Goods and Services Tax (GST) was introduced on 1 July 2000, as a 10 per cent broad range indirect tax that replaced several other taxes such as wholesale
sales tax.
In addition to GST being introduced two other indirect taxes were introduced, being: Wine Equalisation Tax and Luxury Car Tax. It was thought that removing
the wholesale sales tax and replacing it with the much lower GST rate of 10 per cent would unfairly advantage these industries, so these taxes maintain
equity.
GST is a tax on final consumption and is collected in a step process so it is levied on each stage of production. The supplier of the goods and services
may be able to claim credits for the GST they have paid on their business inputs, thus leaving the end user paying the GST.
CALCULATING GST
GST is calculated at 10 per cent of the taxable supply, or by taking 1/11th of the total cost including GST.
For example: The GST on a shirt (taxable supply) costing $20 (ex. GST) would be 10% of $20, being $2. So
the total cost of the shirt including GST would be $22. Conversely, to work out the GST from the total cost of the item, you would take 1/11th of $22, which is $2.
SUPPLIES
There are three different types of supply for GST purposes:
- Taxable supply;
- Input taxed supply; and
- GST-free supply.
A supply for GST purposes is a very broad term, it can be:
- A supply of goods;
- A supply of services;
- A provision of advice or information;
- A grant, assignment or surrender of real property;
- A creation, grant, transfer, assignment or surrender of any right;
- A financial supply;
- An entry into or release from, an obligation to do anything, to refrain from an act, or to tolerate an act or situation.
A supply occurs if:
A supply is made for consideration;
The supply is made in the course of an enterprise ( i.e. the business);
The supply is connected with Australia; and
The supply is made by an entity that is registered for GST, or required to be registered for GST.
Supplies made for consideration
Consideration means any payment that is connected to a supply of anything. This is intended to be very broad and includes,
but is not limited to:
Money;
Inducements to act or not act;
Barter payments;
Forgiving a debt in exchange for a supply of something else; and
Payment for a supply, even if it is paid by the person who did not directly receive the supply.
Enterprise
An enterprise is defined as an activity or series of activities done in the form of a business or in the nature of trade.
Specifically excluded from the definition of ‘enterprise’ are activities, or services of activities done:
As an employee or other PAYG earner;
As a private recreational pursuit or hobby;
By an individual or partnership without a reasonable expectation of profit or gain; or
As a member of a local governing body established by or under a State or Territory law.
Supplies connected with Australia
Goods are connected with Australia if the goods are:
- Delivered in Australia;
- Made available in Australia;
- Removed from Australia;
- Imported into Australia; or
- Installed or assembled in Australia.
Anything other than goods or real property is connected with Australia if:
- The thing is done in Australia; or
- The supplier makes the supply through an enterprise the supplier carries on in Australia.
Required to be registered
An entity must be registered for GST if:
It is carrying on an enterprise; and
Its annual turnover is at or above the registration turnover threshold of $75,000 (or $150,000 for non-profit bodies).
An entity that is carrying on an enterprise, but does not meet the turnover registration threshold can choose to be registered for GST.
The broadness of the definition of a supply is deliberate so as many items are caught in the GST net as possible. Exemptions to certain supplies are then
made to remove supplies of a specific nature. They are input taxed supplies and GST-free supplies.
TAXABLE SUPPLIES
Many GST registered businesses in Australia will make their supplies under this category.
These businesses are payers and collectors of GST, for example:
Taxable Supply: Television
Step One: Electronic Component Supplier
Sells components to television manufacturer for $300 plus $30 GST,
Step Two: Manufacturer
Buys components for $330 from supplier and then sells manufactured television to the retailer for $600 plus $60 GST.
Step Three: Retailer
Buys television from manufacturer for $660 and sells to consumer for $1200 plus $120 GST.
Step Four: Consumer has paid $1320 for television (including $120 GST).
At the end of the supply chain the
chain each business claims an input tax credit on the supplies they have purchased.
INPUT TAXED SUPPLY
Input taxed supplies are not subject to GST as they are specifically excluded from the definition of a taxable supply. Importantly no input tax credits
can be claimed on any items used to produce such supplies. Ultimately the pricing of an entity making input taxed supplies will pass on the cost of
not being able to claim input credits to its clients and customers.
There are three main types of input taxed supplies:
Financial supplies;
Supplies of residential rent;
Supplies of residential premises.
Financial supplies
Financial supplies mainly include:
- Lending or borrowing of money;
-
Granting credit on which interest is due; - Activities associated with clients’ bank accounts;
- Conducting life insurance business;
- Making certain dealings that relate to debt securities, equity securities, unit trusts or future contracts.
