With a handful of exceptions, GST is charged on every single purchase we make.
Of course, you’ve only got experience with the customer side of the GST equation. Now that you’re opening up your own small business however, it’s important that you understand how the business side of GST works.
It’s crucial that you understand your obligations and duties vis-a-vis GST before you open your small business. Not only because it’s a legal obligation, but because failing to meet your obligations could land your business in hot water with the ATO!
So, where can you start?
All businesses collect GST – even the ones that aren’t GST registered.
Luckily for you, unless you do your bookkeeping and accounting by hand, you won’t need to worry about filling out spreadsheets.
Any bookkeeping or accounting software worth its salt will fill this in automatically and calculate the amount of GST you’ve accrued for you.
Accounting for GST collected
If you look at your accounting software, you might notice something strange. Specifically, that GST accrued is listed as a liability rather than an expense!
That’s because when you get down to it, any GST you collect is a debt (or “liability” in accountant-speak).
While you may have collected it, it’s not your money, it’s the ATO’s money – you’re just holding it for them until tax time comes around.
And when it does come around, you’re obligated to pay that money to the ATO. Functionally, it’s identical to a debt – hence, it’s treated as one.
Are you a GST-registered business?
While every business collects GST, not all businesses are GST-registered.
When we say GST-registered, we specifically mean businesses that:
- Have an annual turnover of $75,000 or more
- Turn over of $150,000+ annually (if you’re a non-profit)
- Offer taxi or ride-sharing services
Basically, if your business is registered for GST, your invoices will include a tax component.
Essentially, all your receipts and invoices will double as tax invoices and need to have “tax invoice” printed on it somewhere.
While registering for GST may put a little bit more work on your plate, it also comes with its own advantages – namely, it gives you the opportunity to claim a input tax credit (more on that below).
Paying GST: the other half of the equation
Your business doesn’t just collect GST – it pays it too.
Any business purchases you make – tools, office equipment, raw materials – come with GST.
What you mightn’t know is that your business may actually be entitled to a GST refund!
Are you eligible for a GST refund?
Have you bought anything with the intent of using it at your business?
If so, you’re eligible for an input tax credits.
If you’re a GST-registered business, you can get any GST you paid throughout the year refunded, end of story – provided you adhere to a couple of common-sense rules, of course:
- The purchase is intended solely for use in your business
- The purchase price listed GST (that means it came from a fellow GST-registered business)
- You have a tax invoice proving you made the purchase
If you meet these conditions, you can claim a GST credit equal to the amount of GST you paid.
Accounting for GST paid
In accountant-speak, GST paid is treated as a receivable.
Think about it.
While money might have gone out of your wallet, you’re entitled to a refund of that money thanks to input tax credits. While you mightn’t have the money now, it will be paid back in the future.
Functionally, it’s more or less identical to a customer paying on credit.
When you make any business-related purchases – tools, office equipment, raw materials – you list the GST component of the purchase separately from expense. Specifically, you record it as a debt owed to you.
GST for business: the role a BAS plays
What do you do with all the GST you’ve collected on behalf of the ATO? How do you let the ATO know that they owe you a GST refund?
Why, you tell them, of course. And to do that, you need to fill out a BAS.
Business Activity Statements (BAS) are forms submitted to the ATO by GST-registered businesses.
This is a form you’ll have to become very familiar with as a businesses owner, as it outlines all of your tax obligations such as income tax and luxury goods tax, as well as your entitlements and deductions.
And with regards to GST, that means all the GST you collected throughout the year and any GST you paid.
Using the information on your BAS, the ATO collects GST your customers have paid, as well as refunding any money that you’re entitled to.
The role your small business accountant plays in all of this
Thinking of starting up your own business? Taking your existing business to the next level?
One of the first things you’ll have to do is wrap your head around GST, and what that means for you.
Bruce Edmunds & Associates specialise in helping small businesses with all their accounting needs.
On top of helping you figure out how GST affects you, we can also look after your BAS for you, ensuring that your obligations are accurately recorded and that you receive what you’re owed.