What is GST?
Are you a small business trying to figure out how on earth GST applies to your business?
You’ve probably seen it on an invoice at least once today, but most of us take GST for granted until we have to account for it in our own businesses.
Read on to understand better the what and why of GST and find out not only how it impacts your business, but how you can use it to your advantage to save some money, or maybe even get a little back.
But let’s start with the obvious first—what even is GST?
What is GST in simple terms?
What is GST and what is its purpose?
In simple terms, the Goods and Services Tax, or GST, is a federal tax paid on most goods and services within Australia. Introduced in July 2000, Australia’s GST was designed to simplify the multitude of different taxes on goods and services by creating one unified tax payable by the end consumer. The funds generated by GST are then distributed to the states by the federal government to improve areas such as infrastructure, roads, and healthcare.
How does GST work?
As a value-added tax, or VAT, GST is calculated as a percentage of the goods or services purchased and added to the total payable on an invoice. For Australia, the current GST amount is 10% of the goods or services purchased. This means that a business selling an item for $100 would need to charge the customer $110 in total, with the additional $10 being the GST element of the sale, which is then paid to the ATO by the business. This can be calculated yourself, or by using ASIC’s Moneysmart GST Calculator tool.
For a more detailed understanding, the Australian Taxation Office (ATO) has a great GST webinar on its Small Business Webinars page that explains what GST is and how it relates to business, or you can arrange a chat with one of our accounting professionals.
Does GST apply to all Goods and Services?
Being a broad-based tax, most goods and services must include GST, however, there are a number of items that are exempt from this tax. While the ATO has a detailed breakdown of items that are GST-free, the basic list includes:
- Staple foods (meat, dairy, fruits and vegetables, spices, and sauces)
- Some education courses and resources
- Financial goods and services
- Some healthcare goods and services
Import and export goods may also be GST free in some circumstances. If you are a GST registered business, you may be exempt from paying GST on services or subscriptions from overseas. If you are an exporter, and your goods leave the country within 60 days of you issuing an invoice or receiving payment (whichever comes first) these items can be considered GST-free.
An extra addition to this is Tourist Refund Scheme. This incentive provides a GST refund on any purchases over $300 made in Australia, provided that, on exiting the country, the items must transit in your carry-on for inspection, along with a valid original receipt or tax invoice for the item. This encourages spending within the country and is available for all travelers leaving Australia.
Who pays GST? Is it the buyer or the seller?
GST is an indirect tax, meaning that, while it is collected from businesses by the government, it is paid to businesses by the end consumer. The end consumer is also responsible for paying GST.
Let’s look at that a bit closer.
While GST is paid with every purchase, if a business is not the end consumer of a product or service, they then pass on the GST for these goods or services to their client or customer. They do this by including the 10% GST into the cost of the product, which then gets sent to the ATO, usually quarterly as part of a business’s BAS (Business Activity Statement) processing.
Here’s an example:
Your business sells shoes, which you purchase from a shoe designer. A pair of shoes costs you $100, $10 of which is GST. The designer you purchase from sends that $10 to the ATO and you claim the GST back in your business tax. You then sell the shoes to a customer for $165, including $15 GST. You make a profit of $150 and send the $15 GST to the ATO. As the end purchaser, the customer cannot claim back the GST.
How will GST affect my business?
As you can see from the example above, it can get a little complicated however, as a business, it’s vital to ensure you’re both paying and charging the right GST. If you don’t pay enough GST to your suppliers, you may end up having to pay it back at a later date. Additionally, as with most taxation errors, there will likely be fines for both yourself and other involved parties.
As a business, you will also likely need to register for GST at some point to ensure you are compliant with taxation requirements, and so you can properly claim your GST credits. You’ll also find that registering for GST may have other benefits for your business.
Let’s explore this a bit further.
Should I register for GST?
When do I need to register for GST?
While GST registration is optional initially, most businesses will eventually require GST registration. However, you only need to register once, even if you have multiple businesses.
You will need to register for GST business has reached the GST turnover threshold of $75,000 or believe you will within the next month
- If you are starting a new business and expect to reach the above threshold within your first year of operation
- If you are a non-profit organisation and have or expect to reach a turnover of $150,000 within the next month
- If you are a passenger transport service, such as a taxi, limousine, or ride-share. This applies regardless of whether you have reached the threshold and applies to you whether you own or lease the taxi you are driving
- If you wish for your business to claim fuel tax credits
Registering for GST is also often a requirement for certain business grants, particularly government ones, so you may find it beneficial to register even before you meet any of the above criteria.
