GST (goods and services tax) is ultimately paid by the end user at a certain rate on the supply of most goods and services.
It is implemented by the collection of the tax at each step along a chain of transactions involving the supply of goods or services until the end user is reached. To prevent the cascading, a credit is provided for the tax paid along the chain until the end user is reached.
In Australia, the GST rate is 10% and is imposed on the supply of goods and services in Australia and on goods imported into Australia – these are referred to as the making of “taxable supplies” and “taxable importations”.
The entity making the taxable supply is liable to pay the GST to the ATO but generally collects it from the customer.
The GST is 10% of the value of the supply.
A retailer, registered for GST, sells a dress for $100. The GST will be 10% of $100 = $10. The retailer therefore collects $110 from the customer and pays the $10 to the ATO.
A credit is provided for the GST paid along the chain by entities making taxable supplies which is called an ”input tax credit”. The credit is only available to entities registered for GST.
It effectively means that most sales by registered entities to one another are tax-free.
Example – Input tax credit
If the retailer bought the dress from a manufacturer, the manufacturer will have had to collect GST on the supply of the dress. If the dress was worth $80, the manufacturer would have added 10% of $80 to the price and the retailer would have paid $88 to the manufacturer. The manufacturer would have been required to pay the $8 to the ATO.
The retailer will get an input tax credit for the $8 GST paid to the manufacturer for the dress. When the retailer fills in its Business Activity Statement, it will subtract the $8 input tax credit from the $10 GST and send the difference ($2) to the ATO.
The final customer does not get an input tax credit. Displayed prices are required to include any GST payable.
There are two main variations to the rules above:
- ”GST-free” activities that are not taxed (i.e. GST does not have to be collected on the transactions and input tax credits are allowed for tax paid on purchases); and
- “Input-taxed” activities that are not taxed, and input tax credits are generally not allowed for tax paid on purchases.
The basic rule
The basic rule is that GST does not have to be paid in relation to goods or services provided unless the supplier is registered or required to be registered for it.
If the supplier is registered or required to be registered, GST must be remitted on any goods or services supplied in relation to the enterprise (called taxable supplies) except for the following:
- where the supply is not made for any consideration (there are exceptions if the supply is made to an associate);
- the supplies are made as part of a private recreational pursuit or hobby;
- supplies by an individual or partnership of individuals without reasonable expectation of profit or gain; or
- as a member of a local governing body (e.g. a councillor) established under a State or a Territory law (other than an eligible local governing body pursuant to the Tax Act sec 221A)
- supplies to the extent to which they are GST-free or input-taxed
- employment services for which salary and wages are paid.
An “enterprise” includes activities done in the form of a business or in the form of an adventure or concern in the nature of trade.
Just about any taxpayer or taxpayer entity that carries on an enterprise or intends to do so in the future can register for GST purposes including superannuation funds, trusts and individuals.
Registration is compulsory where the entity is carrying on an ”enterprise” with an ”annual turnover” of $75,000 or more ($150,000 for non-profit bodies). Once an entity is required to be registered, it must do so within 21 days. Registration is free.
All entities, including independent contractors, wishing to register must sign a declaration stating that they are carrying on an enterprise.
As those that do not register (i.e. small businesses) cannot charge GST on their supplies or claim a refund for the GST paid on their acquisitions, a cost/benefit analysis must be carried out to determine if it is beneficial to register or not.
Monthly or quarterly periods
Entities must calculate their GST liability or refund on a monthly or three-monthly (with each quarter ending on 31 March, 30 June, 30 September and 31 December) basis.
Generally, if an enterprise has an annual turnover of less than $20m, it can choose between monthly or quarterly periods. Regardless of its turnover, an enterprise must lodge monthly in the following situations:
- the enterprise elects to lodge on a monthly basis;
- the enterprise will be carried on in Australia for less than 3 months; or
- the enterprise has a history of failing to meet its obligations under a taxation law
If the entity’s annual turnover is $20m or more, it must use monthly tax periods.
An enterprise which has elected to lodge on a monthly basis can go back to lodging on a quarterly basis after 12 months.
Input tax credits
The basic rule is that those registered or required to be registered can claim a refund of any GST paid subject to some exceptions. The refund is referred to as an input tax credit and is subtracted from the GST payable for each tax period.
The amount of the credit is 1/11 of the price of the supply. For example, if a person registered paid $5,500 for an item, GST would have been 1/11 x $5,500 = $500 = the amount of input tax credits available.
Note there are exceptions. Input tax credits are not available to the extent:
- the taxpayer made the acquisition for a private or domestic purpose
- the taxpayer made the acquisition to make input-taxed supplies
- the payment was in respect of one of the following:
- relative’s travel expenses
- club fees
- non-deductible entertainment
- non-compulsory uniforms.
