Updated: Oct 29, 2021
When Builders Shy Away From Fixed Prices
I am a chartered accountant and insolvency practitioner and I have helped lots of businesses with working cashflow pressures and liquidated companies who can’t survive these pressures.
One question I often get asked is how can their company have so much GST to pay. They are on payments basis for GST, start the period with $100 in the bank, trade for the two months, director takes nothing more than wages / drawings, and finish the month with $100 in the bank. How can they have so much GST to pay?
The answer is fairly obvious, but most people don’t think about it. There are various payments a company makes that you can’t claim GST on, for example wages, bank fees, loan payments, drawings etc. So, if you have traded for a two month period with similar opening and closing cash but you have paid out various amounts which can’t claim then basically you will have GST to pay on those amounts. Often this ends up being a large figure, particularly when a business is labour intensive. The only plus side, which is bittersweet, is that if you are not paying GST then you are normally losing money.
what’s the problem?
It is very easy to fall behind with GST, you don’t ring Inland Revenue Department and ask can you have a trade account there is no choice in dealing with them. And when you do fall behind it takes them a long time before they actually start chasing. Time and again I ask business owners how they could fall so far behind, the regular answers I get is that the amount became too large to even get close to payment, Inland Revenue Department weren’t ringing asking for payment but trade suppliers were and to keep trading had to pay them. But once you are behind with GST it can become very expensive with sizable penalties and interest. Plus, Inland Revenue Department has the resources to make your life difficult.
My answer to the issue
One solution that I work through with some of my clients, and I even do this in my own business, is on a weekly basis when payroll is paid we pay the GST portion direct to IRD or put this money aside for GST payment time. For example, $10,000 wage payment, $1,500 is put aside for GST. This means that at the end of a two-month period there is at least some provision for GST. For businesses which have large amounts of finance we also take this account and pay this on a weekly basis. The assumption is that by the time you get to GST payment time the amount you are paying should be approximately your cash surplus and the funds should be there.