By Stephen Riches & Travis Allen
A 10% Goods and Services Tax (GST) started full operation in Australia on 1st July 2000. The introduction of GST was accompanied by a series of other tax measures, including personal tax cuts, collectively forming part of the so-called New Tax System.
GST is an indirect, broad-based consumption tax.
- Indirect means that it is levied on the supply of goods, services or activities, rather than directly on income. Other indirect taxes include stamp duty.
- A broad-based tax applies generally to all transactions by all types of taxpayers, with only limited exceptions.
- Consumption tax means that instead of being applied to income (as measured by the amounts that are received), GST is applied to consumption (as measured by the amounts that are spent). The tax is ultimately borne by consumers, not by producers or suppliers.
Despite its name, GST is not limited to ‘goods and services’ in the normally understood sense. For example, it also applies to real estate and the granting of rights. GST is therefore a convenient, but not an accurate shorthand term.
GST has significant effects on business procedures and has required many businesses to re-evaluate their business practices. In particular, the impact of GST on pricing and cash flow spreads to many areas of the business.
A 10 POINT GUIDE TO GST FOR CAULFIELD BUSINESSES
Here is a 10 point simplified snapshot of how GST works.
- GST liability – Liability for GST arises where a registered business makes supplies to its customers. The GST is imposed at the rate of 10%. Typically, it is included in the price paid by the recipient of the goods and services. The supplier must account for the amount of GST to the ATO.
- Receiving credits for GST paid– If the recipient of goods or services is a registered business entity, it will normally be able to claim a credit for the amount of GST it has paid on acquisitions, provided it holds a tax invoice. This credit – called an input tax credit – is offset against any GST on goods or services that the recipient levies supplies to its own customers.
- Burden on end-consumer– The net effect is that registered business entities receive an amount representing GST but do not keep it, and pay GST but get a credit for it. This means that they act essentially as collecting agents for the tax. The ultimate burden of the tax falls on the private consumer of the goods and services, as this person gets no credit for the GST they pay.
- Registration– Most business entities have to register for GST, although there are some exceptions. If an entity is not registered, it normally is not liable for GST on supplies and cannot claim credits for the GST it pays on acquisitions.
- Returns and tax periods– Business account to the ATO for the GST on the supplies they make and the credits they claim by making a GST return in their Business Activity Statement (BAS). A separate GST return is made for each tax period, which may, according to the circumstances, be monthly quarterly or – for some smaller business – annual.
- Accounting basis– GST and input tax credits are allocated to particular tax periods either on a Cash Basis (based on when amounts are received or paid out) or on an Accruals Basis (based on when invoices are sent or received). There are restrictions on who can use the cash basis.
- Tax or refund?– If the GST allocated to a tax period is more than the credits for that period, the business is liable for the balance to the ATO. If the credits exceed the GST, the business is entitled to a credit or refund. Adjustments may need to be made later if there is a change of circumstances.
- GST exemptions– Some transactions are outside the scope of GST altogether because, for example, they are gifts, are made by unregistered entities or have no connection with Australia. Others are “GST free” which means that there is no liability for GST on the supply, but the supplier can claim credits for the GST on its own related acquisition. The main GST free items are specified exports, health, food, education, international travel and certain charitable activities.
- Input tax supplies– A small range of supplies are “input taxed”. This means that there is no liability for GST on supplies made and that the supplier cannot claim credits for the GST on its own acquisitions. The main input taxed items are financial services and the supply of residential rental premises.
- Special rules– Apply to a wide range of items including charities and non-profit bodies, GST groups and joint ventures, financial supplies, superannuation funds, insurance, vehicles, real property, buying and selling a business, importations, and second-hand goods.
|EXAMPLE OF GST IMPACT ON A TYPICAL CAULFIELD BUSINESS (NON EXPORT)|
Source: Australian Master Tax Guide 44th Edition – Publisher CCH
|Excl GST||Incl GST||GST|
|Wages (Exempt from GST)||10,000||10,000||(500)|
|Net GST Liability (A) - (B)||0||(3,100)||$|
Hillyer Riches is a specialist superannuation and business advisory firm based in Caulfield. Hillyer Riches holds SMSF and business planning strategy seminars. For more information email firstname.lastname@example.org or contact our tax accountants in Melbourne now. This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional.