GST reimbursements and credits: everything you need to know
You’ve heard the old saying about death and taxes, right?
Well, it turns out that some taxes aren’t as unavoidable as we’re led to believe.
At least, this is the case for Australian businesses registered for goods and services tax (GST). In fact, your company may be eligible for reimbursement of some or all taxes paid on any GST-bound expenses over the year.
This is where GST credits come in.
What are GST credits?
Goods and Services Tax credits are tax credits given to GST-bound companies based on any GST-related expenses they incur over time.
As a quick recap, Australian businesses must pay GST if they sell goods and services and:
have an annual turnover of $75,000 or more, or
are a non-profit organisation with an annual turnover of $150,000 or more, or
are a taxi or ride-sourcing driver — regardless of annual turnover.
GST credits can be claimed on a monthly, quarterly, or annual basis. Small businesses must make an annual private appointment of GST, in which they calculate the amount of GST credit owed on partial business expenses.
The goal of issuing GST credits is to balance out the amount of Goods and Services Tax paid by the company over time.
Yes, your company will always be responsible for paying GST on goods and services sold to your customers. But, with GST credits, you can be reimbursed — at least in part — for taxes incurred when making business-related purchases.
When can businesses get reimbursed for GST?
There are 2 key instances in which Australian businesses are eligible for GST credits:
after incurring GST-bound business expenses
when a delinquent customer owes bad debt on a GST-bound purchase.
Let’s take a closer look at each of these scenarios.
GST-bound business expenses
The most common application of GST credits revolves around a business’ expenses.
But, this isn’t to say that GST credits apply to all expense-related taxes a business incurs. To be sure, the rule only applies in certain circumstances.
First and foremost, only purchases made specifically for business use are eligible for GST credits. In cases where a purchase will be used only in part by the business, further calculations will be needed to determine the tax credits earned.
(More on this in a bit.)
GST credits are only applicable to expenses made for operational purposes — and are not applicable to purchases made to create input-taxed supplies.
financial supplies (including most transactions relating to money)
existing residential premises
second and subsequent supplies of precious metals after refining.
According to the Australian Taxation Office:
“If you make an input-taxed sale you're not entitled to credits for the GST on the price of your inputs (the goods or services used to make the goods or services sold).”
GST must also have been included in the purchase price of a product or service for the buyer to claim a tax credit for it. For purchases of over $82.50 AUD, businesses must also have a tax invoice as provided by the supplier.
(Basically, it needs to be crystal clear just how much GST was paid on a given purchase before you can get reimbursed for it.)
Finally, the buyer must have assumed financial responsibility for the purchase. Whether they’ve already paid it off in full, or are still liable for future instalment payments, the buyer can only claim GST credit once they’ve taken complete ownership of a given expense.
To recap, GST credits are only applied:
when the purchase will be used at least in part for business purposes
if the purchase will not be used to create input-taxed supplies
when GST was included in the purchase price, and/or a tax invoice was provided by the supplier
after you’ve assumed liability for payment of the good or service purchased.
Unpaid debts on GST-bound sales
The other key scenario in which GST credits apply is when a company has been stuck with bad debt on GST-bound sales.
A clothing manufacturer sells $10,000 worth of T-shirts to a retailer. After adding GST, the final amount owed is $11,000, which the retailer agrees to pay the balance within 60 days. terms. Unfortunately, the retailer misses both payments, still owing the manufacturer the $11,000 in full. The manufacturer, then, would be eligible for $1000 in GST credit.
(The retailer would also be liable for the rest, but that’s another discussion entirely.)
Simply put: if your customer doesn’t pay up on GST-bound purchases, you can likely recoup the unpaid taxes via a GST credit.
When are businesses not entitled to GST reimbursement credits?
It’s also important to know when your business is not entitled to GST credits.
In some cases, your company as a whole may not be eligible for these tax credits. In others, it’s only certain purchases that will or will not be eligible.
There are 2 main scenarios in which your company as a whole will be ineligible for GST reimbursement.
Most obviously, your company will not be eligible for GST credits if it’s not registered for GST in the first place. If you aren’t paying GST on sales made, there’s nothing to reimburse on the backend.
