It would be very remiss of me not to address my previous post Unable to pay GST? Take Action Now without offering a solution on how to ensure that you always have funds available to pay your GST in full when it is due so as not to end up being unable to pay your GST.
I start by asking the question “Why is it that any Payments Basis Entity is unable to pay the GST Due on time?” I ask this question because: –
1. The GST on Sales and Income (Output Tax), which has been declared on the GST Return, was received at the time the Sales/Income was received from the Customer/Client.
2. The GST on Purchases and Expenses (Input Tax), which has been declared on the GST Return, was paid at the time of the purchase or the expense.
3. Therefore the GST to Pay (Output Tax – Input Tax) should be sitting in the entity’s Bank Account in readiness for when it is due to be paid.
With the above in mind it can be seen that the entity is a receiver of GST on Sales and Income on behalf of the Inland Revenue (IR) and holds it until the IR requires it to be paid less the Input Tax.
It is not for the entity to use to pay Operating Expenses as it does not belong to it, funds belong to the IR, plain and simple. Anyone who thinks otherwise, and uses it, has in my book misappropriated funds that belong to the NZ Government via the IR.
The next question I need to ask is “If an entity is unable to pay the GST when required, what could be the underlying system cause(s) for this to happen?”
In answer to this question I offer the following main two causes for consideration: –
1. The entity is using one bank account for everything, and
2. The time between when the GST Period Ends and the date the GST is due to be paid e.g. The time between when the GST Period Ends 30th November and the date the GST is due to be paid the 15th January has the Christmas and New Year holiday season falling in between these dates.
On reflection of these causes the second reason really has no bearing on the situation as irrespective of the time of the year funds should be available for payment of GST Due.
Which leads me onto the first cause which I believe is the main cause and what we teach in the Profit First Methodology as the entity resorting to “bank balance accounting.” This is where the bank balance is checked every day and financial decisions are made based upon what is seen. Per Parkinson’s Law, we consume what we see in our bank account which can cause the result of when it comes time to pay the GST there is insufficient funds in the bank account to meet this obligation.
As a Profit First Professional I educate the entity to have all the Gross Income Received deposited into a bank account called “Gross Income Received” and then to allocate money, from the Gross Income Received Bank Account , to a GST Bank Account so that when it comes time to pay the GST Due the money is available. Makes sense, sure does!!!
Okay I hear you, the reader asking, as the owner of an entity how would I do this considering I don’t know how much GST the entity is going to be paying when it is due?
That is an excellent question, now let me explain in simple terms how this can be achieved.
1. Get the GST Returns for the last say four years, if the entity has been registered for GST less than this, then use the GST Returns from when the entity first became registered, then calculate the following: – (example in brackets, totals are for 4 years)
a. The Total Taxable Sales and Income ( $575,000),
b. The Total Output Tax on the above ( $75,000),
c. The Total Taxable Purchases and Expenses ( $115,000),
d. The Total Input Tax on the above ($15,000), and
e. The GST Tax to Pay (Total Output Tax – Total Input Tax) ( $75,000 – $15,000 = $60,000).
2. Calculate the Percentage (%) that must be deducted from each deposit in the Gross Income Received Account and deposited into the GST Bank Account. Here is the formulae to determine this: – (example based on the figures above in brackets)
GST Tax to Pay / Total Taxable Sales and Income x 100 = Percentage to be allocated
$60,000 / $575,000 x 100 = 10.43% (Round up to 11% for Percentage to be allocated)
3. Either daily or weekly, most probably weekly you will look at the balance in your Gross Income Received Bank Account and transfer 11% of the Balance to your GST Bank Account.
4. When it comes time for the entity to pay the GST, because you have been transferring money into the GST Bank Account, you simply pay the GST from this Account. Remember though the Balance that is still in the GST Bank Account is GST that you have allocated since the last GST Period End towards the current GST period i.e. in this example 1st December 2014 to the 31st January 2015.
5. Should you choose this assignment the only two requirements left for you to do is: –
a. Open a GST Bank Account, and
b. Ensure all funds received from customers/clients are deposited into the Gross Income Received Account.
Finally, thank you for taking the time to read this. I trust it has been of benefit to you. If you want help or have any questions in regards to the above then please contact us or find out more about Profit First
Disclaimer: This publication has been carefully prepared, but it has been written in general terms only. The publication should not be relied upon to provide specific information without also obtaining appropriate professional advice after detailed examination of your particular situation.