Review and apply GST

GST is an indirect tax that is paid at each step in the supply chain, however, one of the principles of the GST program is that the cost of GST is borne by the final consumer. This is achieved by refunding the business for any GST it has paid in the operations of the business.

Generally, GST-registered businesses will:

• include GST in their selling prices 
• claim credits for GST included in the business purchases when lodging the BAS

GST Principles

GST collected - This is the amount of money your business has collected to cover your GST obligations on the goods and services you have sold.

For example:

Kumar sells various items, including fresh fruit and vegetables, sandwiches, and imported specialty food items. He had to learn what the GST classifications are for each category of item. He followed the ATO’s GST food guide (NAT 3338) to learn them.

He adds the cost of his GST obligation to the item's price. When he records the sale in his books, he will record the GST portion in a separate account, just for GST collections.

Kumar notes the portion of GST for each sale on the customer's docket for transparency as required by the ATO because the sale amount was $118.00.

GST input tax credits - These represent the financial credits for the GST included in the cost of the purchases you make in the operations of your business. Because one of the principles of GST is that it's paid by consumers, not businesses, you can claim back the GST you have paid for things you bought to produce and sell your items or services. You may also be entitled to claim back money for fuel used in machines and large vehicles.

For example:
For Kumar to make sandwiches and soup to sell in his store, he needs specialty ingredients, which he purchases from a local restaurant. The GST portion of his cost for those items becomes GST input tax credits. Kumar carefully stores all of his invoices, receipts, and dockets.

net GST payable - This represents the difference between the GST collected and the input tax credit, the result of which is the amount of your GST obligation owed to the ATO.

GST-related terms and definitions³²

Some terms used in this section may be new to you or have a specific meaning in GST law. Whenever the following words and terms are used in this section they should be interpreted as shown below. 

• Australia: Indirect tax zone
• Aggregated turnover: Business turnover plus the turnover of closely associated entities
• You: You as a business, for example, a sole trader, a partnership, a trustee (of a trust or a superannuation fund), or a company
• Business: The GST term enterprise
• GST turnover: The turnover figure you use to work out if you need to be registered for GST (GST turnover does not include the turnover of businesses you are connected with)
• Sales: The GST term supplies
• Purchases: The GST term acquisitions
• Payment (made or received): The GST term consideration
• GST credit: The GST term input tax credit
• Property: The GST term real property.

Rules around GST

• A business must register for GST if either the current or projected GST turnover is $75,000 or more.
• Whenever a business purchases goods and services, a 10% component for GST will usually be included in the purchase price.
• When the business subsequently on-sells such goods and services (generally after having added value), it also has to include in the sales price a 10% component for GST.
• To stop the obvious double taxation, any GST charged on the subsequent sale (referred to as ‘outputs’) can be remitted to the ATO after deducting any GST previously paid on purchases (referred to as ‘inputs’).
• A good way to conceptualise it is to think of GST as a consumer tax on the end-user rather than a business tax.
• A business registered for GST must lodge a business activity statement which will help to report and pay goods and service tax and to claim GST credits.

GST legislation

On 1 July 2000, a 10% Goods and Services Tax (GST) started full operation in Australia. The introduction of GST was accompanied by a series of other tax measures forming part of the “New Tax System”.

The New Tax System (Goods and Services Tax) Act 1999 (Cth), known as the GST Act, was passed on 28 June 1999. Section 7-1(1) sets out the GST guidelines, setting down the rules of what is taxable and what is free or input taxed and any special rules. ;

According to Division 9-5 of the GST Act, a taxable supply arises (i.e. GST is charged) if:

• It was made for consideration
• The supplier is registered or required to be registered
• It is made in the course of carrying on an enterprise
• It is connected with Australia
• It is not GST-free or input taxed.

According to Division 11-5 of the GST Act, a credible acquisition arises (i.e. an entity can claim back the GST paid) if:

• The entity provides or is liable to provide consideration for the supply
• The entity is registered or required to be registered
• The entity acquires anything
• The acquisition was solely or partly for a creditable purpose
• The thing supplied was a taxable supply (see above).