There is relief for businesses that are inadvertently caught under input taxed financial supplies.
For example: A furniture retailer offers finance terms for which it charges interest.
Ordinarily this would form an input taxed financial supply; however, if input credits relating to those supplies are less than $50,000 and those credits
are less than 10 per cent of the entities total input credit entitlement, then the entity can claim 100 per cent of the input tax credits.
This assessment of input tax credits must be done on a rolling monthly or quarterly basis and you should also be assessing whether the business will stay
compliant in future quarters.
If a business does not pass these tests, input credits must be apportioned according to the type of supply they are for.
For some businesses a reduced input tax credit of 75 per cent is available where the financial supplies are outsourced, for example debt collection.
Supplies of Residential Rent and Residential Premises
The lease of premises that are to be used for residential purposes is input taxed. Also the sale of residential premises is input taxed, unless it
is a new premise which will then be subject to GST.
The main characteristics of commercial premises are:
- Commercial intention;
- Multiple occupants;
- Available to general public at large;
- Accommodation is main purpose;
- Guest services available;
- Centralised management and/or booking facility.
GST-FREE SUPPLIES
A GST-free supply is a supply that is deemed to be GST-free by the Act. However, input tax credits can be claimed on the purchases used to generate
the GST-free supply. It is important to note that it is the supply that is GST-free and not the supplier.
For example a bakery may sell GST-free items such as bread, but also sell soft drinks that are taxable supplies.
Food
The broad approach of the Act is to make all food and beverages fit for consumption by humans GST-free, and then remove specific items from the definition.
Most staple items of food are GST-free, including: meat, bread, vegetables, fruit, eggs, cheese, flour sugar, plain milk, cereals and canned foods.
Other items of food that are specifically a Taxable Supply include: restaurant food, takeaway food, most food that has been prepared and frozen meals.
Other examples of food that attracts GST are:
Chocolate and other confectionary;
Cakes, muffins & puddings;
Pies & sausage rolls;
Bread and buns with sweet filling or coating;
Biscuits;
Soft drinks and alcohol.
Health
The provision of medical services is GST-free. In general the service must be provided by an approved medical practitioner and be a recognised health
service. Hospital care, medical aids, prescription drugs, and private health insurance are also all GST-free when provided in accordance with the
Act.
Cars used by disabled people
Cars used for personal transport by disabled people are GST-free, as long as they are used for that purpose for at least two years.
Education
The supply of pre-school, primary education, secondary education & tertiary education are GST-free. Some trade and professional courses are also
GST-free. The exemption extends to excursions that are related to the curriculum and some other supplies that are related to education.
Child care
The supply of child care is GST-free where it is supplied by a registered provider or government funded.
Exports
Exports are generally GST-free, provided they are not re-imported or where the export is not made with a set time from invoice.
Duty free
Supplies through an inward bound Duty Free shop are GST-free. Care needs to be taken as specific limits apply to each traveller over all, but especially
to alcohol and cigarettes. Amounts brought in excess of these limits will attract customs duty and GST.
Tourist refund scheme
A refund may be sought by tourists on items they take with them when departing Australia. The minimum value of the purchase from any single business
total is $300 and not made more than 60 days prior to exit.
Travel
Travel from overseas to Australia and vice versa is GST-free. Also internal travel by overseas people is GST-free when arranged as part of their international
travel.
Religious services
Services provided in the practice of religion are GST-free provided they are done so by a religious institution.
Charitable institutions
Non commercial activities will be GST-free, commercial activities will fall under the normal GST provisions.
Supply of a going concern
The supply of an enterprise as a going concern is GST-free under the Act, provided:
- It is for consideration;
- The purchaser is registered for GST;
- Both parties agree in writing;
- The supply is for all the items that the purchaser will need to continue to run the business;
- The supplier carries on the business until the purchaser buys it.
Note: That by just selling parts of a going concern does not mean that you will be eligible for this exemption.
For example: A trucking company cannot sell one of its trucks (from a fleet) and call it a going concern.
If the supply was a truck and other elements that enabled it to be a going concern in its own right – for example a given right over an area to move
freight and earn income – then that may qualify as a going concern.
The determination of whether a supply is a going concern is a complex area and an issue that has come under the
Farming land
The supply of farming land either through freehold or long-term lease is GST-free, provided that the land is intended to be used for farming purposes
and the land has been used for farming for a minimum of five years prior to sale.
Exclusions exist where the land is to be subdivided into residential blocks.
INPUT TAX CREDITS
When an entity makes a purchase and is registered for GST it will be able to claim a credit for the GST included in the price where it was for a creditable
purpose.
