As one countdown draws to a close, another begins. Beverley Head reports on the looming scramble for GST compliance Year 2000 remediation has been uppermost in the minds of the world's chief information officers for months, if not years.
Now, just as their international peers might be considering a short respite, Australian CIOs are having to return to the fray to ensure their corporate information systems can cope with the dawn of a goods and services tax -- the key plank in the government's tax reform proposals. The tax bill that is currently before the parliament recommends a goods and services tax of 10 per cent be levied against most goods and services traded in this country. The federal government would abolish a whole raft of other taxes -- including wholesale tax, while organisations would also be able to claim back input credits against any GST paid on goods and services used to perform their business. The tax is scheduled to come into force on July 1, 2000 -- now just one year away. And, although there remains much discussion and debate regarding the detail of the GST, it seems inconceivable that the government would abandon the core of its promised taxation reform. It might be tweaked -- but it seems unlikely to disappear; and business is now being challenged to plan for and develop information systems which will allow it to comply with the new tax, survive the transition period, and compete in the new business environment which will eventually emerge.
David Oliver, partner in transition taxes for PricewaterhouseCoopers (PWC) in Sydney, believes that there is little time to waste if companies are to plan wisely for the new regime. "At this point I think that Australian business has not started at all -- or is very slow in starting -- its planning," Oliver says. He adds that the firm's international experience shows that companies only start turning their minds to the problems associated with a new tax system when it looms very large. "The majority of business waits to the last three months, and then panics. A lot of business thinks that this is just a systems issue and therefore makes bad business decisions that will cost them money," Oliver warns. He also cautions that for many organisations the idea that they can wait until the legislation is actually passed is false, such is the enormity of the task ahead. Following so closely the Y2K crisis, the requirement for yet another systems rework will appear quite cruel timing to many CIOs. Cruel or not, it must be achieved by July 2000. Besides reworking information systems to permit compliance, chief information officers will need to revisit their supply contracts, explore their capital purchasing plans, and ensure the business has access to itemised accounts before the new regime kicks in to ensure it does not suffer financially because of poor planning.
Accounting firm Deloitte Touche Tohmatsu has warned all of its clients that they should have their GST implementation plans in place already if they want "hassle-free" transition to the new taxation regime. "We suggest there is an immediate need to consider an impact analysis of the GST on your business, including product pricing strategies, cash flow, business structuring, transition planning, systems and processes," Deloitte recommends. It also recommends that systems implementation starts now and is completed by December, and that staff training starts immediately and runs to June 2000. For some companies, though, this is simply not possible given the problems they are already facing with Y2K compliance. Paul Nelson, IT manager at Sydney-based shoe making company J Robins & Sons, says that the company has been busy with Y2K and probably won't get around to looking at GST planning until the end of the year. Initially he thought that simply activating the GST module in the British-written software packages the company uses might be enough -- but now acknowledges that it probably won't be that simple. Even so, the company physically cannot get around to tackling the planning for the GST until the end of the year at soonest.
Even for a giant like Telstra the Y2K issue is overshadowing all else. Telstra has a systems changes blackout from December to February 2000 (see related story "Deep Freeze", page 12), leaving it four months to complete any systems updates forced by the GST. It has a list of 120 applications it expects to require an update. Telstra clearly can't rebuild core systems, and its finance director John Stanhope has already criticised the government's timing, claiming Treasury has grossly underestimated both the time and the cost of compliance with the new tax. Although Treasurer Peter Costello has pledged that as a result of the changes, "business costs will fall by more than $10 billion", there will be a high cost associated with establishing the framework needed to comply. For small business the government has pledged $500 million will be available to help them meet those costs, while big business must go it alone.
GartnerGroup research director Bruce McCabe finds it hard to estimate the total cost of compliance in Australia. He says he has heard figures as high as $5 billion but adds "that sounds a little high to me". McCabe's early discussions with Australian retailers suggested that they had scoped compliance as a $30,000 to $300,000 problem. He has since, however, heard of insurance companies which claim it will cost $11 million to prepare GST-ready information systems.
"There is an enormous range of compliance costs," McCabe confirms. "Typically now I am hearing compliance figures of around $1 million [for large companies], but for a big telco it would be a hell of a lot more." And any exemptions -- such as food -- would be "a nightmare which could blow out the cost of compliance to an order of magnitude larger", McCabe warns. In fact, McCabe reckons the retail sector should be granted a further year to achieve compliance if food is exempted. "Business is not well prepared for this," he says. "Small business might not be highly exposed -- it's a right pain in the bum for them, but it's not a big deal in terms of time and money. It's in the really large organisations where it gets scary. Most chief information officers are very underprepared and not nearly enough have completed a straightforward analysis of what might be needed," McCabe says.