According to Section 23-5 of the GST Act, an entity must register for GST if:

• It carries on an enterprise and
• Its GST turnover meets the registration turnover threshold
  or
• As a non-profit organisation it has a GST turnover of $150 000 per year or more
  or
• It provides taxi or limousine travel for passengers in exchange for a fare as part of the business, regardless of GST turnover – this applies to both owner drivers and if the entity leases or rents taxis
  or
• It wants to claim fuel tax credits for the business or enterprise.

If a business or enterprise does not fit into one of the above categories, registering for GST is optional. Should a business elect to register, it generally must stay registered for at least 12 months.³³

How the GST system works

The Australian Consumer Law (ACL) under the Competition and Consumer Act 2010 (Cth) aims to protect consumers and ensure fair trading in Australia. It prohibits misleading or deceptive conduct. Therefore, all prices of goods must be inclusive of all taxes and charges.

A business will charge GST for the goods and services it sells. Then it must lodge a business activity statement which is used to report and pay goods and service tax and to claim GST credits.

A business can claim a credit for any GST included in the price of any goods and services you buy for your business. This is called a GST credit (or an input tax credit). In other words, if you purchase cotton to make clothes, you will pay GST to the cotton supplier, but you will receive credits for that purchase. ;

The table below follows the GST cycle of a high-end T-shirt. ;

Tax codes are used to track taxes paid to a business and by a business. Each code represents a particular type of tax.

When the GST system was introduced in 2000 it was made more complex than was originally intended. The government decided to exclude some goods and services from the 10 percent tax, rather than having GST applied to all goods and services.³⁴

As a result the GST system was split into three categories of goods and services. These are:

• GST-free: no GST is collected for certain goods and services
• input taxed: used for supplies on which no GST is added to the final purchase price, such as residential rents or unit trusts
• GST taxable: most goods and services

Note: Businesses that sell or provide GST-free goods and services do not charge the 10 percent GST tax but can claim any GST input tax credits included in their costs.

As a refresher, here is a look at all of the Australian tax codes:

The table above can be found on MYOB's Tax Codes help centre page. You may like to bookmark it as a tax resource.

Types of supplies in relation to GST

*Check the ATO website for current limits for the financial year

Types of sales

Review the list below to review the types of sales and their GST requirements.

Taxable sales³⁵

You must pay GST on taxable sales that you make. To be a taxable sale (that is, a sale that has GST in the price), a sale must be the following:

Sales for payment

For a sale to be taxable, it must be made for payment. This is usually monetary, but can be some other form of payment, such as the following:

Sales in the course of operating your business

This usually means that you provide the goods or services while conducting your business. It includes all sales of business assets, including items such as motor vehicles and office plant and equipment. It also includes tasks done when setting up or winding down your business.

Sales connected with Australia³⁵

A sale of goods is connected with Australia if the goods are:

• delivered or made available in Australia to the purchaser;
• removed from Australia, or
• brought to Australia, provided the seller either imports the goods into Australia or installs or assembles the goods in Australia.

The sale of a property is connected with Australia if the property is in Australia. for GST purposes, property includes the following:

• land
• land and buildings
• interest in land
• rights over land
• a licence to occupy land.

A sale of something other than goods or property is connected with Australia if the:

• the thing is done in Australia
  or
• the seller makes the sale through a business they carry on in Australia
  or
• the sale is of a right to purchase something that would be connected with Australia.

You pay GST on the taxable sales you make when you lodge your activity statement.
For these taxable sales, you:

• include GST in the price
• issue a tax invoice to the buyer
• pay the GST you’ve collected when you lodge your activity statement.

Partly taxable sales³⁵

If your sale can be separated into identifiable parts and any of those parts are GST-free or input-taxed, the sale is partly taxable. You only need to pay GST on the taxable part of the sale.

Capital assets³⁵

Sales of business assets, such as office equipment and motor vehicles, are usually taxable sales. GST also applies to business assets you trade-in or otherwise dispose of by transferring ownership.

