You can claim GST credits for the Goods and Services Tax (GST) included in the prices of goods and services you purchase for your business. This credit, also known as an input tax credit, allows you to reduce your GST liability.
To make these claims on your Business Activity Statement (BAS), it is essential for your business to be registered for GST.
In this article
- Eligibility for Claiming Input Tax Credits
- Claiming Input Tax Credits for Business and Private Use
- Tax Invoice Requirements for Claiming Input Tax Credits
- Time Limits for Claiming Input Tax Credits and Refunds
- GST Exemptions and Reverse Charge Rules
- How to Calculate and Utilize Input Tax Credits for Business Purchases
- Situations Where Input Tax Credits Cannot Be Claimed
- Special Rules for Specific GST Credit Claims
- Second-Hand Goods
- Other Special Rules for Claiming Input Tax Credits
Eligibility for Claiming Input Tax Credits
Eligibility for Claiming Input Tax Credits
1. Business Use Intent
Ensure that your purchases are intended for use, either wholly or partially, in your business operations. However, remember that purchases related to GST-exempt supplies are not eligible for GST credits.
2. GST-Inclusive Purchase Price
Make sure that the purchase price includes the GST amount. You can claim GST credits only on the GST component of the purchase price.
3. Payment and Tax Invoice
Ensure that you have made the payment for the purchased item or are liable to make the payment. Additionally, ensure that you have a tax invoice from the supplier for purchases exceeding A$82.50.
Verification of Supplier’s GST Registration
Before claiming GST credits, verify that your suppliers are registered for GST. You can do this by checking the GST registration status of the entity on the ABN Lookup website. Keep in mind that there is a four-year time limit for claiming GST credits.
Claiming Input Tax Credits for Business and Private Use
When you purchase goods or services that are utilized for both business and private purposes, the following considerations apply:
1. Apportionment of Input Tax Credits
You can only claim a GST credit for the part of the purchase that is used for your business operations. It is necessary to calculate and claim credits only for the business-related portion of the purchase, excluding the private use component.
2. Adjustments for Actual Use
If you later find that your actual use of the purchased items differs from your initial intended use, adjustments to the claimed GST credits may be required. It is crucial to ensure that the claimed credits accurately reflect the business-related portion of the purchase.
3. Annual Private Apportionment Election for Small Businesses
Small businesses have the option to simplify the process of accounting for the private portion of their business purchases. Instead of making adjustments each time they lodge an activity statement, they can choose to make an annual private apportionment election. By doing so, they can account for the private use aspect of their business purchases once a year.
Tax Invoice Requirements for Claiming Input Tax Credits
When you need to claim Goods and Services Tax (GST) credits for your purchases, it’s essential to know the requirements for obtaining a valid tax invoice.
For purchases that cost more than A$82.50 (including GST), you must have a tax invoice. When you request one, your supplier has 28 days to provide it to you.
Remember to wait until you receive the tax invoice before claiming the GST credit, even if it falls in a later reporting period.
1. Obtaining a Complete Tax Invoice
To ensure a tax invoice is valid, it must contain accurate and complete information. If you receive an invoice that is incomplete or contains incorrect details, it won’t qualify as a valid tax invoice.
However, you can still treat it as one if you can get the missing information from other documents the supplier has given you. In case you can’t obtain the necessary details, ask your supplier to provide a complete and correct tax invoice.
2. Missing Tax Invoice from Supplier
If your supplier doesn’t respond to your request for a valid tax invoice within the 28-day period, and you can’t find the missing information from other supplier-issued documents, you have the option to seek permission to treat a different document as a valid tax invoice.
3. Input Tax Credits for Small Purchases
For purchases that cost A$82.50 or less (including GST), you have several options for claiming GST credits. You can use any of the following documents:
- Tax invoice
- Cash register docket
If you can’t obtain any of these documents, make sure to keep a record of the purchase. Write a diary entry containing the supplier’s name and Australian Business Number (ABN), date of purchase, a description of the items purchased, and the amount paid.