If you aren’t registered and discover you fit any of the above criteria, particularly if you reach the $75,000 threshold, you have 21 days to complete registration without penalty. For easy reference, if you find your business turnover is averaging $1440 or more, then you will more than likely meet the threshold and should consider registering. You can also seek advice from your tax professional at Willmot accounting, who will be able to give you a hand with when and how to register easiest.
What will happen if I don’t register?
If you choose not to register for GST and you meet any of the reasonings for required registration, you will likely be required to back-pay any amounts of GST not accounted for on sales made. Additionally, you may incur interest on the amounts not paid, as well as fines associated with evasion of taxes.
If you discover you have not registered within the required period, or find an unpaid GST amount, contact the ATO to advise them of the mistake. If it was an honest mistake ATO might allow you to backdate registration, or simply pay the amount plus interest without an incurred infringement.
Keeping quality accounting records can prevent errors related to registration and GST payments, something you can discuss with the Willmot accounting team today.
How to register?
Registering for GST is quite simple, however, it requires accurate and up-to-date account-keeping for your business, and quarterly activity statements.
Once you have determined that your business’s goods or services are GST-applicable. If you are a new business you will need to first ensure you have an Australian Business Number (ABN) and, if required, have registered your business name. Then simply complete your registration in one of the following ways:
Once your registration has been accepted, the ATO will contact you in writing to let you know your registration date.
How do I Report my GST?
Once you’re GST registered, you then have to report and pay your GST amounts. This is usually done quarterly through what’s known as a Business Activity Statement, or BAS. The ATO will issue your business activity statement approximately two weeks before the end of each reporting period, with the reporting date for that period recorded on the statement.
For each quarter, you will record the amount of GST you have collected, as well as list any GST credits are entitled to, to determine whether you owe GST or will receive a GST refund for the quarter. That’s right, as a small business, you may even be entitled to a GST refund, from your GST credits.
Will I be able to claim GST money back from the ATO?
What is GST credit?
As a GST registered business, you are able to claim most of the GST paid on goods and services purchased for the running of the business. These GST amounts are known as GST credits or Input Tax Credits (ITCs). These credits are reported on your Business Activity Statement and balanced against GST owed to determine if you a required to pay GST or receive a refund for a particular tax period.
When can you claim a refund in your GST purchases?
You may claim GST tax credits for goods or services used in your business as long as they meet the following conditions:
- The item or service is intended for use solely or partially for use by the business and does not already relate to any input-taxed items (for partial business use you may only claim the business portion of the item)
- The cost of the goods or services included GST
- You provide payment for the goods or services purchased
- You received a valid tax invoice
For goods and services considered small purchases (those costing a total of less than $82.50), you will need at the least an invoice, register docket, or receipt showing the value of the item and GST component. However, for larger purchases, you will be required to have a valid tax receipt containing the following details:
- The words ‘tax invoice’
- The date of invoice issue
- The seller’s name and ABN
- The buyer’s name and address/ABN
- A description of the item sold and quantity or a description of the service provided
- The price for each item or service
- The GST amount or a note that the total amount includes GST
If the goods or services in question meet all the above the GST component will be useable as GST credits on your BAS and be deducted from the GST payable for that quarter.
There are special considerations to GST credits, such as those related to Income tax deductions and other specific credits (second-hand goods, lay-bys, etc.). Have a look at the links provided, or speak with your Willmot Accounting tax professional for further information.
Are all items you bought within the financial year GST refundable?
There are a number of goods and services your business may buy or use that are not eligible for GST credits. These naturally include any items that are GST free, but may also include:
- Goods or services purchased or used whilst your business was not registered for GST
- Purchases from a supplier that is not registered for GST themselves
- Wages paid to staff
- Goods or services for which you do not have a valid tax invoice
If you are in doubt over a GST credit, it is always best to confirm if it is claimable. This can be done by speaking to your accountant or contacting the ATO directly.
Navigating the world of GST may be a little tricky at first, but with help from the ATO website and your accounting professional, it will become a simple process for your business. The key points to remember are to always issue, and request, valid tax invoices for all goods and services, and to sure to keep quality accounting systems in place. These two tips alone will make recording and reporting your GST simple.
If you’ve reached the point of requiring GST registration, remember to register within 21 days of any threshold to avoid any backdated payments. And, as always, for any questions about GST, tax, or any other business accounting concerns, the Willmot Accounting team are here to guide you in the best direction for your business success.