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Businesses risk cashflow disaster

WA business, especially building contractors and manufacturers, risk a New Year cash flow disaster if they do not plan for the impact of the new tax system, CPA Australia warns.

Insolvency spokesman Mr George Lopez said the cash flow lag caused by traditional end-of-year industry shutdowns would coincide with the New Tax System’s second and third quarterly reporting dates.

“Christmas-New Year usually represents a cash flow drought for the manufacturing and building industries because of the seasonal shutdown or slowdown,” said Mr Lopez, the chairman of CPA Australia’s Insolvency and Reconstruction Centre of Excellence.

“For those who are unprepared, the December and March tax payments could be the straws that break the camel’s back.”

Mr Lopez said manufacturers had a high proportion of permanent staff and faced a significant annual leave pay-out in December. Most would shut down from mid-December to mid- January and would not get their next invoices out until the end of February.

“They will have to fund the 30 December quarterly remittance period themselves and, by the time their cash flow starts again in March/April, will have to report and remit for the next period,” he said.

Mr Lopez said the building industry would experience a similar New Year revenue lag. This would be compounded by the current slow-down in building activity.

He said smaller contractors in the industry were particularly at risk because they were unaccustomed to paying their own tax.

“Under the new tax system, small contractors have to pay their own Pay as You Go (PAYG) tax. This replaces the Prescribed Payments System (PPS), in which many businesses employing small contractors previously deduct tax on their behalf,” said Mr Lopez.

“The danger for small contractors is that, with increased cash flow from GST charged and from not having PPS deducted from their income, they might spend the money before it comes time to pay the Tax Office,” he said.

““The New Zealand experience was that for 18 months to two years after introduction of GST there was a substantial increase in the rate of business failure.

“The New Tax System certainly changes the cash flow dynamics for business, but business failures can often be avoided if you plan ahead.

“If you haven’t already, you should urgently see your CPA to prepare cash flow and tax liability budgets and negotiate with your financier to ensure you have an adequate financial resources in place to cover this period.”

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