For small business owners, GST (good and services tax) is an issue that comes up regularly. When starting out, a business owner must determine whether to register for GST. Australian businesses that have registered for the goods and services tax then need to account and pay the tax to the ATO. Here we'll cover the elements that small business owners need to consider to meet requirements connected with the goods and services tax.
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.
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.
Taxi drivers and ride-sharing drivers need to register for and charge GST no matter what their turnover is. Not-for-profit organisations, by contrast, can reach a turnover of $150,000 before they are required to register.
You can register for GST online (and also apply for an ABN) via the Australian Business Register (ABR) website (www.abr.gov.au). You can also register for GST via the Business Portal on the ATO website, or H&R Block can help you register.
The ABR is the central registry of Australian business information so as well as getting an ABN and registering for GST you can get a business tax file number (TFN), apply for pay-as-you-go (PAYG) withholding and register your business name.
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, 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 if credits on purchases exceed debits on sales). You do this by completing a business activity statement and paying the net GST to the ATO.
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.
A business activity statement (BAS) is used to report all your periodic 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.
Businesses with a turnover greater than $20 million must complete a BAS monthly, 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.
Accounting for GST
When you make a taxable sale of more than $82.50 (including GST), your GST registered customers must be given a tax invoice for them to be able to claim the GST credit. If they request one and you don't provide it at the time, you have 28 days from their request to give it to them.
Invoices need to display specific information. For sales of $1,000 or more, invoices must display:
- the words' tax invoice'
- the seller's name and ABN
- date of the invoice
- buyer name and ABN or address
- a description of the items sold, the quantity and the price
- the GST amount or that the total amount includes GST.
Invoices for less than $1,000 need to have all the above but not the buyer's details.
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 from 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.
Should you be charging GST?
Businesses generating less than $75,000 of income per year are exempt from charging GST. But if you have the choice, that doesn't necessarily mean you should avoid collecting GST.
If you're working towards earning more than the threshold, then it's smart, to begin with, the end in mind. Remember, most of your clients will expect to pay GST. This is particularly important if you're providing products or services to other businesses, who generally don't factor the GST component into their costs, business plans or budgets.
Also, consider whether it will be beneficial to claim back the GST in the same quarter in which it is incurred. This applies particularly to soloists, whose operating costs are a high percentage of their income. You're able to claim the GST as an operating expense in your tax return, but it won't have the same impact as claiming back all the GST each quarter.
GST and invoices
Your invoices must state whether or not they include GST, and if you're charging GST, you must issue a Tax Invoice that clearly states the amount of GST it includes. On the other hand, if you're not charging GST, you'll need to issue an Invoice that clearly states' No GST has been charged'.
As a purchaser, when you receive an invoice from a supplier that doesn't charge GST, you need to record it correctly and make sure that you don't inadvertently over-claim GST. The full amount is your cost.
Remember that it's not really your money
One of the most important aspects of successful GST management is to remain aware that the GST you collect is not your money. It belongs to the ATO and is merely in your possession for a short time before you must hand it over.
If you're not careful, collecting GST can cause problems for your cash flow, so I highly recommend that you create a separate bank account and regularly siphon off the GST you've collected into it. Whether you do it daily or weekly, put 10% of the funds that come into your business into that account.
My clients who do this never have BAS payment issues. Numerous high-interest accounts are easy to set up, and many don't charge any fees. Stash the GST in one of them, and not only will you always have the cash in the bank to pay your BAS, but you'll even earn interest on it. If you have employees, stash the PAYG tax into that account as well.
Choose a payment cycle that suits you
One of my clients has recently moved from paying GST quarterly to paying monthly because it's easier for her cash flow. I can hear some of you groaning at the thought, but sometimes doing things more regularly does make it easier. If you struggle to keep on top of your BAS quarterly, this could be a good option for you.
What is the goods and services tax (GST)?
The goods and services tax (GST) is a broad-based tax of 10% on most goods, services and other items sold or consumed in Australia. Businesses collect GST for the government whenever they sell products and services and pay this revenue to the Australian Tax Office (ATO). The government then distributes this money to our states and territories to pay for public services and infrastructure, such as hospitals, roads and public schools.
The GST was introduced on 1 July 2000 and replaced a range of state and federal taxes, duties and levies. GST is ultimately paid by consumers who are the end-users of these goods and services.
What products or services are exempt from GST?
Most basic foods, some education courses, and some medical, health and care products are exempt from GST. If you're exporting and unsure whether you should be charging GST on your sales, speak to your business activity statement (BAS) agent or accountant.
The sale of a business as a going concern is GST-free if:
- Prior to the sale, the buyer and seller agree in writing that the sale is of a going concern.