Input-taxed sales

Input-taxed sales are sales of goods and services that don’t include GST in the price. You can’t claim GST credits for the GST included in the price of your “inputs”.
The most common input-taxed sales are the following:

Financial supplies

You generally make a financial supply when you:

• lend or borrow money;
• grant credit to a customer;
• buy or sell shares or other securities;
• create, transfer, assign, or receive an interest in, or a right under, a superannuation fund; or
• provide or receive credit under a hire purchase agreement if the credit is provided for a separate charge that is disclosed to the purchaser.³⁶

In special cases, you may be entitled to claim a GST credit for a purchase that relates to making a financial supply if:

• you do not exceed the financial acquisitions threshold
  or
• your purchase relates to an amount you borrowed and used to make a non-input taxed sale
  or
• your purchase qualifies as a reduced credit acquisition – you will be entitled to a reduced GST credit.³⁶

Grants and Sponsorship³⁷

• Grants: If your organisation is registered for GST – or required to be – and receives grant funding (from a government body or private foundation, for example), it may not have to pay GST on the funding payment unless it makes a “supply” in return for the payment.
• Sponsorship: Under a sponsorship arrangement, when an organisation undertakes a fundraising activity, it often receives support in the form of money. In return, it may provide such things as advertising, signage, naming rights, or some other type of benefit of value.
  • This means that the sponsor receives something of value in return for the sponsorship, so the sponsorship payment is not a gift.
  • If the organisation is registered for GST, it has to pay GST on the sponsorship it receives. On the other hand, the sponsor may be able to claim a GST credit.

Insurance settlements³⁸

You do not have to pay GST on an insurance settlement, provided you tell the insurer before making the claim what proportion of the premium you can claim GST credits for. (You can claim GST credits on the part of the premium related to business purposes.)

If you do not tell your insurer before making the claim, you may have to pay GST when your claim is settled and you lodge an activity statement.

The insurer will expect to cover you only for the actual loss – that is, the loss minus the amount of GST credits you can claim on the repair or replacement cost of the item insured.

GST-FREE supplies³⁹

You do not include GST in the price if your product or service is GST-free, but you can still claim credits for the GST included in the price of purchases you use to make your GST-free sales.

In principle, most basic foods, some education courses, some medical products, and health and care services are exempt from GST.
There are some exceptions within these categories, but generally, GST-free includes:³⁹

The following links to the ATO provide additional detail.

For food, refer to:

• The GST food guide (NAT 3338), which contains an alphabetical list showing whether general food and drink products are taxable or GST-free
• GSTD 2002/2 Goods and services tax: what supplies of fruit and vegetable juices are GST-free.

For health, refer to GST and:

• medical services
• other health service
• medical aids and appliances
• Herbal medicine practitioners and naturopaths
• Certificate for medical assessment to obtain a car or car parts GST-free (NAT 3417)

The following relates to education and charities regarding GST. Take some time to research information about these areas:

For education, refer to:

• GST for preschool operators (NAT 12579).
• GSTR 2000/27 Goods and services tax: adult and community education courses; meaning of “likely to add to employment related skills”.
• GSTR 2000/30 Goods and services tax: supplies that are GST-free for pre-school, primary, and secondary education courses.
• GSTR 2001/1 Goods and services tax: supplies that are GST-free for tertiary education courses.
• GSTR 2002/1 Goods and services tax: supplies that are GST-free as special education courses.
• GSTR 2003/1 Goods and services tax: supplies that are GST-free as professional or trade courses.
• GSTD 2000/11 Goods and services tax: is the supply of commercial pilot training GST-free as an education course under section 38-85 of the New Tax System (Goods and Services Tax) Act 1999 (Cth) (the GST Act).
• GSTD 2000/7 Goods and services tax: is the supply of the services of apprentices or trainees by a Group Training Company to host employers under a Group Training Scheme a taxable supply in terms of section 9-5 of the New Tax System (Goods and Services Tax) Act 1999 (Cth).

For non-commercial activities of charities, refer to:

• GST and fundraising dinners or similar functions;
• endorsements to access charity tax concessions;
• Fundraising (NAT 13095);
• Tax basics for non-profit organisations (NAT 7966);
• Volunteers and tax (NAT 4612).

Registration and turnover

• As a reminder, a business can only register for GST if it has an Australian Business Number (ABN).
• Your ABN will also be your GST registration number.

What businesses need to apply?

Greater than $75,000

• If you run a business or other enterprise and have a GST turnover of $75,000 or more ($150,000 or more for non-profit organisations) or you expect to do so if it is your first year of operation.
  or
• You provide taxi travel (including ride-sourcing) as part of your business, regardless of your GST turnover. (Taxi travel means transporting passengers by taxi or limousine for fares.)