An acquisition is for a creditable purpose if it is a purchase that is made in carrying on an enterprise. If something is acquired for making an input
taxed supply or for a private purpose, then it is deemed to not be a creditable acquisition and you cannot claim any input credits.
As previously discussed (under input taxed supplies) there may be circumstances where an input taxed financial supply may be below the thresholds for
input credits and those credits can be claimed as if they were a creditable acquisition.
When claiming an input tax credit and the purchase has been for a partly private purpose you will need to apportion your claim accordingly. For small
businesses most of these adjustments can be done on an annual basis.
Small food retailers that have a combination of GST-free purchases and sales have simplified accounting options made to them by the
normally. The options are:
- Business norms method
- Snapshot method
- Stock purchases method
Business norms method
Certain food retailers with an annual turnover of less than $2 million can elect to use the
| TYPE OF RETAILER | GST-FREE SALES % | GST-FREE PURCHASES % |
| Delis that do not sell | ||
| hot food or prepared meals | 85 | 90 |
| Convenience stores that | ||
| prepare takeaways | 22.5 | 30 |
| Convenience stores that | ||
| do not prepare takeaways | 30 | 30 |
| Cake shops | 2 | 95 |
| Hot bread shops | 50 | 75 |
| Health food shops that do | ||
| not prepare food | 35 | 35 |
| Fish shops that sell fresh & some | ||
| cooked food | 35 | 98 |
| Pharmacies with both taxable & GST-free food sales | ||
| Dispensary: non claimable sales | 98 | Nil |
| Dispensary: over counter sales | 47.5 | 2 |
| Rural convenience stores that may sell fuel or have an Aust. | ||
| Post agency | ||
| Converter sales | 22.5 | 30 |
| Non-converter sales | 30 | 30 |
Snapshot method
The retailers can take a snapshot of two two-weekly periods and estimate the GST-free purchases and sales over those periods. Alternatively retailers
can work out their GST-free purchases from invoices and estimate the GST-free sales.
Care must be taken to ensure that there is a reasonable basis for the estimation, especially if the percentage differs greatly from the
Stock purchases method
Where a retailer is only a reseller of products (for example small convenience store that does not prepare takeaways) the stock purchases method is
available.
Under this method over two four-weekly periods retailers take a snapshot of purchases only. From this they can estimate GST purchases and sales which
should have the same percentages, as they are only resellers. This option is available to retailers with a turnover of less than $2 million.
MORE SIMPLIFIED ACCOUNTING METHODS
In the May 2007 Budget it was announced that more simplified accounting methods would be allowed for small businesses (annual turnover less than $2
million).
This will give more small businesses the option of using a simplified method to calculate their GST obligations if it suits their requirements. From
1 July 2007, any small business that makes mixed (taxable and GST-free) supplies or mixed purchases will be able to approach the Australian Tax
Office (ATO) to discuss the development of a simplified accounting method for their use.
SPECIAL INPUT TAX CREDIT RULES
There are a number of circumstances where input credits are able to be claimed in full, at a reduced rate or not at all depending on the scenario.
Non-deductible expenditure
Specifically under the Act if a non-deductible (for income tax) purchase is made in the following circumstances no input tax credit is available:
- Fines & penalties;
- Travel expenses for a relative;
- Costs associated with maintaining your family;
- Health club memberships;
- Leisure facilities or boats;
- Entertainment expenses;
- Non-compulsory uniform expenses;
- Non-deductible non-cash business benefits; and
- Some car parking expenses.
Pre-establishment costs
In general where a company has not yet commenced business, an input tax credit can still be claimed for the costs of setting up the entity and acquiring
trading stock. The requirements are:
- The expense is not private in nature;
- The company is created and registered within six months of the expense being incurred;
- The entity that first incurred the expense is reimbursed by the new company and becomes a member, officer or employee of the new company.
Motor vehicles
If you purchase a car in an entity that is registered for GST and it is used to for business purposes you will be able to claim input credits on its
purchase and for running expenses.
The current depreciation cost limit is $57,581 and where your vehicle costs more than that, your input tax credit will be calculated at the depreciation
cost limit amount and not the purchase price.
If you use the vehicle for part private use, an apportionment for private use will need to be made on input credits claimed. The
Logbook method: A logbook of business trips is made for 12 weeks and a business percentage usage is ascertained. Unless business use
drops significantly the logbook is valid for five years.
One-third method: Where the vehicle travels more than 5,000km you may claim input credits up to one-third of the expenses incurred.
