Accounting
May /June 2000
Pricing and
the GST
By Geoff Coy, Certified Practising Accountant
In this article, Geoff Coy looks at the impending
introduction of the new taxation system and the importance placed on
implementing and using the correct pricing structure in your business.
One aspect of the New Tax System that should
not be ignored is the impact the GST will have on prices.
All businesses need to adjust their prices
on 1st July 2000. In particular service stations and convenience stores
need to take into account the following when adjusting their prices:
- Introduction of 10% GST
- Abolition of sales tax on
01/07/2000
- The expanded Diesel Fuel
Rebate Scheme
- Cost of implementing the
GST including new computer systems, new software, additional accounting/legal
costs, costs in determining new prices/changing prices, staff training,
new letterheads and stationery etc and
- Increased administration
costs to the business as a result of having to account for and lodge
GST returns on a monthly or quarterly basis.
- Abolition of other taxes
which will be phased out over the next 5 years
When adjusting prices businesses also need
to be aware that pricing exploitation provisions have been introduced
into the Trade Practices Act 1974 with penalties up to $10 million dollars
for companies found guilty of breaching pricing exploitation provisions.
Price Exploitation
The main concern for businesses found in breach
of any price exploitation provisions is not the monetary penalties but
the fact that the Australian Competition and Consumer Commission (ACCC)
can publish a price exploitation notice in a newspaper naming the offending
company.
There are numerous guidelines that spell
out when price exploitation has occurred. The main points are:
- Prices should be reduced
immediately to pass on the full effect of tax cuts
- Any price increase based
on the GST should include a full offset for the removal of sales tax
and other indirect taxes.
- No mark up should be applied
to the GST component of the price.
- Prices should reflect only
actual, not anticipated, tax increases
- The net dollar margin of
goods and services
- should not be increased as
a result of the new tax system alone.
- Recovery of reasonable compliance
costs in prices
- Compliance costs of a capital
nature should be spread over a number of years.
- Re-pricing stock at 30th
June 2000 to show the GST inclusive price.
Businesses will therefore need to estimate
how much the suppliers' prices will increase or decrease.
The easiest way to determine savings to
any business is to refer to the most recent financial accounts and examine
each item of expenditure - in particular those where sales tax has been
charged and estimate what savings, if any, will be achieved as a result
of the abolition of sales tax. Other ways to assist this process would
be to:
(a) Write to each supplier and seek confirmation
of the savings that will be passed on
(b) Contact your accountant or financial
adviser to obtain a generic list of price variations for many common
items found on a business's profit & loss statement.
In this example notice how the mark up
and gross margin in percentage terms remains unchanged yet Con's gross
profit has reduced from $8.00 to $6.55 and the selling price has reduced
from $24.00 to $19.65.
Con would only opt for this method of pricing
if he had reviewed his business cost and over-
head structure and was confident that these
prices would reduce to the same extent as his gross profit.
Dollar Pass Through
Fortunately the other method of pricing available
to Con is what is known as the "dollar pass through rule" or "net dollar
margin".
This method is permitted by the ACCC and
would allow Con to maintain the gross dollar margin of $8.00 (below)
as outlined in the first example.
| New Cost |
$13.10 |
| GST @ 10%claim
input tax credit of $1.31 |
$13.10 |
| Mark-up (net-dollar) |
$ 8.00 |
| Retail Price |
$21.10 |
| Gross Profit
Margin |
37.91% |
Under the present tax system Con's Convenience
Store sells a Gregory's street directory for $24.00. Con buys the street
directory for $13.10 plus sales tax of $2.90. The cost to Con is $16.00.
His gross profit is $8.00. Con's mark up on cost is 50% and his gross
profit margin is 33.33%.
| Wholesale Cost |
$13.10 |
| Sales
Tax @ $2.90 |
$16.00
|
| Mark-up of 50% |
$8.00 |
| Retail Price |
$24.00 |
| Gross Profit
Margin |
33.33% |
| Under the New
Tax System the cost to Con will be |
$13.10. |
This assumes that his supplier has not
passed on any price increase or saving. There will be no sales tax included
in the price as this tax will be abolished on 1st July 2000. Con will
be charged and pay GST of $1.31 this being 10% of the purchase price.
Con will not account for the GST component
of $1.31 in the purchase price. Rather this amount will be held aside
separately in a GST holding account to enable Con to claim the inputs
tax credit when he lodges his monthly/quarterly GST return.
Con now has two options available for his
pricing. If Con continues to mark up his product by 50% then the new
selling price of the street directory will be $15.00. This will give
a gross profit of $5.00 at a margin of 33.33%.
| New Cost |
$13.10 |
| GST
@ 10% claim input tax credit of $1.31 |
$13.10 |
| Mark-up of 50% |
$ 6.55 |
| Retail Price |
$19.65 |
| Gross
Profit Margin |
33.33% |
To maintain a 'net dollar margin' of $8.00
Con has effectively to mark-up his cost by 61%. His gross profit of
$8.00 remains unchanged whilst the selling price has reduced to $21.10
and his gross profit margin has increased to 37.91%.
Con would also have to justify (if questioned)
his entitlement to marking up his product to 61%
Con should review his business mark up
procedures by taking into account any increases/savings listed at (1)
to (8) previously.
If Con's costs including overheads were
found to have decreased since the introduction of the New Tax System
then he would not be justified in increasing his present mark up and
could fall foul of the ACCC guidelines .
Note also how the mark up is not applied
to the GST inclusive price as was previously the situation with Wholesale
Sales Tax.
You can't assume that your prices and hence
your mark up system won't change.
Pricing and market place issues will become
more important over the next few months. The major issue will be getting
the price to fit within ACCC guidelines and meeting market expectations.
This means not being accused of raising
prices by more than 10% when rounding the retail price and not pricing
a product so that it is too expensive compared with the competition
and thus potentially going out of business.
A Tip !!
Prices can be adjusted now for insurance policies,
club memberships, leasing arrangements etc that span the pre-GST and
post- GST period and have been entered into after 2nd December 1998
to reflect the GST liability to be incurred on the supply after 1st
July 2000.
For any GST paid on these items you need
to ensure that your bookkeeping system captures the GST component by
setting up the control accounts in the current financial year.
Never Assume Anything!
There are many variables to be used in determining the final price
of a product.
All businesses need to adjust their prices on 1st July
2000 not only to reflect the abolition of sales tax but also cost savings
passed on by suppliers and the cost of implementing the New Tax System.