GST was introduced into Australia in July 2000 and despite being part of our way of life for over 18 years it can still be quite a daunting system for business owners.
Each year thousands of Australians make the decision to start a new business. We have recently been working with several small businesses and sole traders who, without realising it, have grown their business and exceeded the GST registration threshold. This has highlighted the need for small businesses to track their sales, know their obligations to ensure they aren’t left out of pocket having to handover 1/11th of their sales to the ATO without factoring GST into their sale price.
So if you are running a small business or sole trader and not yet registered for GST here are some important things you need to know.
Does my business need to register for GST?
Your business will need to register for GST if your annual turnover is $75,000 or more. You have a choice to register or not if it's less than that. Taxi drivers and ride-sharing drivers, however, need to register for and charge GST no matter what their turnover is. (For example Uber Drivers must register)
- You must register for GST if you reach the $75,000 turnover threshold or if it looks likely that you will exceed it
- Once you’ve passed the turnover threshold, you must register within 21 days
Businesses with a turnover of less than $75,000 are given the choice of registering for GST because if a business is spending extensively on supplies, the business might want to claim the GST credits back. This is particularly the case if GST credits on purchases exceed the GST charged to customers.
How does GST work?
The current rate of GST is 10%. This means that if you charge $100 for your goods or services, your customer will be charged $110. The additional $10 is the GST which needs to be paid to the ATO.
When you buy supplies for your business, for a lot of your purchases you'll be charged 10% in GST which you can claim back as a credit. At the end of each GST period – usually quarterly but occasionally monthly - you need to account for the GST you've collected on your sales minus any that you've paid (the credits) on your purchases. The difference is the amount payable or refundable.
You do this by completing a Business Activity Statement (BAS) and paying the net GST to the ATO or advising them of the refund owing to you.
A Business Activity Statement (BAS) is used to report all your business tax obligations and entitlements. You need to report all the GST charged on your sales and the credits on your business purchases on your BAS as well as your pay as you go (PAYG) instalments and PAYG withholding tax if you are an employer.
Businesses with a turnover greater than $20 million must complete a BAS on a monthly basis and other businesses can also choose to do this if they prefer (for instance, if there are cash flow advantages to your business). Otherwise, BAS forms are due quarterly.
You must lodge your BAS quarterly by the 28th day of the month following the end of the financial quarter (September, December, March, June). If you lodge monthly, your BAS must be lodged by 21 days after the end of each month. If you use a Registered Tax or BAS Agent to lodge your BAS on your behalf you may be eligible for an extra month to lodge your quarterly BAS.
Accounting for GST
When registered for GST you must provide your GST registered customers with a tax invoice for all sales totalling more than $82.50 (including GST)
There are two ways to account for GST: the cash basis or the accruals basis.
Businesses with a turnover of less than $2m can choose which method they prefer. Other businesses must use the accruals basis.
If you apply the cash basis, you must account for sales and purchases in the period in which you are paid for sales or pay for purchases. The advantage of this method is that GST reporting is better aligned with cash flow, which can be helpful for small businesses.
If you apply the accruals basis, you must account for sales and purchases in the period in which you invoice sales or receive an invoice for purchases.
GST and income tax deductions
If you are able to claim an income tax deduction for something you've bought for the business, you can only claim for the net amount (without the GST). This is to prevent you effectively getting tax relief twice on the same amount.
If there's no GST credit for that purchase (for example if it's an 'input taxed' item), you can claim an income tax deduction for the gross amount (including the GST).
'Input taxed' items do not include a GST component in the price, hence a GST credit cannot be claimed. Examples of input taxed items include rent on residential premises, financial items such as loans, ATM transactions and sales of existing residential premises (excluding new homes or commercial buildings.
For more information on GST and how it affects your business, contact us today (08)8284 3208.
Carly Thornton, Senior Tax Manager