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GST ruling prompts new cash flow challenge for SMEs

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The Australian Taxation Office's (ATO) recent ruling on the treatment of deposits for GST will hit the cash flow of SMEs, leaving many with the challenge of finding additional finance or having to make the difficult decision to get tougher on customers in order to meet GST liabilities. Bibby Financial Services, Greg Charlwood, businesses with significant funds tied up in unpaid invoices will be the worst affected.

According to Managing Director of Bibby Financial Services, Greg Charlwood, businesses with significant funds tied up in unpaid invoices will be the worst affected.

"Businesses rely heavily on these deposits for the cash flow needed to meet their immediate liabilities to suppliers, staff and the ATO, particularly around tax time.

"The ruling will mean businesses with already tight cash flow will either have to source the additional finance from within the business e.g. from savings or increase borrowings just to meet GST liabilities.

"Or for many, the cost will have to be passed on through higher deposits or stiffer terms of trade - steps which could make small businesses less competitive."

Under the ruling, deposits of greater than 10%, formerly considered security deposits and therefore GST exempt, will now be considered part payment and attract the GST on the full value of the sale, even when full payment is yet to be received.

For example, a printing company accepting a $5,000 deposit on a $20,000 job will be required to remit GST on the full $20,000 sale upfront and not on the deposit actually received.

And to make matters worse, suppliers will now also have to pay GST on payments collected from customers who have forfeited their deposit.

"Businesses already struggling with their quarterly ATO liabilities are in danger of falling even further behind," Mr Charlwood said.

Mr Charlwood urges businesses hit by the GST ruling not to lose sight of the need to maintain a healthy cash flow.

"Businesses need to be proactive in their approach to cash flow management and develop and implement a strategy to ensure cash flow is consistent," he said.

According to Mr Charlwood the increased pressure brought on by the new ruling will see many SME operators turn to Factoring to help them meet their GST liabilities.

"By allowing businesses to convert up to 90 percent of their unpaid invoices into instant cash within 24 hours, Factoring gives companies the continual injections of cash they need to pay their bills on time and to grow.

"What's more, the beauty of using a Factor such as Bibby Financial Services in this instance is that it allows businesses to keep their terms of trade with customers unchanged and avoid taking on additional debt," Mr Charlwood explains.

Industries most likely to be affected by the ruling include transport, construction and printing.

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