Australian businesses with an annual turnover of more than $75,000 must be registered for GST. Charging an extra 10 per cent on top of services sounds simple, yet a number of traps routinely catch small business owners.
Businesses falling beneath the $75,000 threshold are not required to register for GST. Those businesses that choose not to register cannot:
- state “Tax Invoice” on invoices; they must only use the word “Invoice”,
- collect an extra 10% from customers,
- claim credits for the GST paid on items purchased.
Calculating GST correctly
Businesses registered for GST must regularly lodge a Business Activity Statement (BAS) and this is where many run into trouble. One of the most frequent mistakes made when manually preparing a BAS is to calculate 10% of the total sales amount as GST.
The correct method is to divide the total sales figure by 11. The examples below show total sales of $5,500 including GST of $500.
- $5,500 x 10% = $550
- $5,500 / 11 = $500
Method B is the correct option. If your business has been using Method A, you haven’t been calculating your payment correctly and are likely paying too much GST.
How personal use affects GST
Equally common are mistakes that involve claiming credits. The Australian Taxation Office (ATO) takes a dim view of credits being claimed for assets that are partly used for private purposes. Credits can only be claimed for the portion of the assets or services that relate to business.
For example, if you purchase a printer for your small business for $1,100 (including $100 GST) but for 20% of the time the printer is used by your children to print school work, only 80% (or $80) of the GST can be claimed.
On another point, credits cannot be claimed where a contractor or supplier is not registered for GST because GST should not have been included in the amount you paid.
If you are registered for GST you should ensure that any tax deductions you claim for business expenses do not include the GST component as you should have claimed these amounts as GST credits separately.
GST has applied since July 2000 but continues to be the source of confusion for many small business operators. For full clarification phone the ATO’s dedicated business tax enquiries line on 13 28 66.