Understanding Goods & Services Tax (GST)
Goods and Services Tax (GST) is a broad-based tax of 10% on most goods, services, and other items sold or consumed in Australia. (Source: Australian Taxation Office or ATO)
When to charge GST
GST is levied on most transactions in the production process and is included in prices of products and services.
GST is included in all transactions such as the sale of goods, provision of services, and leasing of properties or buildings. These are all taxable sales.
You must register for GST if your business or enterprise has a GST turnover of $75,000 (GST threshold) or more. If it is below the threshold, registering for GST will depend on your choice.
To register for GST, you must have an Australian Business Number (ABN). You may use the same application form provided by ATO, in applying for both GST and ABN. Otherwise, you may use a separate form in applying for GST if you already have an ABN, which you will use as GST registration number.
How GST works
Generally, businesses registered for GST will include GST in the price they charge for their goods and services and then claim credits for the GST included in the price of goods and services they purchase for their business.
Kurt’s business is on timber production. A furniture manufacturer buys timber from him for $110. He then pays $10 GST to ATO and keeps the $100 for his business.
A furniture retailer buys a table produced by the furniture manufacturer for $220, with $20 GST. The furniture manufacturer can claim a credit of $10 for the GST included in his payment to Kurt. The remaining $10 after offsetting the credit from the $20 GST collected from the purchase made by the retailer will be paid to ATO.
The table is bought by Karen at the furniture retailer’s shop for $330 including $30 GST. Same as with the furniture manufacturer, the furniture retailer can claim a credit of $20 for the GST amount he paid for the table. The remaining $10 after the offset of $20 from the $30 GST collected from Karen will be paid to ATO.
ATO collected a total of $30 GST. Karen, the final consumer bears the whole amount of GST included in the price of her purchased product.
A tax invoice should be issued to your customer for every taxable sale. Similarly, your business should receive tax invoices for you to claim GST credits on your purchases.
There are information that needs to be reflected in the tax invoice depending on the sale price.
For taxable sales of less than $1,000, tax invoices must include sufficient information to clearly identify the following seven details:
- ‘Tax Invoice’ should be notably reflected
- Seller’s identity
- Seller’s ABN
- The issue date of the tax invoice
- A brief description of the items sold
- The GST amount payable (This can be shown separately or, if the GST amount is exactly 10% reflect the words ‘Total price includes GST’)
- The sale price including GST
In addition to the items listed above, for taxable sales of $1,000 or more, tax invoices should include the following:
- Buyer’s Identity
- Buyer’s address or ABN
- For each description, the quantity of the goods or the extent of services sold
If you have not provided a customer with their tax invoice, they may require you to provide a tax invoice. This should be given to them within 28 days from their request.
Accounting for GST in your business
As a GST-registered business, you need to pay the GST that you collected to the ATO on a regular basis whether it be monthly, quarterly, or annually depending on the type of your business and its yearly turnover. This reporting period is known as the ‘tax period’.
Collected GST should be sent to ATO with your business activity statement (BAS) at the end of each tax period. The total amount to be paid to ATO is reduced by the GST credits for your business purchases.
Businesses which are not registered or not obliged to register for GST must not include GST in the price of their products and services, consequently, they are not eligible for GST credits for their GST-inclusive purchases. However, on their personal tax return, they can claim as an income tax deduction the GST that was paid on GST-inclusive purchases as business expenses.
- Register your business for GST when required or necessary.
- Issue valid tax invoices to customers
- Keep your purchase tax invoices so you can claim GST credits
- Read the guide to GST for SmallBusinesses available on the ATO’s website.
NOTE: This month we’re holding a limited number of Free Business Strategy Sessions designed to show business owners how they can manage and grow their enterprises with the least amount of cost and disruption possible.
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James HuyVuong is a CPA and the owner of Your Accounting Partners. Partnering with businesses from start to scale thru to sale.