Less than $75,000

• If you carry on a business but have a GST turnover of less than $75,000 (or $150,000 for non-profit organisations), you can choose to register for GST.
• Having a turnover of less than $75,000 in this context gives you the option to calculate, report and pay your GST annually. Generally, you must then stay registered for at least 12 months.
• If you are not registered for GST, you must check monthly to see whether you have reached the GST turnover threshold. If you reach the threshold, you must register for GST within 21 days.

Working out GST turnover

The GST turnover is your gross business income (not your profit), excluding any

• GST you included in sales to your customers
• Sales that are not for payment and are not taxable
• Sales not connected with an enterprise you run
• Input-taxed sales you make
• Sales not connected with Australia.⁴⁰

Note: GST, input taxed supplies, supplies not taxable, and supplies not connected with the enterprise are not included in the calculation.

You reach the GST turnover threshold if either:

• Your turnover for the current month and the previous 11 months is $75,000 or more ($150,000 for non-profits.) = Current GST turnover.
  or
• Your turnover for the current month and the next 11 months is likely to be $75,000 or more ($150,000 for non-profits.) = Projected GST turnover.

One owner for multiple businesses

• If a business owner has more than one business, they can only register once for GST.

What happens if a business doesn't comply?

• If a business is not registered but is required to do so, it has to pay GST on the sales it has made since the date it was required to register together with penalties and interest. ⁴¹

Closing the business - selling off business assets

In working out your projected GST turnover, you do not include amounts you received for the sale of a business asset (such as the sales of a capital asset) or for any sale you made, or are likely to make, solely as a consequence of ceasing or substantially and permanently reducing the size of your business.⁴⁰

GST Groups and Branches⁴²

A GST group is two or more associated business entities that operate as a single business for GST purposes and satisfy certain membership requirements.

• One group member (the “representative member”) completes activity statements and accounts for GST on behalf of the whole group.
• If you are a member of a GST group, your turnover includes the turnover of the other group members (except supplies made from one member of the group to another member of the group).
• GST groups are treated as a single entity. Generally, transactions between group members are ignored for GST purposes. So you don’t have to pay GST, and you can’t claim GST credits on these transactions.

A GST branch is formed when a business entity separately registers its branch to suit the structural, management, and accounting arrangements of the organisation. When an entity registers a branch for GST purposes, the entity is called the “parent entity”.

• A GST branch accounts for GST separately from their parent entity.
• If an entity registers a branch for GST purposes, the branch operates as a distinct entity for reporting purposes, accounting for GST separately from its parent entity.
• Unlike GST groups, transactions between the branch and the parent entity will be taxable, and GST credits can be claimed.

GST Simplified Accounting Methods (SAM) for Food Retailers

Many small food retailers buy and sell products that require GST (such as prepared food), as well as products that are GST-free (such as fruits and vegetables). Others buy products requiring GST (imported, sweet mango chutney) and GST-Free products (bread, lettuce, tomato, ham) but sell only GST products (sandwiches).

Depending on the point-of-sale equipment they use, accurately identifying and recording GST-free sales separately from those that are taxable can be difficult, which makes accounting for GST complicated.⁴³

The Simplified GST accounting methods for food retailers was introduced by the ATO to make it easier to account for GST. These methods will help the small food retailer work out the amount of GST they are liable to pay at the end of each tax period. We have provided the link, but please note that you could have found this information on the ATO by searching for "NAT 3185".

There are five methods to choose from, so you need to decide which one is best for your business:

1. Business norms
2. Stock purchases
3. Snapshot
4. Sales percentage
5. Purchases snapshot⁴³

*Simplified Accounting Methods (SAM)

Note: The averaging involved in these methods cannot be used to set your prices – you need to keep doing this in line with the Australian Competition and Consumer Commission’s (ACCC) guidelines.

Example of the Business Norms method⁴⁴

The Business norms method is the simplest way to work out your GST. This method can be used if all of the following conditions are met.

• Available to specified business types only listed in the Business norms table and pharmacies that sell food and rural convenience stores.
• Nature of business – reseller and/or converter.
• Point-of-sale equipment – inadequate.
• Same premises – sell taxable and GST-free food on the same premises.
• Turnover threshold – SAM turnover of $2 million or less.

Keep up with the ATO's changes to GST applied to food

Staying on top of changes to these laws is important so a business knows whether a product has moved from GST to GST-Free or vice versa. The ATO provides this page to track and communicate those changes: Goods and Services Tax Industry Issues Detailed Food List.