According to John Quirk, chief executive officer of supply chain management specialist Motherwell Information Services, although there will be challenges associated with the introduction of the tax, there will be long-term benefits.
Based on the company's experience working with New Zealand customers, Quirk says: "In our experience some of the best ways of avoiding the pitfalls of the new tax are for business to invoke much tighter monetary controls and to charge someone with the task of ensuring the business is prepared to cope with the impost of the new tax. "There are costs associated with compliance; but with good planning those costs can be accommodated, leaving the company a competitive and tightly managed operation." PWC's Oliver says business should start immediately looking at how it can make sure that the costs associated with GST don't blow out more than necessary. Companies, for example, needed to pay close attention to any contracts signed which span the date of the GST's introduction -- regardless of whether the company is supplier or purchaser.
Somewhere in the contract negotiations the issue of the GST needed to be addressed, he warns. "It is still possible to write non reviewable contracts up to the date of royal assent (of the bill)", Oliver says, which might help reduce costs.
At a very basic information level, Oliver says that companies which have not yet implemented systems that can monitor input and output, and any tax associated, will need to remedy this in order to both pay and claim back any GST liabilities, "because the GST can potentially hit every transaction". "If you don't capture the input, it will potentially cost a lot of money," Oliver says. He also warns of the massive cash-flow implications of the tax. Companies will have to submit GST returns to the Tax Office every month or every quarter.
In general, companies with annual turnovers above $20 million must submit monthly returns, smaller companies can opt for quarterly or monthly returns.
GST is deemed due in the period when the invoice is issued for the goods or services -- not when the invoice is paid. So for companies which have had three-month trading terms, and are now facing paying the GST in the month it invoices customers, there might be a cash drought -- especially in seasonal businesses. Information systems and services purchasers therefore should not be surprised to see their suppliers attempt to negotiate much shorter trading terms in order to minimise the impact.
Gartner's McCabe recommends that any organisation buying computer products and services pays very close attention to the pricing implications of the GST as soon as possible. Besides the cost of compliance and "there are plenty of business processes involved, and for IT this is a heavy burden", McCabe warns that "the GST will change the prices of technology and software and services and therefore the strategy that you should employ". For the information technology sector McCabe predicts this will translate to a period of high volatility until the tax regime is well bedded down. "Most computer hardware is currently subject to a wholesale tax of 22 per cent, which will move [with the GST] to an effective rate of nil," McCabe says, accounting for the input credits which business would expect to claim back. "Effectively you can expect to get a one-fifth reduction in the cost of a PC." The computer industry itself would also have to consider its pricing strategy in light of the new taxes, and McCabe predicts that there would be an initial drop in the price of goods, which would stabilise over six months. "Realistically you can't hold off your purchases for six to nine months but in the three to four months before the tax comes in we will be advising all our corporate and government clients to hold off their purchases." His core advice is that "for all projects scheduled for the second quarter of 2000 -- hold them off to the third quarter, if the delay in business benefits would not be prohibitive."For the computer industry: "I expect a significant slump" in the first half of the year, McCabe warns. That would be followed by a "peak in the third quarter, which is the reverse of the usual seasonal pattern, which might leave a lot of customers without supply in the third quarter". McCabe advises companies to avoid getting caught in a supply squeeze by signing letters of intent demanding a guarantee of supply during that period from their vendor. For software the impact of the new tax will be negligible, as software will be going from a current zero taxation rate to a 10 per cent taxation rate, but the business would claim that back as an input credit. Similarly, the input credit which business could claim on any services it buys means that the cost of services should remain fairly static. For the financial sector, which is input taxed, this is not the case. The government proposals indicate that the financial sector will not be able to levy a GST on the services it provides, but neither will it be able to claim back any input credits it has paid.
So although the cost of hardware for a bank might still be expected to fall (as the 22 per cent wholesale tax is replaced by 10 per cent GST), it would not fall by as much as for a business in a different sector. Financial institutions will also have to cope with the burden of a 10 per cent tax on software and services, which they will not be able to claim back. McCabe warns, though, that no CIOs should expect a bonanza, as the GST input credits would be claimed by the company accountant -- not by the information systems group. So "within IT you will still have to lobby for budget" to cope with the apparent cost increases as a result of the GST.
A further budgeting minefield is associated with outsourcing, McCabe warns, adding that any organisation currently exploring an outsourcing opportunity needs to conduct a GST implications study to ensure that what might make financial sense today would still have currency after the GST is introduced.
McCabe recommends that companies explore all of the issues sooner rather than later, adding: "Obviously the thing to do is if you have a New Zealand arm, get those people in here and get them involved in your planning." Expert help is going to be essential for most organisations, says PricewaterhouseCoopers' Oliver. This will also be important in handling any transitional issues. For example, companies will need to have very granular accounting records available at the end of the next financial year so that they can get a credit against any stock held for sale or exchange when the GST regime debuts. "You will need a close handle on inventory. You need a value on each item for the sales tax, and this is quite a significant exercise," Oliver says.
