being voiced, are contradicted in turn by strong verbal support of this decision.

Financial specialists, such as NZ Institute of Chartered Accountants tax director Craig Macalister, support this new financial equation, maintaining that personal tax cuts, plus a GST hike, equals an improved tax system for New Zealand.

Yet a poll conducted by the Newmarket Business Association in May 2010, which was undertaken to gauge the opinions of key Auckland retailers on the GST rise, revealed 82 percent of the 400 respondents believed the timing of the government’s GST increase was “bad”.

And while the survey revealed retailers were not overly-anxious about the rise, given personal tax cuts will be occurring simultaneously, it also showed that 53 percent of retailers believe the GST increase will have a negative impact on their own customers’ spending and a subsequent impact on their business turnover.

Newmarket Business Association chief executive Cameron Brewer says, “Given the very challenging retail environment of the past two years, the timing of the GST increase is viewed by most retailers as poor. Retailers have been knocked around for many months and they view this as just another obstacle.”

Brewer adds that despite personal tax cuts offering financial compensation to consumers, 73 percent of businesses surveyed also believed the GST increase will cost their business money to comply, due to the necessary acquisition of computer systems and repricing and retagging merchandise.

According to Brewer, the causal inspired commercial domino affect will also rear its ugly head across New Zealand, as meeting the cost of these demands will see businesses buckle under the financial pressure.

“There’s been a theory circulating that retailers won’t put up their prices come October for fear of scaring off price-sensitive shoppers,” he states. “However, the reality is there is not much room left in most retailers’ margins to absorb the rise. Eighty-seven percent of retails told us they intend to put up their prices to reflect the GST increase.”

Green Party small business spokesperson, David Clendon agrees with this argument, as he engages his own business experiences in consideration of the potential impact. “I’ve owned a small business myself and am shocked that so little consideration has been given to the sector when making such a major decision as hiking up GST.

“What we need is a smart economy with smart taxes that ensures a fair go for everyone. Bumping up GST without hard analysis of the implications will only enlarge the divide between rich and poor. If the Government had spoken to business owners they would have realised how much disruption a decision like this can create for the industry.”

Clendon also believes the GST rise will have immediate and on-going implications for SMEs in the wake of the economic recession. “To cope with the GST rise, small businesses will need to prepare for inevitable fluctuations to demand and cash flow, major changes to their accounting system, a disjointed tax return and possibly an overhaul of all their products’ prices, which combined, is no small task.”

Brace for the impact

Employers and Manufacturers Association chief executive Alasdair Thompson says there is no point running from the inevitable and impending GST rise; therefore it is imperative for businesses to go through this transition well prepared.

“SMEs will be aware of the rise being implemented on October 1, 2010 and most will not be able to just absorb the impact of this. Therefore, businesses will have to consider what increases they may need to implement on existing stock, as well as what their policy will be for new goods that come in after this rise.”

Thompson also acknowledges that pressures placed on SMEs by retailers to reduce costs on goods they are supplying to them, will find some businesses losing margin if they fulfil these demands. “It does put them in a quandary because if they don’t reduce prices on request, they risk losing that retail contract to their competitors.”

Thompson says in the lead up to the October 1, legislation changes, businesses should consider three things in particular; position, best pricing and margin.

“It is very important for business to maintain their margins, because if they don’t, they might find themselves on the road to ruin.”

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