Set rate method: Where usage is below 5,000km you can estimate your kilometres travelled and use the following rates:
ESTIMATED ASSUMED ANNUAL
BUSINESS INCOME CREDIT CLAIM
KILOMETRES
0-1,250 5%
1,251-2,500 10%
2,501-3,750 15%
3,751-5,000 20%
Formula method: You can make an estimate of business kilometres and apply this as a fraction over your total kilometres for the taxation
year. This percentage is used to calculate business portion of input credits.
For example: Julie estimates that of the 20,000km travelled during the year that 13,000km were work-related.
Her percentage would be 13,000/20,000 X 100 = 65% business usage.
It should be noted that both the 12% of original value method and the one-third method have been repealed for income tax purposes.
Insurance
If you are registered for GST you are able to claim an input tax credit on your insurance payments that are made for business purposes.
You should inform your insurer of the amount of input credit you are claiming, as if a claim is made you will receive the payment net of GST (i.e.
it will not require GST to be remitted to the
You are able to claim input credits on the purchase of replacement items or on the repair of an item damaged.
Second-hand goods
So that second-hand dealers are not unfairly disadvantaged when competing with private individuals not registered for GST, special rules apply. Even
though a second-hand dealer may purchase an item from someone that is not registered for GST, they can claim an input tax credit on that purchase
when they sell the item.
In this way the second-hand dealer is only remitting to the
Fringe benefits
GST does not apply to a fringe benefit made to an employee where fringe benefits tax has been applied. The FBT gross up factor has taken the GST into
account when calculating the taxable value of the benefit.
Where an employee does make a contribution towards the benefit and the employer is registered for GST that contribution will be deemed to include GST.
For example: Fred’s employer manufactures beds and sells a bed to Fred for $1,200 that usually retails
for $2,500. The contribution by Fred to his employer is GST inclusive and his employer would have to remit 1/11th or $109 to the
For detailed examples of how FBT is calculated refer to the Fringe Benefits Tax chapter.
Real Property and the Margin Scheme
The margin scheme is one method used to calculate GST on the sale of real property no matter whether it was acquired before or after the introduction
of GST on 1 July 2000.
For example: A developer purchased a block of land in 1998 for $200,000 and its value at 30 June 2000,
was $400,000. On 31 December 2000, the developer sold the block for $440,000. Using the margin scheme the developer could only pay GST on the margin
of $40,000 – being the difference between the valuation at 30 June 2000 and the sale price at 31 December 2000.
Importantly, under the margin system the new purchaser would not be able to claim an input tax credit on the amount of GST included in the $440,000
purchase price, even if they were registered for GST. However, when the new owners sell the margin would be the difference between $440,000 and
the selling price.
The margin system is a complex and crucial area, so get professional advice from an accountant or lawyer as its application can vary greatly with significant
consequences.
In the May 2008 Budget, changes to the margin scheme were announced. The changes relate to the application of the margin scheme where the land being
sold was acquired through a GST-free or non-taxable supply, such as the farm land or going concern exemptions.
REGISTERING FOR GST
Businesses with an annual turnover of more than $75,000 are required to register for GST, while those with a turnover less then $75,000 per annum have
the option to register. The registration threshold for non-profit entities is $150,000.
To avoid having 47% withheld from payments it is in the best interests for businesses to apply for an
You are not eligible to register for GST unless you are genuinely in business with an expectation to profit. This excludes activities undertaken as
a hobby, and salary & wage earners.
When registering for an
- The type of business you will be operating and your turnover;
- Accounting systems you will employ;
- Cash flow;
- Whether you will be employing others;
- Type of supplies you will be making, being: taxable, GST-free, and input taxed;
- The extent to which you will be able to claim input tax credits.
These are all important issues as it will help you determine the following:
- Should I register on the cash or accruals basis? (Businesses with a turnover less than $10 million have an option).
- Should I lodge my
BAS/IAS monthly or quarterly? (Businesses with a turnover less than $20 million have an option). - Do I have adequate systems in place to calculate and budget for my monthly or quarterly tax office remittances?
Many businesses will find that registering on the cash basis will be the best option for them. Under this option GST is recorded when you physically
pay or get paid for a service or item.
Under the accruals method all debtors and creditors are included for GST purposes. This means that if you’re carrying a large amount of debtors (accounts
receivable) you will be remitting GST to the
Conversely those on the accruals method with high creditors (accounts payable) may benefit from this option.
The decision on whether to lodge monthly or quarterly depends on the taxpayer. Many find it easier to budget for GST payments when they lodge monthly,
others can manage with quarterly and see savings in reduced compliance costs.
Many businesses that make mostly GST-free supplies (for example a doctor’s surgery) lodge monthly to improve cash flow as they are often refundable.
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