Goods and Services Tax (GST) is a prevalent tax paid by businesses across Australia. It is crucial to comprehend the inner workings of this tax, along with understanding the associated reporting and record-keeping obligations that apply to most businesses. In this informative article, MYC Partners will delve into various aspects of GST, including its definition, the pivotal question of when to register for GST, the registration process, and why registering for GST can actually prove to be advantageous for businesses. Let’s explore the world of GST together.
Unveiling the Essence of GST
GST, or Goods and Services Tax, is a consumption tax levied on most goods and services sold within the territory of Australia. This tax typically amounts to 10% of the sale price of a given good or service. For instance, if your business is GST-registered and you’ve sold a product valued at $100, your business would owe the federal government $10 in GST.
The application of GST can vary, as it may be included in or excluded from the sale price, depending on the nature of the good or service. In cases like purchasing a $1,000 television, for instance, the store would not directly charge you an extra $100 to account for GST. Instead, they would pay the government $90.9 in GST from the $1,000 you paid.
On the other hand, many professional services often exclude GST from their prices. This explains why you often encounter invoices showing a subtotal without GST, followed by a total with GST included.
The Significance of Registering for GST
Unlike certain taxes, GST isn’t obligatory for all businesses. In this section, we will explore the reasons why registering for GST can be a positive move.
Claiming GST Credits
While registering for GST implies paying additional taxes, it also bestows the ability to claim GST credits for eligible business purchases. These GST credits effectively reduce the total GST you owe to the government at the end of the fiscal year. For instance, if you owe the government $20,000 in GST but have been charged $5,000 in GST on business purchases, your final payment will only amount to $15,000 in GST.
It’s essential to note that you can only claim GST credits on GST included in the price of goods or services your business procures. If the price of a good or service does not incorporate GST, you cannot claim GST credits for it. Common examples of GST-free purchases include:
- Sales that are input-taxed, such as residential accommodation, bank fees, and loan interest.
- Sales from suppliers that are not registered for GST.
- Most basic food.
- Certain medical services.
- Duty-free sales.
- Certain education courses.
- Specific medicines, medical products, and hygiene items.
Moreover, claiming GST credits necessitates adequate proof. For purchases exceeding $82.50 (including GST, or $75 excluding GST), you must obtain a tax invoice from the supplier.
Registering for GST as a Sole Trader
The decision of whether to register for GST as a sole trader largely hinges on your unique business circumstances. If your annual GST turnover surpasses $75,000, registration is a legal requirement. However, if your turnover falls below this threshold, consulting your accountant to determine the appropriateness of GST registration for your business is advisable.
Registering for GST does come with the responsibility of filing quarterly Business Activity Statements (BAS), which can represent an additional administrative burden for some businesses. Nonetheless, BAS lodgment can offer valuable financial insights throughout the year, aiding businesses in maintaining financial control. Many businesses even choose to delegate their BAS statements to virtual bookkeepers for added convenience.
Understanding the Timing of GST Registration
Once a business meets specific criteria, it becomes legally mandated to register for GST. These criteria encompass:
- A business earning more than $75,000 per year in GST turnover.
- Non-profit organizations generating over $150,000 per year in GST turnover.
- Providing taxi travel services, which includes ride-sourcing for companies like Uber or GoCatch.
Should you be aware that your GST turnover will exceed the $75,000 per year threshold and you haven’t registered for GST, you must initiate the registration process within 21 days. It’s essential to remember that GST turnover is equivalent to your business’s gross income and not its profit.
GST Obligations for Businesses Earning Less Than $75,000 Annually
Businesses with annual GST turnovers of less than $75,000 are only legally required to register for GST if they provide taxi travel services. This regulation applies to sole trader taxi drivers and contractors working with companies like Uber and GoCatch. For such businesses, GST registration is obligatory from their first day of operation.
Navigating the Registration Process
Registering for GST can be done through three primary methods:
- Online Registration: Utilize the federal government’s Business Registration Service to register online. If you lack an Australian Business Number (ABN), which is a prerequisite for GST registration, you can apply for both an ABN and GST registration simultaneously.
- Direct Contact with the ATO: Reach out to the Australian Taxation Office (ATO) directly through various means, including phone, online chat, written communication, social media, or in-person meetings.
- Engage a Registered Tax Agent: Alternatively, you can enlist the services of a registered tax agent, typically an accountant, to handle your GST registration.
Online registration is often the most straightforward method. However, if any complications arise, don’t hesitate to seek assistance from a virtual bookkeeper.
Exploring the Costs of GST Registration
The good news is that registering for GST is entirely cost-free. There are no administrative costs or fees associated with Goods and Services Tax.
Verification of GST Registration
If you initiated your small business some time ago and have recently crossed the $75,000 annual GST turnover threshold, you might be uncertain whether your business is already registered for GST. To verify your GST registration status, you can follow these steps:
- Access the Australian Business Register’s ABN Lookup tool.