There is a limit on the input tax credits that can be claimed on luxury cars. The most that can be claimed is 1/11th of the luxury car limit which is currently $57,581.
If a supply is GST-free, no GST is payable on the supply, but the entity is entitled to an input tax credit on any creditable acquisitions that relate to the supply.
A registered retailer exports a dress for $100. He paid $8 GST to the manufacturer when he acquired the dress. Most supplies of goods and services exported from Australia are GST-free and therefore the retailer will not be required to collect it. The customer will only pay $100 (not $110) for the dress.
The retailer will claim an input tax credit of $8 for the GST he paid to the manufacturer and this will be refunded to him. The supply will be a GST-free supply as the $8 remitted by the manufacturer to the ATO will now be refunded to the retailer. Therefore, the result is that the ATO will receive no GST in respect of the dress.
There is a list of GST-free supplies in the GST Act.
If the supply is input-taxed, no GST is payable on the supply. However, the taxpayer is not entitled to input tax credits for anything acquired or imported to make the supply. Input-taxed supplies include:
- the supply of residential premises (other than commercial residential premises or new residential premises)
- fund- raising events by charitable institutions
- financial supplies.
Joe rents out a residential rental property. This is input-taxed. Joe will not collect any GST on the rent. However, Joe cannot claim back input tax credits for the GST component of any expenses in relation to the rental property (e.g. agent’s fee, repairs).
If an entity has an annual turnover of less than $10m per annum, it may choose to account for GST on a cash basis.
All others (i.e. those with an annual turnover of $10m or more, except charities) must account for it on an accruals basis. (The ATO is given a discretion to allow entities to operate on a cash basis even if they exceed the threshold).
Accounting for GST on a cash basis means that the tax does not have to be remitted until payment is received from customers.
No input credit entitlements arise until the purchases are paid and the entity holds a tax invoice for the creditable acquisition. A tax invoice is not necessary if the value of the supply is less than $82.50 (GST inclusive).
Accounting on an accruals basis means that the whole of the GST payable must be remitted on the earlier of:
- the issue of an invoice; or
- the receipt of any consideration in connection with the supply.
The whole of the input credit entitlements on creditable acquisitions arise on the earlier of:
- any consideration being provided by the entity; or
- the entity becoming liable to provide any consideration,
and the entity holds a tax invoice for the creditable acquisition. A tax invoice is not necessary if the value of the supply is less than $82.50 (GST inclusive).
The Commissioner can change the attribution rules where he is satisfied that otherwise their application would be inappropriate. In GSTR 2000/29 he has changed the rules in the following circumstances:
- contracts subject to a statutory cooling off period – the GST liability or input tax credit entitlement is attributed to the tax period in which the cooling off period expires;
- retention of consideration contracts – the entitlement on the retention is attributed to the period in which it is received or paid;
- agents – where a principal is reliant on an agent for information then the general attribution rules are varied so that instead of an entitlement arising when a trigger event occurs, it arises when the principal “becomes aware” of the trigger event;
- contracts where consideration is received or provided before the total consideration is known – the entitlement is proportionately limited according to the extent of the consideration received or paid. When the total amount of the consideration becomes known the remaining liability or entitlement is attributed to the period in which this becomes known; and
- supplies made through coin-operated machines and similar devices – the GST liability on these taxable supplies is attributed to the period in which the coins and notes are removed from the machines.
The rules have also been changed in respect of lay-by sale agreements and gas and electricity supplies.
In GSTR 2000/28, the Commissioner stated that where there is a taxable supply of land under a completed standard land contract, the GST is attributed to the tax period in which settlement occurs whether the taxpayer accounts on a cash or accruals basis. This means that no GST is payable, and no input tax credits can be claimed until settlement.
Transactions with different treatment
It is inevitable that businesses will have transactions that have different GST treatment.
For example, most businesses will be the recipient or supplier of at least one of the following input-taxed supplies: bank charges, borrowing expenses, insurance and superannuation. No GST is charged on these supplies and no input tax credits are available.
Similarly, no input tax credits are available for GST-free items acquired.
Therefore, for a business, all supplies provided and received need to be identified and categorised.
How we can help
At Bristax, business accounting is one of our specialist areas. Our business accountants would be happy to speak or meet with you to discuss your situation. We’ll take the time to understand your circumstances and provide advice that maximises your financial position.
You can contact us on 1300 883 597. We have offices in Brisbane, Sydney and Melbourne and provide full tax and accounting services Australia wide via the internet, email and phone.