Unique input tax restrictions prevent finance sector from claiming IT services rebatesFinancial institutions have been dealt a hefty blow by the federal government with the July 1 introduction of the goods and services tax (GST) likely to force a hike of up to 10 per cent in the cost of some outsourced IT services.
And the new legislation is set to adversely impact IT contractors within the industry as their services will now also cost financial services companies an extra 10 per cent.
Under the legislation, banks and financial institutions are classified as input taxed organisations, exempting them from charging GST on most services, but also preventing them from claiming back on inputs.
In laymen's terms, the financial services industry, unlike any other corporate or government body, can't claim back the GST because it does not incur the cost of applying it to customers.
Hence, financial institutions are facing an increase of 10 per cent in the cost of outsourced services.
"It is an important issue on the agenda," Bruce McCabe, research director at Gartner, warned. "Every bank and financial institution, each of which outsources major elements [of their IT infrastructure] will be going through a review of outsourced services."
According to McCabe, in response to the pleas of the industry, the federal government recently issued a schedule of certain IT services on which financial institutions can claim back about three-quarters of the 10 per cent consumption tax.
But McCabe predicted large outsourcing arrangements in the industry would generally be more expensive, adding there would be examples where it would make more financial sense for the institutions to bring areas of their IT services back in-house.
Likewise, IT contractors within the industry will feel the pinch as financial organisations seek to utilise full-time employees rather than pay a 10 per cent premium on external staffing fees.
However, it's not only external services and consulting that will cause GST headaches for the banking and finance sector.
The industry will also see little, if any, of the drop in hardware tax from 22 per cent because of claim restrictions, whilst incurring an additional 10 per cent cost on software, which is currently not subject to tax.
Meanwhile, McCabe also revealed to Computerworld preliminary findings of a local Gartner survey which has found about 8 per cent of large organisations will not be ready for the GST when it takes effect on July 1.
The survey also found that about half of Australia's large companies will only be about 95 per cent compliant, which McCabe indicated could mean staff training, pricing or systemupgrades would not be completed on time, leaving the organisations vulnerable to post-GST expenses.
Gartner has predicted the total cost for Australian business to achieve GST compliance will be $3.3 billion.
But McCabe warned hundreds of millions of additional dollars could be lost during the six months following the introduction of the tax as companies finally plug their compliance gaps.