- Search for your business by using your ABN, ACN, or business name.
- Locate and click on your business in the search results.
- Confirm whether you are registered for GST.
Knowing how to check GST registration is crucial, especially when onboarding new suppliers who sell goods and services to your business. It’s imperative to verify the ABN and GST registration status of new suppliers. If a supplier charges GST but lacks the necessary registration, you won’t be able to claim back that GST from the government.
In instances where you can’t locate your supplier via the ABN lookup or if they have incorrectly charged you GST when unregistered, request them to reissue their invoices with the accurate business details or the correct amount.
The Intricacies of Backdating GST Registration
Backdating GST registration can be a valuable option for businesses that have made substantial purchases. For example, if you’ve incurred $100,000 in GST-eligible expenses, you would be entitled to claim $9,090 in GST credits. This can prove beneficial, especially if your revenue has been relatively low.
The Australian Taxation Office (ATO) permits businesses to backdate GST registration for up to four years for tax periods starting from 1 July 2012 or later. To initiate backdating, you will need to communicate with the ATO. However, it’s crucial to bear in mind that backdating GST means you can claim GST credits from the backdate, but you’ll also be liable to pay GST on applicable goods or services that you’ve sold. The four-year backdating window is exclusive to voluntary registrations for GST. In cases of fraud or evasion, the ATO retains the authority to backdate your registration for extended periods.
Charging GST: Understanding the Categories
Sales typically fall into one of three categories, each contingent on the nature of the good or service being sold:
- Taxable Supplies: These encompass goods or services for which GST must be charged.
- Non-Taxable Supplies: These include goods or services for which GST is not applicable.
- No GST Status: This applies when your business is not registered for GST.
It’s important to note that non-taxable or GST-free supplies still need to be reported. However, some GST-free supplies are exempt from reporting. For accurate classification of your sales, it is advisable to consult your BAS agent or accountant.
Charging GST without GST Registration
If your business isn’t registered for GST, you cannot charge GST. While it is generally the responsibility of the purchaser to confirm the GST status of a transaction, they may report you to the ATO if you have incorrectly charged GST.
Settling GST Payments
The reporting and payment of GST are integrated into the Business Activity Statements (BASs). You also need to claim GST credits during the BAS filing. These activity statements are lodged on a monthly basis for businesses with over $20 million in GST turnover, quarterly for those with less than $20 million in turnover, and annually for businesses with less than $75,000 in turnover.
Under the current guidelines set by the ATO, businesses with less than $10 million in GST turnover can opt for the Simpler BAS option, which only mandates reporting three essential pieces of information:
- Total sales for the reporting period.
- Total GST on sales.
- Total GST on purchases.
While maintaining proper records for income tax purposes remains a requirement, Simpler BAS simplifies the process of lodging and payment. The alternatives include the full reporting method, demanding the submission of seven pieces of information, and the GST instalments, paid quarterly with annual reports. BAS lodgment and GST payment can be conveniently executed through the ATO’s online services hub.
Reverse Charge GST: An Unconventional Aspect
While GST is typically paid to the government by the seller, there are scenarios in which the purchaser may be responsible for paying GST. This reverse-charged GST follows the same principles as regular GST, amounting to 10% of the purchase price.
Reverse-charged GST is applicable only when specific conditions and circumstances align:
- The purchase is primarily or partly intended for a business conducted in Australia.
- The purchase comprises both business and private or domestic aspects, or pertains to input taxed supplies.
- The purchase is made in exchange for payment, not as a sample.
- The purchaser is registered for GST or is obligated to be registered.
- The purchase takes place outside of Australia, and the sale isn’t facilitated through a business maintained in Australia by the overseas supplier.
- The sale is associated with Australia, indicating that the purchase is conducted or performed in Australia. This typically applies when the seller operates a business in Australia and the transaction involves the sale of a right or option to acquire another item that would be linked to Australia.
- The sale isn’t executed through a business operated by an overseas supplier in Australia. The item acquired is performed in Australia and is intended for an Australian-based business recipient.
While reverse-charged GST isn’t a commonplace tax scenario, it’s prudent to be aware of it, especially if your business frequently engages with overseas suppliers.
In conclusion, while GST can be relatively straightforward to report and pay, there are intricacies and complex scenarios that necessitate careful navigation. Similar to most taxes, precision is paramount. Incorrectly claiming GST credits or failing to charge GST on eligible sales can lead to bookkeeping complications. For this reason, collaborating with a registered Business Activity Statement (BAS) agent is advisable, particularly for small businesses. At MYC Partners, we are committed to assisting businesses in understanding and complying with their GST obligations, ensuring financial stability and regulatory adherence.
This article is intended to provide general information only and does not constitute financial advice. Every effort has been made to ensure the information provided is accurate, but it should not be relied on as a substitute for professional advice. Please consult with a financial advisor before making any decisions regarding your cash flow management. The author and the website are not liable for any losses or damages that may arise from using this information.