Generally, a business charges its customers, and then pays the ATO, goods and services tax (GST) for taxable sales of goods and services made in the course of business. This is set at 10% of the price of an item.
However to isolate the amount of GST from the “displayed” price it is necessary to calculate one-eleventh of the total (as 10%, or one tenth, of the base price is added to arrive at an overall price, it is necessary to divide the lot by 11 to find out what that tenth is worth).
If you are entitled to claim a GST credit, you can claim back the GST that is incorporated into the price of purchases you use for your business. You can also offset these GST credits against the amount of GST you are liable to hand over to the ATO because of your customers’ purchases. If your GST credits are greater than the amount of GST you are liable to pay to the ATO, you will be entitled to a refund.
To claim GST credits, you must be:
- registered for GST
- purchasing goods or services (with GST in the price) to use in your business.
You report the GST you pay and the GST credits you wish to claim on your monthly, quarterly or annual activity statement (and you report many of your other tax obligations on this form).
If you are not registered for GST, you:
- do not include GST in the price of sales you make
- will not be able to claim GST credits
- will still have GST included in the price of most of your business purchases.
Whether you can claim GST credits depends on how you use the goods or services you purchase, and if they are taxable, GST-free or input taxed.
Some goods and services are GST-free, for example:
- basic food
- some health services.
As GST is not included in the price of GST-free goods and services, you cannot claim GST credits for these.
If you sell GST-free goods or services, you can still claim a GST credits for the GST included in the price of things you buy to use in the business. For example, a hospital does not include GST in the price of most of its services; however, if it buys disinfectant, it can claim a GST credit for the tax that is included in the price of the disinfectant.
Input taxed purchases
Some goods and services, such as certain financial supplies, are “input taxed”. This means GST is not included in the price, so you cannot claim GST credits for them. The two most common input taxed sales for small businesses are financial supplies and renting or selling certain supplies of residential premises.
And if you only sell input taxed goods or services you cannot claim GST credits for GST you pay in the price of things you purchase and use in your business.
For example, if a bank buys a calculator to calculate interest on its housing loans, even though GST will be included in the price, the bank cannot claim a credit for the GST it pays in the price of the calculator.
Purchases private use
You cannot claim credits for the GST you pay in the price of goods and services you use only for private purposes. For example, if you own a roof tiling business, you cannot claim GST credits for the cost of any tiles you use on your own house.
Purchases for both business and private use
You are allowed a partial GST credit for the price of things you use partly for business purposes and partly for private purposes. The amount of the GST credit you are entitled to depends on how much you use the purchase for business purposes.
However, if you account on a cash basis and have not paid for the purchase in full, you can only claim a credit for the GST included in the amount you have paid.
Records that are required
To claim GST credits, you must have a valid tax invoice for the goods and services that you purchase for your business. However, you can claim GST credits for business purchases you make up to $82.50 without holding a tax invoice as long as you keep records that support the claim (for example, cash register dockets or receipts). These records will also help you keep track of any GST credits you can claim.
Why that seemingly random amount of $82.50 you ask? It’s just $75 plus the GST that would usually be added. The bar was set at $50 back in 2000 when GST was introduced, and has, like a lot of things, just crept up since then.
How do you work out a GST credit?
Your tax invoice may specify the amount of GST included in the price of your purchase. However, if the tax invoice only states that the price includes GST, you can work it out (as mentioned above) by dividing the price by 11.
This is the amount of the GST credit you can claim if you use the purchase wholly for business purposes. If the purchase is partly used for private purposes, you can still claim a GST credit for the portion of the amount for business purposes.
If you account on a cash basis and have not paid the full price of a purchase, you can only claim a GST credit for the GST included in the amount you have paid for.
You may be eligible to choose to make an “annual apportionment”. This will allow you to do both of the following:
- claim a GST credit for the GST included in the price of purchases you make
- account once a year, rather than when you lodge your activity statements, for the amount you use your business purchases for private purposes.
You can include purchases that you use for both private purposes and business purposes, but not used solely to make input taxed sales.
At the end of the financial year in which you claim the GST credit, you must make a single increasing adjustment to account for how much you used the purchases for private purposes and to make sales other than input taxed sales.