Says Motherwell's John Quirk: "Clearly the longer the supply and logistics chain the more complex the financial and management accounting required. In the process manufacturing business some of the GST loops will be labyrinthine and hard to manage without robust information systems to underpin the business." Companies also need to develop information systems to support the development of pricing models that will take account of the effects of the GST and be critical in ensuring the company maintains competitiveness. "It will be important to have a good hard look at the pricing model," Oliver says, "and that may affect the sales model for the future, since some goods will be cheaper after June 30, 2000. Companies need to be planning their marketing for pre- and post-GST to cope with any distortion in demand."The ACCC prices monitoring role associated with the introduction of the GST starts on July 1, 2000 and runs through to July 2002. Any company found guilty of rorting the system could face fines of up to $10 million. As Gartner's McCabe warns: "The deadline is very tight for compliance, but the penalties are severe and real." Already Y2K systems issues have made "severe" and "real" two of the least favourite words in the CIO dictionary, and they're about to face a second round with them.
Bill of Fair?
The government's bill on GST proposes a tax rate of 10 per cent be imposed on most goods and services traded in Australia. The government will establish some GST-free categories, including medical services, health services, residential and community care, disabled services, education, childcare, religious and charitable services, but most business with annual revenues of more than $50,000 will have to deal with the GST. Wholesale tax will be abolished, along with financial institutions duty, debits tax, a range of stamp duties, and conveyancing duties on business properties, over a period of time. Payroll tax will remain as a state tax. Imports will face a GST, exports will not. The financial sector will be placed in the input-taxed bracket -- that is, it will pay GST on goods and services it needs to run the business, but will not charge GST on its services, nor will it be able to claim back GST it has paid. The financial sector aside, business will be able to claim back any GST it has paid on inputs to the business. It must make monthly (business with annual turnover $20 million and above) or quarterly (other businesses unless they chose to submit monthly) returns to the tax office and be liable for GST on any invoice issued during that period, which has significant cash-flow ramifications.
Food for Thought
Peep down at that wire shopping basket that's full of White Wings, MeadowLee, Uncle Tobys, Steggles and Pampers products and imagine that in a little more than a year it will cost you an extra 10 per cent, (assuming that the GST is levied on groceries, following the senate wrangles). Now consider the information systems which parent company Goodman Fielder has to have in place over that same period to ensure that it can comply with the new taxation regime. Goodman Fielder's CIO Doug Falconer is keen to get the project under way but complains that "like most organisations we're up to our necks in year 2000". The earliest he believes the company can get to the problem will be July this year -- about the same time as the government hopes to squeeze the bill through the senate -- and shortly after, Goodman Fielder expects to be largely through its Y2K remediation program. The company divides into six divisions, and for each one the goods and services tax will prompt a further re-examination of the information systems.
Falconer believes that there will be some advantage to be reaped from the Y2K program, which has left the grocery giant with a good grounding in project management. It has also already combed through its current information inventory, and in many cases updated applications. He also believes that the current migration to SAP will help achieve GST compliance. Already the company is advanced with the SAP implementation in New Zealand, where a GST regime is already operating. But it still needs to revisit its information structure and systems to ensure it can cope intelligently with the GST. "We have already got a commercial group set up to determine how the legislation affects our business, then we will examine the information systems, implement changes, and then conduct similar testing to that we've done for Y2K," Falconer says. He freely admits, the GST compliance will be yet another "pretty big" assignment for the information group, hard on the heels of Y2K. -- Beverley HeadCFOs. Retail and the GST A straw poll survey yields some interesting resultsAbout the survey: - All questions were focused on the proposed GST - 27 CFOs from the retail industry were involved - Half were headquartered in Sydney; the remainder in Melbourne - The survey was conducted during the week of 19-23 April 19991: Do you believe the GST will be passed in time for introduction on 1 July 2000?Yes: 64% No: 36%2: If the GST is introduced on 1 July 2000 do you believe your organisation will be fully prepared?Yes: 92% No: 8%3: Is there a specific person in your organisation with responsibility for monitoring and managing the GST?Yes: 80% No: 20%3a: Is this person in finance or information technology (IT)?Finance: 44% Both finance and IT: 36%4: Do you know if your financial management system will cope with a GST?Yes: 92% No: 8% Do you plan to employ additional staff to help manage GST reporting requirements?Yes: 20% No: 80%Source: The prestige Software International Vox Pop is a bi-monthly telemarketing survey of CFOs in Australia. It is designed to provide a quick snapshot of CFO views on current trends. Prestige Software International is a division of Computer Associates International
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