GST (Goods and Services Tax) has been a part of the Australian taxation system since its introduction in 2000 and understanding GST registration requirements and obligations is important for small business owners.
Many small businesses don't satisfy the minimum requirements set by the ATO with regards to GST, and as it is your responsibility to ensure compliance, you will be held liable for any errors. So to help you comply with the GST regulations, I have compiled a list of the 10 most common questions that I am asked about GST.
1. What is GST?
Goods and Services Tax (GST) was introduced in Australia with A New Tax System (Goods and Services Tax) Act 1999 and took effect from July 1, 2000.
GST is a broad-based tax of 10% levied on almost everything that we buy. But, of course, it isn’t quite that simple. There are exceptions to the rule which are classified as GST-free supplies and Input-taxed supplies, which includes medicine, basic foods like bread and milk, bank fees and residential rents, to name a few.
So as you are completing your BAS, keep an eye out to ensure that you have checked your receipts and you are not claiming GST on GST free purchases.
2. Is GST a business expense?
GST is not a business expense. You are simply nice enough to be a collection agent for the Australian Taxation Office.
GST is paid at each step in the supply chain, so businesses pass it on until it gets to the end user. But businesses do not actually bear the economic cost of the tax as any GST paid by a business is claimed back from the ATO via the BAS (Business Activity Statement).
The actual cost of GST is paid by the final consumer (you and me!) as we cannot claim any GST credits.
3. Do I have to register for GST?
An Australian business must register for GST if both of the following apply:
You are carrying on an enterprise – so you are a business, not a hobby
Your GST turnover meets or exceeds the registration annual turnover threshold of $75,000 (or $150,000 for non-profit organisations).
You can choose to register for GST even if your GST turnover is below the registration turnover threshold.
Some industries, including taxi and limosine travel providers (and includes Uber drivers), are required to be registered for GST regardless of their turnover. Your business will also be required to register for GST if you will be claiming fuel rebates.
If your GST turnover falls below the registration threshold, you can choose to cancel your GST registration. If you are not registered for GST, but you expect your income to increase above the threshold, then you are required to register for GST at that point.
4. How do I apply for GST registration?
You can apply online for GST registration at the same time you apply for an ABN at The Australian Government Business Register https://register.business.gov.au/
If you are not required to register for GST at the time that you obtain an ABN, you can go back and register for GST when your business meets the requirements for registration.
5. How does GST work?
Once registered, your business is required to:
include GST in the sales price of goods and services offered to customers and
claim GST credits for GST included in business purchases.
If you are not registered for GST, you do not include GST in the sales price of your goods and/or services. In addition you can't claim credits for any GST included in the price of your purchases, even if they are for your business. The total cost of the purchase, including GST, when you are not registered for GST is an expense of the business.
6. Cash and Accruals – what is the difference?
There are 2 main calculation methods for reporting GST to the ATO - Cash and Accruals. During the GST registration process, you will be required to select one of these methods of reporting.
The Cash Accounting Basis is based upon the date of cash transactions, so sales and purchases are reported based upon the day the payment was made or received.
Whilst the Accruals Accounting Basis reports sales and purchases based upon the date of the invoice.
For example, if you purchased a new printer for your business on 15th March for $110 and paid the invoice on 4th April. In this example, the business reports GST quarterly.
Cash basis reporting - the purchase would be included in your BAS quarter that incorporated April as this is the month that printer was paid, so in our example this would be the June BAS.
Accruals basis reporting - the purchase would be included in the BAS that covers the month of purchase. In our example, the printer would be included in the March BAS.
7. How do I report my GST to the ATO?
A reconciliation is prepared on a regular basis (your choice of monthly, quarterly or annually) between the total GST you have received and the total amount of GST you have paid to suppliers.
The balance is either paid to the ATO if you have collected more on sales than you have paid on purchases, or refunded back to you by the ATO if you have paid more than you have collected.
This process is reported via the completion of a Business Activity Statement which is issued to you by the ATO or lodged on your behalf by your accountant.
Example 1:
If you collected $33,000 from your customers in the period, this would include $3,000 GST which you must pay to the ATO. And, if you paid expenses of $11,000 during the period, the $1,000 GST paid is deducted from the $3,000 resulting in a net GST liability for the period payable to the ATO of $2,000.
GST Collected $3,000
Less GST Paid $1,000
Net Due to be paid to the ATO: $2,000
Example 2:
If the business experienced sales of $5,500 for the period, this would include $500 GST which is payable to the ATO. In the same period, you had expenses to the value of $22,000 which includes GST of $2,000.
Completion of the Business Activity Statement-
GST Collected $500
Less GST Paid $2,000
Net Due to be refunded by the ATO: $1,500
Example 3:
Completion of the Business Activity Statement will require the following information for the period – total sales, total purchases, total GST collected and total GST paid.
8. Do I need to change my invoices when I register for GST?
The ATO requires that your invoices are in a Tax Invoice format and display certain information in order to comply with the GST requirements.
For sales of $1,000 or more, invoices need to display:
- the words 'Tax Invoice' prominently
- the seller's name and ABN
- invoice date
- name of the buyer and their ABN or address
- quantity and description of the items sold
- the GST amount or a statement noting that the total includes GST.
Invoices for less than $1,000 need to have all the above except the buyer's details.
9. How do I calculate GST?
As GST is 10%, it is common to make the mistake of calculating GST by simply dividing the total amount by 10, however this is not correct.
GST is actually calculated as displayed in the below examples:
To calculate the invoice amount excluding GST:
Total Amount divided by 11 and then multiplied by 10.
For example, you purchase a computer for $1,628, the cost of the computer before GST is $1,628 / 11 * 10 = $1,480.00
To calculate the GST component of an invoice received from a supplier:
Total Amount divided by 11.
For the computer example above, the GST component is $1,628/11 = $148
10. Is GST applicable if I sell my business?
As with many taxation laws, the answer to this question is, it depends on the situation.
If you sell your business as a 'going concern', that is, the business is trading at the time of sale and everything required for the business to continue trading is sold as one, then GST is not applicable to the sale. The sale will be GST free.
I hope the above has answered some of your GST questions. If you have any other GST questions, drop us a line via our contact page.
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