Understanding GST for your business
GST is a tax first introduced back in 2000. Even though it has been in place for over a decade, as a practicing accountant, this is still one of the areas my clients frequently require assistance with.
There are two reasons for this. There’s not a blanket GST imposed on all goods and services, nor is there only one method of accounting for GST. Also, understanding the wording alone can be very tricky — it really is like learning a new language. That’s why the very first point of order is to make sure your financial recordkeeping is up to scratch, and the best way to do that is to implement an online accounting software in your business.
Beyond that, knowing some of the specifics regarding GST will help keep you prevent any issues regarding reporting and compliance when it comes to dealing with the ATO.
The current GST rate is 10 percent and is charged on the supply of most goods and services. There are two methods of accounting for GST: on a cash basis or a non-cash (accrual) basis. The method you use affects when you must account for GST and when you are able to claim GST credits.
Methods to account for GST
- Cash basis — You can use this method if both of the following are met:
- Your business annual turnover is less than $2 million.
- You lodge your business tax return on the basis of declaring income when you bank it and expenses when you pay for them out of the bank account. This is also known as a cash basis, and it is the same for GST. You claim an expense for the GST paid when you pay it, and you remit the GST collected when you receive the payment for your goods or services supplied.
- Non-cash (Accrual) basis — You use this method when your business annual turnover is $2 million or more and you lodge your business tax return on the basis of declaring income when it is invoiced and expenses when your business has been invoiced.
Understanding reporting obligations
There are four tax periods when you will be required to report your GST to the Australian Tax Office (ATO). These are for the July-September quarter, October-December quarter, January-March quarter, and April-June quarter.
You will be required to complete a tax form known as a Business Activity Statement (BAS) in each of these quarters declaring the GST collected on sales income. In the BAS, there are three options you can choose from on how to report the GST information each quarter, including an option if you are eligible to report annually. You can choose from:
- Calculating GST and reporting quarterly.
This is available to all quarterly businesses. You report on all the GST labels on your activity statement and pay your actual GST amount.
- Calculating GST quarterly and reporting annually.
This is available to all businesses with a turnover less than $20 million. You still calculate and pay your actual GST amounts but report only the GST collected and paid and total sales for each quarter. You then report any amounts for exports, other GST-free sales, capital purchases and non-capital purchases on an annual GST information report, which can be lodged at the same time as your annual income tax return.
- Paying a GST installment amount, available to businesses with a turnover of $2 million or less.
This allows you to pay a quarterly GST installment amount worked out by the tax office and to report your actual GST information annually. To be eligible you need to have reported actual GST amounts for at least four months (or two quarterly activity statements), and you can’t be in a net refund position.
The option you choose also depends on your current accounting situation, as the only way you can accurately complete the GST reporting requirements is to have all your business transactions up to date and reconciled.
Calculating GST payable
GST is payable if you make a taxable supply. A taxable supply is a supply you have paid for or receive consideration for in the course of running your business. The supply is connected with Australia, and is not GST-free or input taxed.
Note: Some purchases and income received from overseas are GST-free.
The following are examples of GST-free purchases or input-taxed purchases:
- Health and medical services
- Educational services
- Government fees
- Most food
- International travel
- Bank fees
- Residential rent
GST is calculated as 10 percent of the value of the supply. The value of a taxable supply is the consideration payable for the supply (before GST is added). For example, if the value of the supply is $100, the GST payable is 10 percent of $100, being $10. The price GST inclusive of the supply is $110. To work out the GST paid, you can divide by 11. For example, if the supply cost $77, then the GST paid would be $77 divided 11, being $7.
It’s important to ensure you are declaring GST collected and GST paid accurately, as the ATO can use the BAS as an audit point. To do this, you must choose the correct GST code when recording your business income and expense transactions in your accounting software.
Always have the invoice you paid in front of you, and check the GST paid amount when you are entering the expense. The same goes for your business income — ensure your invoices are accurate. You must have the tax invoice to know your business GST obligations.
In other words, do not guess the GST amount. The invoice must be called a “tax invoice” if GST is charged. The tax invoice should include the supplier’s ABN and name, date of issue, what is supplied (including quantity, if applicable), the GST amount, and the total price of the supply.
Finally, remember that your friendly accountant can assist in getting this right, so use them!
For a peace of mind this financial year, it is important to meet all your tax and compliance obligations for the EOFY period. Visit MYOB’s Tax Changes Information section, meant to help small businesses and startups stay on top of their game with tax changes and more.
And finally, remember to engage with an accredited tax advisor to make sure you’re getting things right from the start.
The information provided here is of a general nature for Australia and should not be your only source of information. Please consult an experienced tax agent as each small business’ circumstance will vary for end of financial year.