- If you are an Australian business with an annual turnover of $75,000 , then you need to register for GST.
- But not before you learn every single detail about it. If you decided to register for GST, which is good, you need to know all bout the regulations and responsibilities that come with it.
- So without further ado, keep on reading to find out the basics before you register for GST because you'll need all of them.
One of the basic principles of GST is that it is paid by the end consumer. A business that decided to register for GST is not the end consumer. This means that if you’re a business and you register for GST and see a price of $100 + GST quoted, although you may physically pay $110 to the supplier, you will get the $10 GST back when you lodge your BAS.
To expand on this example, let’s say you buy the $110 item and you then invoice your customer with a mark-up of 20%, so $100 x 120% = $120 + GST = $132 for the item. You will have paid $10 in GST and collected $12 in GST. If this was your only transaction for the period, then the amount of GST you would owe to the ATO would be $12 - $10 = $2. When you register for GST, you never pay or keep it, you just calculate the differences and pay or receive a refund for the difference. You are effectively an unpaid GST collector for the ATO.
Items without GST
When you register for GST, it does not apply to all products and services that you pay for. There are many things that businesses pay for on a regular basis that don’t include GST. This can include items like:
- Bank fees (but not merchant fees as these do include GST),
- Some components of insurance,
- Some components of motor vehicle registrations,
- Some licenses,
- Milk, tea, coffee and sugar,
- Overseas phone calls,
- Overseas travel,
- Employee medical expenses,
- ASIC filing fees,
- Stamp duty,
- Google Adwords,
- Bonds or deposits (on your office rental property, for example),
- Entertainment (check with your accountant first),
- Fines and penalties,
- Payments to overseas suppliers and domestic suppliers not registered for GST.
When you decide to register for GST, know that ff you import large quantities of goods and pay GST to customs, then you will be able to claim the GST, but this customs bill would need to be entered and the GST component handled in a particular way to ensure that it reports correctly on your BAS. The methodology here depends very much on the accounting software used.
How to enter transactions into the system when you register for GST
After you register for GST and start entering these transactions into your system, you need to use the correct tax code so that your accounting software firstly shows the right amount of GST and secondly reports the amount on your BAS (if in fact, it needs to be reported at all). I will use an example to illustrate this:
If you were to buy a number of items from the supermarket, let’s say biscuits and milk, then you would notice that the GST on the receipt is less than 1/11th of the total. This is because you pay GST on biscuits, but not on milk. You would need to enter this transaction as two lines. The milk would need to be on one line with a tax code that is GST free and does report on your BAS, (GST Free Expenses tax code in Xero lingo), and biscuits would be on the second line with a GST tax code, (GST on Expenses). The GST for the transaction should now match your receipt. Remember to keep an eye on this when you register for GST.
Another area where mistakes are often made before businesses register for GST is with motor vehicles or other plant and equipment that are financed. The GST may have been claimed when the asset was purchased, but then GST is claimed on the monthly repayments. This is double-dipping on the GST. When entering a repayment for an asset, be sure to check whether the GST was claimed upfront with the purchase, or whether GST is applicable to the repayments as different types of leases have different GST consequences.
If you have purchased goods from an overseas supplier and GST is shown, you cannot claim this amount. The ATO will not refund you for GST, VAT or sales taxes paid in another country. When you do register for GST bear in mind that if you see GST, VAT or any other type of tax on an invoice from an overseas supplier you can ignore it. Enter it as if there was no tax.
What if you don't register for GST?
Many sole traders and contractors are not registered for GST. The law gives you the option to either register for GST or not if your annual turnover is under $75,000, ($150,000 for non-profit organisations). So even though you may have received an invoice for labour, which is subject to GST ordinarily, if the supplier or contractor isn’t registered for GST, then they shouldn’t have charged you GST and you therefore can’t claim a GST credit. The advantages of not being registered for GST means that your tax affairs are simpler.
Button the flip side, if you’re re-invoicing goods to your customers, then it means that you’re more expensive because they’ve effectively lost out on the GST credit. To take the example from the first paragraph, if you bought the $110 item, (which you can’t claim GST back on), and markup the item by 20%, then you’re still charging your client $132, but without any GST on the price, which makes you $12 more expensive ($132 excluding GST - $120 excluding GST).
How to use tax code
When you register for GST, the use of a tax code can be quite confusing to non-professionals. There are two in particular that are often used incorrectly. The first one is a no GST tax code that does report on the BAS, (GST Free Expenses), and the second one is a no GST tax code that does not report on the BAS (BAS Excluded). So how do you know when to use one over the other? Generally speaking, any purchases made for the business need to be reported on the BAS. There are a small number of exceptions like stamp duty and entertainment, or anything else that’s not actually claimable as a business expense, like fines and penalties.
Other types of transactions that are not shown on the BAS are items such as funds that the owner has deposited into or withdrawn from the bank account that are not wages, superannuation payments, vouchers, prepayments, interest and loan repayments.
Final thoughts before you register for GST
It would be so much easier if everything we bought had GST and everyone would have to register for GST. That would save a lot of time having to check the GST amount on an invoice and then split the transaction accordingly.
If you feel bamboozled by GST and how to treat it correctly, then I would recommend getting a competent bookkeeper as soon as you can afford one. They’ll be able to do it in a fraction of the time, get it right, save you stress and free you up to work on areas of your business where your time is far better spent, like making more money.
Were there any difficulties you faced when you decided to register for GST? Let us know.