- Everything necessary for the business's continued operations is supplied to the buyer.
- The seller carries on the business until the settlement date.
- The buyer is registered for GST.
- Payment is made for the sale.
Unless all of these conditions apply, the sale of a business may be subject to GST. You should always speak with your accountant and solicitor prior to entering a sale transaction for advice specific to your situation.
Are exports exempt from GST?
Exports of goods from Australia are generally GST-free, so long as they're exported from Australia within 60 days of the supplier issuing an invoice for the goods or receiving any payment for those goods.
Exports of services are usually GST-free if the recipient of that service is outside Australia.
There are specific rules that determine whether an export sale is GST-free; it's best to speak with your accountant or the ATO on 13 72 26 regarding your specific circumstances.
Do I need to register my business for GST?
You must register for GST if:
- Your annual business income is $75,000 or more a year, or $150,000 or more for not-for-profit organisations.
- You provide taxi travel (transporting passengers by taxi or limousine for a fare) as part of your business.
- You want to claim fuel tax credits.
If your annual business income is less than $75,000 (or $150,000 for not-for-profit organisations), you don't need to register for GST, but you can do so if you choose.
Once you're registered for GST, you can claim back the GST you pay on the goods and services you buy for your business (so long as you have a tax invoice from the supplier).
How do I pay GST to the ATO?
Your GST reporting and payment cycle depends on your annual turnover.
- If your GST turnover is $20 million or more, you're required to report and pay GST monthly. You can use one of two reporting methods — the full reporting method or the simpler BAS reporting method. (If your GST turnover is $10 million or more, you'll need to use the full reporting method.)
- If your GST turnover is less than $20 million and the ATO hasn't asked you to report GST monthly, you can report and pay GST each quarter. If you pay GST quarterly, you can use one of three reporting methods — the full reporting method, the simpler BAS reporting method or the GST instalments method.
- If you're registered for GST, but your GST turnover is less than $75,000 (or under $150,000 for not-for-profit organisations), you can elect to report and pay GST annually. You don't need to report or pay any GST during the year but must do so at the end of each financial year using the simpler BAS reporting method.
Once you're registered for GST, the ATO will send you a business activity statement (BAS) to complete. Your BAS will help you to report and pay your GST, any pay as you go PAYG instalments and other taxes. You must lodge and pay your BAS on time to avoid penalties; if you're likely to miss the due date, you should contact the ATO on 13 72 26 as soon as possible.
Accounting for goods and services tax
The two ways to account for GST are cash and (non-cash) accrual.
Business with less than $2 million in annual sales (and that meet other criteria) can account for GST on a cash basis. Under this method of accounting, you account for GST for payments you receive in the reporting period (usually a quarter) for goods and services delivered. For purchases, you account for the goods and services tax based on the funds you spend on these during the reporting period.
For example, if you received $66,000 (including goods and services tax) in the quarter and purchased $22,000 of goods and services for the business, you would need to pay the ATO $4,000 in goods and services tax ($6,000 received and $4,000 spent on goods and services tax).
Non-cash (accrual) basis
Using the non-cash (accrual) method of accounting for the goods and services tax, you account for GST on the sales you make. This can include issuing a tax invoice or receiving full or partial payment for goods and services. So when using this accounting method, you might need to pay the goods and services tax before you receive these funds.
For purchases, you can claim input tax credits for amounts invoiced to you and if you make some payments (whichever comes first), but you are not required to as you can wait up to four years to claim input tax credits.
Most small businesses use the cash accounting method for GST. With this method, the money flowing through your business is more closely connected with good and services tax liabilities, so it makes it easier to manage cash flow.
Consider business finance options to overcome cash flow issues
Not being able to pay your GST obligations is a sign that your business is having cash flow challenges. In addition to taking steps to overcome a cash flow crunch, unsecured business finance could be an option. These types of business loans assist with short-term cash flow challenges. The application process is quick and simple. With Moula, for example, you can complete the application online in around 10 minutes. In addition to your application, your financial data is safely and securely analysed online to determine your eligibility and the amount of the loan. If approved, the funds will be available in your account within 24 hours.
GST is an indirect tax payable by the suppliers of certain goods and services. If you are registered to pay GST, you first need to work out whether your goods and services are taxable. You cannot charge your customers GST if your goods and services are GST-free or input taxed. You can charge your consumers GST by adding a 10% flat fee on top of the price you charge for your goods and services. As a business, you may also claim for a refund on the GST you paid yourself when you purchase input materials from suppliers. However, this will not apply if the input purchased is used to produce input-taxed goods and services.