General accounting methods - a refresher

There are two methods of accounting for GST: Cash Basis and Non-Cash Basis (accruals). The method you use will affect when you will report GST.

You will likely be familiar with accounting methods, but here is a refresher on the information about cash vs accrual based, and double-entry accounting, which will assist with your understanding of GST calculations.

Cash vs Accrual based accounting

Revenue and expenses can be recorded on either a cash or accrual basis and the difference between them focuses on when transactions are recorded vs occurred in real life..

With cash accounting:

• Revenue is recorded when the cash is received from the customer
• Expenses are recorded when the cash is paid

With accrual accounting:

• Revenue is recognised in the period it is which the revenue is earned
• Expenses are recognised in the period they are incurred

How cash or accrual basis affects GST reporting

The table below summarises the differences between the two methods of accounting for GST.

Double-entry Bookkeeping system

Double-entry bookkeeping is an accounting method that keeps a company's accounts balanced and provides an accurate financial picture of a company's finances. In double-entry bookkeeping for every debit, there must be a corresponding credit.

The double-entry method of bookkeeping records transactions based on the principle of duality; that is, for each debit entry in the ledger, there is a corresponding credit entry. It fully records the effects of every transaction in the accounts in the chart of accounts, making reconciliation possible, and agrees with Generally Accepted Accounting Principles (GAAP). It is the method most businesses adopt.

Invoicing, or providing a receipt or sales docket is a way of recording and reporting for tax and GST requirements.

Rules for invoices⁴⁵

1. If the taxable sale amounts to more than $82.50 (including GST), the GST-registered customers must be given a tax invoice so that the business can claim a credit for the GST in the purchase price.
2. If a customer or client asks the seller for a tax invoice, they must provide one. They must be registered for GST to issue a tax invoice.
3. If the sale is over $1000:
   • Tax invoices for sales of $1,000 or more also need to show the buyer's identity or ABN.
   • If your tax invoices meet the requirements for sales of $1,000 or more, you can also use them for sales of lesser amounts.
4. If the sale has both taxable and non-taxable items, the tax invoice must also show:
   • each taxable sale
   • the amount of GST to be paid
   • the total amount to be paid.
5. If the supplier does not provide an ABN and the total payment for goods and services is more than $75 (excluding GST) you generally withhold the top rate of tax from the payment and pay it to us.

Under normal circumstances, a receipt, docket, or invoice must have a certain amount of information for it to be a valid tax invoice. It must include the following:

• the words tax invoice stated prominently
• the date of issue of the tax invoice
• the name of the supplier
• the supplier’s Australian Business Number (ABN)
• the GST-inclusive price of the taxable supply
  • when GST is exactly one-eleventh of the total price, a statement that GST has been included within the total price charged
• an indication of which items represent taxable sales and which do not, if any
• a brief description of each thing supplied

The invoice below was generated in MYOB. See if you can find all of the elements from the list above reflected on it.

Did you find everything? 'The Total Amount (inc. tax)' let's the ATO and customer know that the total amount on the invoice is a GST inclusive amount.

Take a look at this excellent resource from the ATO about Tax invoices.

Digital invoices⁴⁵

A tax invoice doesn't need to be issued in paper form. The record transmitted to the customer needs to contain all information required for a tax invoice.

For example, you can issue a tax invoice to a customer by:

• using eInvoicing (Peppol eInvoice), an automated direct exchange of invoices between a supplier's and buyer's software, or
• emailing an invoice in portable document format (PDF)

MYOB Business accounting software makes invoicing easy with PDF invoicing and online payments.

GST Calculator

The Australian government provides a link to a GST calculator so that suppliers can determine GST obligations and credits. It helps businesses ensure they are charging the correct GST.

• How to calculate GST (goods and services tax) in Australia
• The amount of GST you will pay or should charge customers
• The price excluding GST and the total cost including GST

MYOB Business includes functionality to set up GST taxed items and track GST obligations.

To get started, check or change the GST settings in your business file by clicking your business name and choosing Business settings > GST settings tab.

Once you have that set up, there will be additional features accessible to you.

Tax codes appear in the accounting menu.

