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One of the most challenging aspects of starting and running any small business can be managing your tax obligations. GST can be particularly difficult because of the need to complete a Business Activity Statement (BAS) every quarter.
Thousands of small businesses every year find themselves in hot water with the ATO through failing to lodge their BAS on time (or at all, in some cases), often because they are too busy keeping their business afloat to stay on top of the admin.
So, with that in mind, here is my guide to getting your GST right
Do I need to register for GST?
The first question to consider – particularly if your retail business is newly opened – is whether you need to register for GST in the first place.
The basic rule is that your business must register for GST once your annual turnover is $75,000 or more.
Once you’ve passed the annual turnover threshold, you have 21 days to register so it’s worthwhile checking your turnover each month to see if you’re close to exceeding it. Registration is voluntary before that point.
Once you are registered for GST you will need to:
- include GST in the price you charge for your merchandise, provided the sales are taxable
- issue tax invoices for your taxable sales and obtain tax invoices for your purchases
- claim credits for the GST included in the price of your business purchases, such as stock
- account for GST on either a cash or non-cash basis and put aside the GST you have collected so you can pay it to the ATO when due
- lodge activity statements or annual returns to report your sales and purchases, and pay GST to the ATO or receive a GST refund.
If you choose to voluntarily register, you generally must stay registered for at least 12 months.
If you’ve just started a new business and expect it to reach the GST turnover threshold or more in its first year of operation, you should register for GST even if you haven’t yet reached the $75,000 threshold.
You can register for GST online via the Australian Business Register website. You can also register for GST via the Business Portal on the ATO website.
TIP: You only register once for GST, even if you operate more than one business. So, if you run a pastry shop and a plumbing business, you only need the one registration unless one of the businesses is operated through a different entity, such as a company.
If you fail to register when you should have done, you may be forced to account for GST on all sales backdated to the point at which you became required to register, plus penalties and interest. If you didn’t charge GST to your customers, that will be a hit to your profits.
How does the GST work?
The current rate of GST is 10%. This means that if you charge $100 for your merchandise, your customer will be charged $110. The additional $10 is the GST which needs to be paid to the ATO.
When you buy supplies for your business, you’ll be charged 10% in GST which you can claim back as a credit. At the end of each GST period – usually quarterly but occasionally monthly – you need to account for the GST you’ve collected on your sales minus any that you’ve paid (the credits) on your purchases. The difference is the amount payable (or refundable if credits on purchases exceed debits on sales). You do this by completing a business activity statement (BAS) and paying the net GST to the ATO
Businesses with a turnover of less than $75,000 are given the choice of registering for GST because if a business is spending extensively on supplies, the business might want to claim the GST credits back. This is particularly the case if GST credits on purchases exceed the GST charged to customers.
Tax Invoices
When you make a taxable sale of more than $82.50 (including GST), you must give GST-registered customers a tax invoice so that they can claim a credit for the GST in the purchase price. If you can’t provide that immediately, you have 28 days to supply it.
Tax invoices for taxable sales of less than $1,000 must include these details:
- that the document is intended to be a tax invoice
- the seller’s identity
- the seller’s Australian business number (ABN)
- the date the invoice was issued
- a brief description of the items sold, including the quantity (if applicable) and the price
- the GST amount (if any) payable – this can be shown separately or, if the GST amount is exactly one-eleventh of the total price, as a statement such as ‘Total price includes GST’
- the extent to which each sale on the invoice is a taxable sale (that is, the extent to which each sale includes GST)
In addition, tax invoices for sales of $1,000 or more must include the buyer’s identity or ABN
GST Credits
You can claim a credit in your activity statement for any GST included in the price you pay for things that you use in your business like trading stock. This is called a GST credit (or input-tax credit, a credit for the tax included in the price of your business inputs).
You can claim GST credits if the following four conditions apply:
- you intend to use your purchase solely or partly in carrying on your business and the purchase does not relate to making input-taxed supplies (ie, supplies on which GST is not charged)
- the purchase price included GST
- you paid for the item you purchased
- where the purchase costs more than $82.50, you have a tax invoice from the supplier. A four-year time limit applies for making claims.
If you purchase something which you use partly in your business and partly privately, you can only claim a GST credit for the part of the purchase relating to the business portion of the cost.
Accounting for GST
There are two ways to account for GST: the cash basis or the accruals basis.
Businesses with a turnover of less than $2m can choose which method they prefer. Other businesses must use the accruals basis.
If you apply the cash basis, you must account for sales and purchases in the period in which you are paid for sales by your customers or pay for purchases to your suppliers. The advantage of this method is that GST reporting is better aligned with cash flow, which can be helpful for small businesses.
If you apply the accruals basis, you must account for sales and purchases in the period in which you invoice those sales or receive an invoice for purchases.
Lodging a Business Activity Statement (BAS)
A business activity statement (BAS) is used to report all your periodic business tax obligations and entitlements. You need to report all the GST charged on your sales and the credits on your business purchases on your BAS as well as your pay as you go (PAYG) instalments and PAYG withholding tax (which will be relevant if you employ staff).
If the GST you collect is more than the GST credits you are claiming, you send the difference to the ATO with your BAS.
Businesses with a turnover greater than $20 million must complete a BAS on a monthly basis and other businesses can also choose to do this if they prefer (for instance, if there are cash flow advantages to your business). Otherwise, BAS forms are due quarterly.
You must lodge your BAS quarterly by the 28th day of the month following the end of the financial quarter (September, December, March, June). If you lodge monthly, your BAS must be lodged by 21 days after the end of each month.
For more information on GST and how it affects your business, contact H&R Block Tax & Business Services team
Mark Chapman is director of tax communications at H&R Block.
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