By Alisa Sainoski

One of the many things which need to be done when you are starting a new business is applying for an Australian Business Number (‘ABN’).  This is followed up by whether or not you should register for Goods and services tax (‘GST’).  GST is a broad-based tax of 10% on most goods, services and other items sold or consumed in Australia.

Many business owners automatically register for GST, unaware that in some circumstances it may be optional.  Currently, it is mandatory to register for GST if you expect your annual turnover to be $75,000 or more, you are a ride-sourcing driver/taxi or you want to claim fuel tax credits for your business or enterprise.  However if your turnover is expected to be less than this amount registering for GST is optional, and you should consider the cash flow and administrative implications of your decision.

If your turnover is forecasted to be below $75,000, not registering for GST will effectively lead the selling prices to be 10% cheaper than those of your GST-registered competitors.  However it is recommended you charge the same price as your competitors and not only enjoy a healthier profit margin but also not suffer from a price-increase shock if and when you are required to register for GST at a later date.  Not being registered for GST means you won’t be able to claim back the GST on your expenses or on any goods you purchase for sale.  Some businesses prefer to purchase from GST-registered businesses just so they can claim the GST back.

Being registered for GST means additional work typically on a quarterly basis.  A registered business has two distinct roles, the running of the business and acting as a tax collector for the Australian Taxation Office (‘ATO’).  However, being forced to maintain your financial records is time consuming and requires some insight into the GST rules to be able to report correctly.  However, it often is a valuable tool that assists in the management of the business and its performance.

A business with high sales and minimal expenses and capital purchases may benefit from not being registered for GST, if the option is available to them.  For example, a GST-registered business with an income of $70,000 excluding GST and outgoings of $10,000 excluding GST would be required to pay $6,000 worth of GST to the ATO.  This creates a negative impact on their cash flow, as well as additional paperwork and time.  On the flip side if the business is not registered for GST the sales are all yours, at least until the time comes to pay your income tax.

In terms of GST reporting, there are differences between the three types of sales for GST.  Taxable Sales which cover most sales of goods and services.  The GST is usually accounted for in the price and you can claim GST credits for goods and services purchased to make the sale.

GST-free sales include basic foods, some educational courses, some medical expenses, health and care products and services. Whilst GST is not included in the price, GST credits for goods and services purchased to make the sale can still be claimed.

Input taxed sales are mostly financial supplies, examples being lending money or provision of credit for a fee, and selling or renting out existing residential premises.  These sales do not account for GST in the price and you cannot claim GST credits for goods and services purchased to derive the income.

The threshold to consider when issuing tax invoices is $82.50 including GST.  So if you make a taxable sale of more than this threshold your GST-registered customers will need a tax invoice from you in order to claim a GST credit for the purchase.  If a customer asks you for a tax invoice, you must provide one within 28 days of their request.

A GST credit for purchases relating to your business expenses which have GST included in the price may also be claimed.  There are four conditions which need to be met before you are able to claim a GST credit.  The first relates to whether the purchase is solely or partly intended to be used to run your business and secondly, the purchase does not relate to making input-taxed supplies.  Thirdly, the purchase price must include GST and you must have paid or will be liable to pay for the purchased item.  And finally your business must have a tax invoice from the seller.

When you have worked out your total GST credits they can be offset against the amount of GST liable to paid.  If your GST credits are greater than the amount liable to paid, you are entitled to a refund.

A GST credit cannot be claimed without a valid tax invoice.  There is no GST credit available for purchases which do not have GST in the price i.e. basic foods. When calculating the GST liability in relation to the purchase of food most supermarkets have the GST amount paid included at the bottom of the receipt which is the only amount available as a GST credit.

When claiming a GST credit on the purchase of a motor vehicle and the price is more than the car limit, you can only claim GST credits up to the cost limit of $57,581. Anything in excess of this figure has no impact on your GST credit.  The maximum amount of GST credit is $5,234 which is one-eleventh.

Why one-eleventh you say?  Well if you sell an item without GST, and GST needs to be applied to the item, simply add 10%.  The easiest way to calculate the price is by multiplying your base amount by 1.1.  In basic terms is saying “what is 110% of the amount?”  To be able to go the other way, let’s say we have $110 which is inclusive of the 10% GST and we want to work out how much of it is the GST component. The first thing we need to do is divide the amount by 11. Not 10 you say? No, 11.  The reason being is before GST you only had 1 number but with GST you have 2 numbers. The first number is 10 parts of a number, and the “extra” 10% is another “part”. So working backwards would be to divide the GST inclusive amount by 1.1 which will give you the original amount.  However, if you would like to add 10% to an already GST inclusive amount you most divide the amount by 9%.

As with all tax issues, you will need to speak to one of our professionals at Venta about GST and the complicated ways to calculate it and give you advice for your own individual situation.

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