One of the basic principles of GST is that it is paid by the end consumer. A business that is registered for GST is not the end consumer. This means that if you’re a business and you’re registered for GST and you see a price of $100 + GST quoted, although you may physically pay $110 to the supplier, you will get the $10 GST back when you lodge your BAS.
To expand on this example, let’s say you buy the $110 item and you then invoice your customer with a mark-up of 20%, so $100 x 120% = $120 + GST = $132 for the item. You will have paid $10 in GST and collected $12 in GST. If this was your only transaction for the period, then the amount of GST you would owe to the ATO would be $12 – $10 = $2. You never pay or keep GST, you just calculate the differences and pay or receive a refund for the difference. You are effectively an unpaid GST collector for the ATO.
GST Free Items
GST does not apply to all products and services that you pay for. There are many things that businesses pay for on a regular basis that don’t include GST. This can include items like:
- Bank fees, (but not merchant fees as these do include GST)
- Some components of motor vehicle registrations
- Milk, tea, coffee and sugar
- Overseas phone calls
- Overseas travel
- Employee medical expenses
- ASIC filing fees
- Stamp duty
- Google Adwords
- Bonds or deposits, (on your office rental property for example)
- Entertainment, (check with your accountant first)
- Fines and penalties
- Payments to overseas suppliers and domestic suppliers not registered for GST.
If you import large quantities of goods and pay GST to customs, then you will be able to claim the GST. This customs bill would need to be entered and the GST component handled in a particular way to ensure that it reports correctly on your BAS. The methodology here depends very much on the accounting software used.
How to enter transactions into the system
When entering these transactions into your system, you need to use the correct tax code. This is so that your accounting software firstly shows the right amount of GST and secondly reports the amount on your BAS (if in fact it needs to be reported at all). I will use an example to illustrate this.
If you were to buy a number of items from the supermarket, let’s say biscuits and milk, then you would notice that the GST on the receipt is less than 1/11th of the total. This is because you pay GST on biscuits, but not on milk. You would need to enter this transaction as two lines. The milk would need to be on one line with a tax code that is GST free and does report on your BAS, (GST Free Expenses tax code in Xero lingo). Biscuits would be on the second line with a GST tax code, (GST on Expenses). The GST for the transaction should now match your receipt.
Another area where mistakes are often made are with motor vehicles or other plant and equipment that are financed. The GST may have been claimed when the asset was purchased, but then GST is claimed on the monthly repayments. This is double-dipping on the GST. When entering a repayment for an asset, be sure to check whether the GST was claimed upfront with the purchase, or whether GST is applicable to the repayments as different types of leases have different GST consequences.
If you have purchased goods from an overseas supplier and GST is shown, you cannot claim this amount. The ATO will not refund you for GST, VAT or sales taxes paid in another country. If you see GST, VAT or any other type of tax on an invoice from an overseas supplier you can ignore it. Enter it as if there was no tax.
What if you are not registered for GST?
Many sole traders and contractors are not registered for GST. The law gives you the option of whether to register for GST or not if your annual turnover is under $75,000, ($150,000 for non-profit organisations). So even though you may have received an invoice for labour, which is subject to GST ordinarily, if the supplier or contractor isn’t registered for GST, then they shouldn’t have charged you GST and you therefore can’t claim a GST credit.
The advantages of not being registered for GST means that your tax affairs are simpler, but on the flip side, if you’re re-invoicing goods to your customers, then it means that you’re more expensive because they’ve effectively lost out on the GST credit. To take the example from the first paragraph, if you bought the $110 item, (which you can’t claim GST back on), and mark-up the item by 20%, then you’re still charging your client $132, but without any GST on the price, which makes you $12 more expensive ($132 excluding GST – $120 excluding GST).
How to use tax codes
The use of tax codes can be quite confusing to non-professionals. There are two in particular that are often used incorrectly. The first one is a no GST tax code that does report on the BAS, (GST Free Expenses), and the second one is a no GST tax code that does not report on the BAS (BAS Excluded). The ATO is working towards a simpler BAS, which will alleviate this issue, but this will only be available to small businesses. This starts on the 19.01.17 for new businesses, and 01.07.17 for existing business. In the meantime, this is how you know when to use one over the other.
Generally speaking, any purchases made for the business need to be reported on the BAS. There are a small number of exceptions like stamp duty and entertainment, or anything else that’s not actually claimable as a business expense, like fines and penalties. Other types of transactions that are not shown on the BAS are items such as funds that the owner has deposited into or withdrawn from the bank account that are not wages as well as superannuation payments, vouchers, prepayments, (such as those used to recharge a mobile or toll account – GST is claimed when the prepayment is actually used up), interest and loan repayments.
It would be so much easier if everything we bought had GST and everyone was registered. That would save a lot of time having to check the GST amount on an invoice and then split the transaction accordingly. Unfortunately our politicians have decided otherwise and we are left to deal with the consequences. I just wish I could sit them down in a chair and teach them how to do bookkeeping for several days. But I’m dreaming that they would learn the errors of their complicated ways.
If you feel bamboozled by GST and how to treat it correctly, then I would recommend getting a competent bookkeeper as soon as you can afford one. They’ll be able to do it in a fraction of the time, get it right and save you stress. Plus it will free you up to work on areas of your business where your time is far better spent, like making more money.