These functions also appear:

• You can choose whether the amounts in your transactions include or excludeTax/GST.
• TheTax code/GST codefields are added so you can choose the type of tax to apply to each line in a transaction.
• In general journals, you can choose whether the transaction will be displayed as a sale or purchase in your GST reports. (By choosing purchase, you are tracking your GST credits.)
• PDFs of your invoices will showTax invoiceinstead ofInvoice.

The business products: items and services

MYOB calls all products and services that a business might sell "items" and allows businesses to enter GST details associated with it so that when anyone is creating an invoice, the GST code is already applied when the 'item' is selected. An item is either physical or a service that the company sells.

When entering an item, you can indicate the price you sell it for and the GST code. You can also store the fact that you buy it as well, for how much and the tax code you purchase it using.

Creating items

to sell:

and buy intending to sell:

With your business settings set to GST collecting, and your items set up, you can create invoices simply by selecting items from a list. To do shit, head to the sales tab of the main navigation and choose create invoice.

Accounting for GST

We've previously mentioned how important it is to manage your cash flow by having a GST collected account. By doing that, you won't get caught out unable to pay your GST and tax obligations on time. Some bookkeepers also create a different account for GST paid on purchases.

MYOB suggests a single account that you track to stay on top of GST instead.

If your accounts list has a single GST Balance account, this ensures that the net GST amount on your GST Return or BAS matches the net amount in the ledger. You can also set this account as your GST clearing account under your Report settings.

Benefits of a single account include:

• The ledger records net GST by transaction regardless of the account type selected. A GST Balance account in the ledger prevents a mismatch between how GST is allocated in the ledger compared to the BAS/GST Return allocations.
• It saves time when allocating BAS/GST Return payments as the payment doesn't need to be split between GST collected and paid.
• Many accountants find it convenient because they often combine GST collected and paid accounts when preparing financial statements.
• Gross and GST amounts can be viewed on the General ledger report, and the GST reports also can show an Account Name and Account Number with sorting options.

If you don't already have a GST Balance account setup in MYOB, you can follow these instructions for adding, editing and deleting accounts.

The image above shows the header and detail accounts North Park Stationery Supplies uses to track GST.

This image shows the GST report. Can you see what the net GST Payment is based on this report?

You can claim a credit for any GST included in the price of any goods and services you buy for your business.

Paying GST for an item you sell, or use in the production of the item you sell is called a GST credit; or an input tax credit – a credit for the tax included in the price of your business inputs.

Your business can claim GST credits if the following conditions apply:

• The business is registered for GST.
• The taxed purchase was made within the last four years.
• The purchase was intended to be used solely or partly in carrying on the business, and the purchase does not relate to making input-taxed supplies.
• The purchase price included GST.
• You provide or are liable to pay for the item you purchased.
• You have a tax invoice from your supplier (for purchases more than $82.50).⁴⁶

To calculate the amount of GST that has been included in the price of a purchase using the following formula: 
The GST inclusive price of the good or service × 1/11 = the GST included in the price of the purchase

You cannot claim a GST credit:

• without a valid tax invoice
• for purchases that do not have GST in the price
• for wages you pay to staff (there is no GST on wages)
• for motor vehicles priced above a certain limit.⁴⁶

Goods and services that do not have GST in their price include:

• GST-free items (such as basic foods)
• input-taxed items (such as bank fees and loan interest)
• purchases from a business that is not registered for GST (and therefore cannot charge GST).⁴⁶

You also cannot claim GST credits for the following, even if GST is included in the price:

• purchases you intend to use for private or domestic purposes
• purchases you intend to use to make input-taxed supplies, such as those associated with providing residential accommodation
• some purchases that you can’t claim as an income tax deduction, such as entertainment expenses
• land purchases under the margin scheme.⁴⁶

GST credits and income tax deductions⁴⁷

If you can claim a deduction for a business purchase in your income tax return, claim the amount of the purchase on the income tax statement less any GST credit, which is reported on the BAS.

If you are not entitled to a GST credit, claim the full cost of the purchase, including any GST, as a deduction.

For capital items, such as machinery, you may be entitled to an income tax deduction for the item’s decline in value (depreciation). When working out the decline in value, use the cost of the item less any GST credits you are entitled to.

Credits don't last forever

See the ATO for more information about time limits on GST credits and refunds.

The resources and activities here will help confirm your understanding of the GST system.