Similarly, if none of your suppliers are registered for GST, this inherently means none of your business purchases will be eligible for said tax credits. Again, since you haven’t paid goods and services tax on the expenses, there’s nothing to reimburse in this regard.
Even if your company is registered for GST, this doesn’t mean you’ll be eligible for tax credits on every GST-related expense you incur.
Purchases made for private use are not eligible — period. While this goes without saying, we’d be remiss in our duties if we didn’t say it clearly.
As mentioned, your input-taxed purchases will not be eligible for GST reimbursement. Purchases made to create input-taxed supplies (such as costs associated with providing residential accommodations) are also ineligible.
Real property purchases under the margin scheme also cannot be claimed for GST reimbursement. Staff wages — which are GST-free — are ineligible, as well.
In certain cases, a purchase may only be eligible for GST credit under certain circumstances. Purchases on business vehicles, for example, may only be credited up to a certain amount. Purchases for entertainment purposes may also be eligible, in part or in full, based on a variety of factors.
Finally, purchases become ineligible after the legal time limit for reimbursement has elapsed. We’ll look more into this in a bit.
Bonus resource: Avoid these common GST mistakes in BAS reports — and avoid leaving money on the table.
How do you calculate GST input tax credits?
Calculating the GST input tax credits you’ve earned varies in complexity based on the situation.
Simple GST reimbursement calculation
When GST credits apply in full to a given purchase, the credits due are equal to the amount of taxes charged.
To find the total amount of GST credits earned for all applicable purchases, you’ll simply need to add up the total GST charged.
Calculating GST credit on partially input-taxed sales
We said earlier that expenses incurred for the purpose of creating input-taxed products are ineligible for GST reimbursement.
But, this only applies if the entire purchase is used for these purposes.
In cases where part of the expense will be used for operational purposes, businesses can claim tax credits as appropriate. Essentially, you’re figuring out what percentage of the expense is bound to GST — which will in turn tell you how much tax credit you’re eligible for.
The formula to figure out how much tax credit you’re eligible for here:
Claimable GST Credit = (Full GST Credit) x (Extent of the non-input taxed purpose%) x (extent of payment%)
How do GST credits and income tax deductions work?
There are 3 key things to know about the relationship between GST credits and income tax deductions:
1. Tax deductions on purchases
Income tax deductions are made on purchases before GST has been added and accounted for.
So, if you buy $100 in goods, and are then charged $10 more for GST, you’d only claim $100 as an expense on your income tax statement. (The extra $10, of course, would be claimed for GST credit.)
2. GST-ineligible purchases
If your company is not entitled to a GST credit on a given purchase, you’d claim the entire cost — including any GST charged — as a deduction.
Here, you’d claim the full $110 on your income tax statement, and would not add any information to your GST ledger.
3. Deductions based on depreciation
There may be times when you’ll be entitled to an income tax deduction based on depreciation. In such cases, the cost of the depreciating asset is reduced by the amount of GST credit you’re entitled to. An example:
ACME is registered for GST and purchases an industrial printer. The seller, also registered for GST, charges ACME $1100 total — with the additional $100 being added on for GST. ACME can immediately claim the $100 on its GST activity statement. When accounting for depreciation, ACME will use $1000 as the baseline cost of the purchase.
Are there time limits on claiming GST credits and refunds?
We mentioned earlier that GST credits expire after a certain period of time.
In the simplest cases, this so-called “period of review” extends 4 years and 1 day from the earliest activity statement in which you could have claimed it. So, a payment logged on June 1, 2021 would be eligible for tax credit reimbursement through June 1, 2025.
For purchases made in instalments, payments from different payment statements will have this 4-year period of review attached. So, if you agree to pay off a purchase in 2 equal monthly instalments (for example, through June and July 2021), you’d then have until June 2025 to claim the first half of your GST reimbursement, and July 2025 to claim the latter portion.
Take the hassle out of BAS and GST reporting
The government will never tell you when you’re actually owed money, but they won’t be backwards in coming forward when you owe them.
With our software, you’ll always know what reimbursements you’re eligible for — and can easily put wheels in motion to get the cash back you deserve.
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