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GST Basics for Small Business

One of the basic principles of GST is that it is paid by the end consumer.  A business that is registered for GST is not the end consumer.  This means that if you're a business and you are registered for GST and you 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 then you invoice your customer with a mark-up of 20%, so $100 x 120% + GST = $132.  You will have paid $10 in GST and collected $12 in GST,  If this was you only transaction for the period, then the amount of GST you would owe to the ATO would be $12-$10=$2.  You never pay or keep GST, 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

GST 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 (not merchant fees as they do inclue GSST)
  • Some components of insurance
  • Some components of motor vehicle registrations
  • Some licences
  • Milk, tea, coffee and sugar
  • Overseas phone calls, travel
  • Employee medical expenses
  • ASIC filing fees
  • Stamp duty
  • Interest
  • Bonds or deposits
  • Entertainment (check with your accountant)
  • Fines and penalites
  • Payments to overseas suppliers and domestic suppliers not registered for GST

If you import large quantities of goods and pay GST to customs, then you will be able to claim the GST, but this customs bill will 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 entering these transactions into your accounting 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 it needs to be reported at all).  

For example, if you were to buy a number of items for the supermarket, let's say biscuits and milk, then you would notice that the GST on the receipts is less and 1/11th of the total.  This is because you pay GST on the biscuits, but not the 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 biscuits would be on the second line with a GST tax code.  The GST for the transaction should now match your receipt.

Another area where mistakes are often made are with motor vehicles or other plant & equipment which 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 form an overseas supplier and GST is shown, you cannot claim this amount.  The ATO will not refund you for GST, VAT or sales tax paid in another country.  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 are not registered for GST?

Many sole traders and contracts are not registered for GST.  The law gives you the option of whether to register for GST or not is your annual turnover is under $75,000.  So even though you may have received an invoice for labour, which is subject to GST ordinarily, if the supplier or contractor is not registered for GST, then they shouldn't charge GST and therefore you can't claim a GST credit.  The advantages of not being registered for GST means that your tax affairs are simpler.  But on the flip side, if you are re-invoicing goods to your customers, then it means that you are more expensive because they've effectively lost out on the GST credit.

How to use tax-codes

The use of tax codes 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, 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 and loan repayments.

Final Thoughts

It would be so much easier if everything we bought had GST and everyone was registered.  That would save a lot of time having to check the GST amount on an invoice and then split the transaction accordingly.  Unfortunately, this is not the case and many small business are left to deal with the consequences.  If you feel confused by GST and how to treat it, then get in touch with us today.  We are able to do your bookkeeping 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.



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