Time Limits for Claiming Input Tax Credits and Refunds
When claiming Goods and Services Tax (GST) credits or indirect tax refunds, it is essential to be aware of the applicable time limits.
Your entitlement to claim a GST credit expires four years from the due date of the earliest activity statement in which you could have claimed it, irrespective of any tax invoice requirements.
Within this four-year period, you can claim the credit in any activity statement that you lodge.
Managing Refunds Resulting from GST Errors
If you have a refund due to a GST error, you have several active options:
1. Revise the Activity Statement
You can revise the activity statement in which the error occurred. By making the necessary corrections, you can rectify the error and claim the refund.
2. Request an Amendment in Writing
Another active option is to request an amendment in writing. This allows you to formally request the correction of the error and claim the refund.
3. Correct the Error in a Later Activity Statement
Alternatively, you can correct the error in a subsequent activity statement. By ensuring that you make the correction within four years and one day from the date you lodged the initial activity statement, you can still claim the refund.
The Period of Review
The period of review refers to the time limit for making changes or corrections to activity statements, whether through revision, amendment, or subsequent filings. This period extends for four years and one day from the date you lodged the original activity statement.
GST Exemptions and Reverse Charge Rules
If you are registered for GST, you should not be charged GST on imported services, digital products, or low-value imported goods. To ensure GST is not applied, provide your ABN to the supplier and explicitly state your GST registration. In these situations, tax invoices are not required for these sales.
If a supplier has erroneously charged you GST on an imported service, digital product, or low-value imported good, you have the right to request a refund from the supplier. Be proactive in rectifying these situations to ensure correct taxation.
Reverse Charge Rules and GST Payment
Under certain circumstances, the “reverse charge” rules may apply, requiring you to pay GST on purchases for which you would not be entitled to claim a full GST credit.
The reverse charge rules necessitate GST payment through your Business Activity Statement (BAS) for specific transactions. It is important to evaluate your entitlement to claim GST credits to determine if reverse charge rules apply.
Non-Resident Businesses Selling into Australia
For non-resident businesses engaged in selling goods and services into Australia, additional considerations regarding GST on imported services, digital products, or low-value imported goods apply. Ensure you are aware of the specific guidelines governing these transactions.
How to Calculate and Utilize Input Tax Credits for Business Purchases
Calculating the GST Amount on a Tax Invoice
When a tax invoice only mentions that the price includes GST without specifying the amount, you can calculate the GST credit. Divide the price by 11, and this result represents the GST credit you can claim, provided the item is used wholly for business purposes.
For purchases used for both business and private purposes, you can claim a GST credit only for the portion used for business. For instance, if 50% of the usage is for business purposes, you should claim a GST credit for 50% of the GST paid.
Cash Basis Accounting and Partial Payments
If you employ the cash basis accounting method and have not yet made full payment for a purchase, you are eligible to claim a GST credit solely for the portion of GST included in the amount you have already paid.
This applies until the full payment is made. Refer to the relevant guidelines for more information on choosing an accounting method.
Once you have computed your total GST credits, you can use them to offset the amount of GST you are required to pay. If your GST credits exceed your GST liability, you are entitled to a refund of the difference.
Situations Where Input Tax Credits Cannot Be Claimed
Claiming Goods and Services Tax (GST) credits is an important aspect of managing your business finances. However, there are specific circumstances where you cannot claim a GST credit.
- Not Registered for GST: If your business is not registered for GST, you cannot claim GST credits on your purchases. Registering for GST is a prerequisite for claiming these credits.
- Purchases without GST: You cannot claim a GST credit for purchases that do not include GST in their price. This includes purchases where the sale is GST free, such as basic foods, and purchases where the sale is input-taxed, such as residential accommodation, bank fees, and loan interest.
- Purchases from Unregistered Suppliers: GST credits cannot be claimed for purchases from suppliers who are not registered or not required to be registered for GST. Unregistered suppliers cannot charge GST on their sales.
- Wages Paid to Staff: GST credits cannot be claimed on wages paid to staff. Wages are exempt from GST, so no credits can be applied to these expenses.
- Absence of a Valid Tax Invoice: For purchases exceeding A$82.50 (including GST), you must have a valid tax invoice to claim a GST credit when lodging your activity statement. Without a tax invoice, you cannot claim GST credits for these purchases. However, there are specific circumstances where GST credits may be claimed without a tax invoice.
Other purchases for which you cannot claim GST credits, even if the GST is included in the purchase price, include:
- You cannot claim GST credits for purchases made for private or domestic purposes. GST credits are only applicable to purchases used for business-related activities.
- Purchases associated with making input-taxed supplies, such as those linked to providing residential accommodation, are not eligible for GST credits.
- For real property purchased under the margin scheme, you cannot claim GST credits.
- GST credits cannot be claimed on certain expenses that are not allowable as income tax deductions. Examples include entertainment expenses, which are subject to specific tax regulations.
- If the purchase of a car results in the cost exceeding the car limit amount specified for the relevant financial year, you cannot claim GST credits on the excess amount.
- GST credits cannot be claimed if the time limit for claiming them has expired. Ensure timely submission of GST credit claims to avoid missing out on eligible credits.
Special Rules for Specific GST Credit Claims
Certain purchases are subject to special rules when it comes to claiming Goods and Services Tax (GST) credits. These rules apply to specific types of transactions and are important to consider when managing GST credits for your business.
When setting up a company, the company is eligible to claim GST credits for the GST included in certain purchases made before the company’s official establishment. These pre-establishment costs may include expenses like set-up fees, trading stock, business premises and business registration.
In order to claim GST credits for pre-establishment costs, it is necessary to meet the following seven criteria:
- Purchase Purpose: The purchase must be made to bring the company into existence or to support its business activities after its formation.
- Timely Company Registration: The company must come into existence and be registered for GST within six months after the purchase.
- Membership, Officer, or Employee Status: You must become a member, officer, or employee of the company.
- Full Reimbursement: The company must fully reimburse you for the cost of the purchase.
- Non-Input Taxed Sales or Private Use: The purchase must not be used for making input-taxed sales or for private purposes.
- No Double GST Credit Claim: The company should not be entitled to claim a GST credit for the purchase if it subsequently acquires the same item from you.
- No Double GST Credit Claim for You: You should not be entitled to claim a GST credit for the same purchase.
When purchasing second-hand goods from unregistered suppliers for the purposes of sale or exchange (excluding manufacture), you can claim a GST credit, even if GST was not included in the price.
However, specific conditions must be met to be eligible for this credit. These include:
- The goods must be bought with the intention of reselling or exchanging them.
- The purchase should be made from an unregistered supplier, meaning they are not registered for GST.
- The second-hand goods must not be intended for use in the process of manufacture.
Other Special Rules for Claiming Input Tax Credits
- Periodic or Progressive Supplies: Special rules apply for claiming GST credits on periodic or progressive supplies, such as lease payments or service contracts. Ensure compliance with these rules when making such purchases.
- Purchases with Corporate Credit Cards: Specific guidelines govern GST credits for purchases made using corporate credit cards. Adhere to these rules to claim eligible credits.
- Land Purchases under Standard Land Contracts: When purchasing land under standard land contracts, additional special rules apply for claiming GST credits.
- Supplies of Gas and Electricity: Public utility providers’ supplies of gas and electricity are subject to distinct rules for claiming GST credits.
- Lay-by Purchases: During the lay-by period, GST is generally not charged on the payments made. However, once the lay-by is fully paid and the goods are delivered, GST becomes applicable to the total purchase amount.
This article is for general information only. It does not make recommendations nor does it provide advice to address your personal circumstances. To make an informed decision, always contact a registered tax professional.