As with all areas of tax, GST can get very complicated. In this article I will do my best to summarise the information you need to know about GST. Bear with me, it isn’t always easy.
What is GST?
GST stands for Goods and Services Tax. It is a value-added tax levied on the supply of goods and services in Australia.
GST is applied to most goods and services, but we will go through a few exemptions below. The GST rate is 10% of the final price of a taxable item or service.
This collected GST is not a cost to the business but rather a tax collected on behalf of the government. It is a consumption-based tax which means that the GST cost is borne by the consumers of the product (stay with me, I’ll explain this in the examples).
Businesses can claim input tax credits for the GST they pay on their business purchases and expenses. This credit can be offset against the GST they collect on their sales.
When to register for GST?
When your business has or expects to have gross income from business activities of $75,000 or more you are required to register for GST.
You are also required when you provide taxi or ride-sourcing regardless of your GST turnover. The ATO has other specific situations where GST registration is required, but I will only discuss the most common examples here.
Registering for GST is optional if you do not meet the criteria above.
Once you have an ABN you can register for GST through online services for business or through a registered tax or BAS agent.
When to charge GST and when not to?
If you are registered for GST, or required to be, the goods and services you sell in Australia are taxable, unless they are GST-free or input-taxed.
GST-free products and services include most basic foods, medical and health care products, exports, childcare services and many more. As the name suggests, you would not include GST in the price of these products or services.
Input-taxed sales are for financial supplies (lending money, buying or selling shares, etc) and selling or renting residential premises.
When to claim GST credits?
You can claim a credit for any GST included in the price of any goods and services you buy for your business.
Consider the categories from the section above in reverse when you are determining if an expense you have paid should include GST.
You can claim GST credits if:
1. you intend to use your purchase solely or partly for your business, and the purchase does not relate to making input-taxed supplies. An example of something partly used for business could be a mobile phone that is used 50% for business and 50% private.
2. The purchase price included GST. This is another way to check that the person selling you the goods/services is registered for GST
3. you have a tax invoice from your supplier (for purchases more than A$82.50)
How does it look on an invoice?
Let’s think of a situation where you are operating as a sole trader. Previously you were not required to remit GST as your sales were below $75,000 and you were not registered for GST.
If you were to make a sale for $1,500 it would be simple, you would write out an invoice for $1,500 and give it to your supplier.
In the following year you register for GST and make the same sale. Instead of your total being $1,500, you now must add on the 10% of $150 making the total $1,650.
As we discussed above the sale is now greater than before as the GST is not a cost of the business, but rather a tax collected on behalf of the government. See the impact on small businesses for the practicalities of how this works.
When do I report GST and how do I pay it?
GST is paid when you lodge your Business Activity Statement (BAS) or in an annual GST return depending on your reporting requirements.
For the most part GST reporting is done quarterly (Sept, Dec, Mar & June), with annual GST reporting only an option if you are voluntarily registered for GST.
The due date for lodgement of a quarterly BAS is 28 days after the end of each quarter on your own, with a two-week extension available for lodging online and a further two weeks when lodged through a BAS or Tax Agent. This is only a guide, please see your activity statement due date for the accurate reporting date.
If a BAS payment is required, you can access the payment reference details through Online Services for Business or MyGov.
If you have more GST credits to claim than GST to pay, then you are eligible for a refund.
The impact on small businesses
I wanted to provide a few examples to show the practicalities of how this works for a small business.
In the examples below let’s consider a plumber who is providing their services. The services provided are worth $1,000.
For the business related purchase the plumber is providing the service to a commercial rental property.
Example 1: Seller is not registered for GST and the purchase is business related
This is the simplest example. If you are not registered for GST or you’re purchasing good or services off someone not registered for GST, then no GST trades hands.
The plumber would include $1,000 in their accounts as sales.
On the other hand, the owner of the property would include $1,000 in their accounts as an expense.
Example 2: Both parties registered for GST and the purchase is business related
In this example the services provided are for $1,000 with $100 of GST making the total sale for $1,100.
The plumber would include $1,000 in their accounts as sales and is required to pay the $100 to the ATO when they lodge their BAS. The net outcome after lodging the BAS is that they have received $1,000 (prior to income tax)
On the other hand, the owner would include $1,000 in their accounts as an expense and is entitled to a GST credit of $100. The net outcome after lodging the BAS is that they have paid $1,000 (prior to income tax).
In this example we can see the GST change hands, but the net outcome does not differ from the first example.
Example 3: Seller registered for GST, but the customer isn’t registered for GST or the purchase is not business related
We will slightly change the situation so now the plumber is providing the same value service, but it is provided to fix someone’s main residence. This transaction is no longer business related.
In this example the services sold are for $1,000 with $100 of GST making the total sale for $1,100.
The plumber would include $1,000 in their accounts as sales and is required to pay the $100 to the ATO when they lodge their BAS. The net outcome after lodging the BAS is that they have received $1,000 (prior to income tax)
On the other hand, the member of the public is paying $1,100 of which they cannot claim an expense or the GST as it is not a business-related expense.
In this example we can see the GST has now been paid by the plumber to the ATO, but the additional $100 has been paid by the customer. This is what we mean when we say that GST is a consumption-based tax.
This is an important consideration for small businesses because moving from not being registered for GST to being registered can make it seem like your prices increase by 10% to your customers, but you don’t get to see any of that money.
In practice it can be difficult for some small businesses to increase prices by 10% so some of the cost may impact business profits.
What next?
Like much of the tax system this can all feel overwhelming quite quickly.
I would strongly recommend accounting software like Xero to assist with the recording and managing of GST. It helps with recording the amounts, lodgement and saving the necessary invoices.
If you would like further explanations or require assistance with your GST, then please reach out to Bell Accounting WA.
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