GST Guide for Small Business

The goods and services tax is a broad-based tax of 10% added to most goods and services that are sold or consumed in Australia. A business that is registered for the tax is required to collect extra money from sales to customers and then pay this money – minus the GST it has paid for goods and services it has purchased – to the Australian Taxation Office.

For example, if a business charges $1,000 for a product, it must add $100 to the amount as GST. These amounts collected must be accounted for and paid to the ATO. 

The tax came into effect on 1 July 2000 after legislation was passed in 1999. The goods and services tax was introduced to replace a wholesale sales tax (WST) which had been introduced in the 1930s. The WST included a range of rates various products. With a larger proportion of services in the economy, the WST lost effectiveness as a way to raise revenue and the GST was proposed as a way to capture tax revenue from both goods and services.

Financial thresholds are used to determine if a business is required to register for the tax. A business must register if it has a turnover (gross income) of $75,000 or more per year. For not-for-profit organisations, the annual threshold is a turnover of $150,000 or more per year.

GST for Taxi Services and Ride Sharing Businesses

Businesses that provide taxi travel and ride-sharing drivers (such as Uber drivers) must register for the tax regardless of their annual turnover.

For new businesses that expect to earn $75,000 or more in the first year, the ATO recommends registering for the GST. If a business hasn’t registered for GST and it becomes clear that it will reach the threshold, it must register for GST within 21 days.

If you are engaging in a part-time activity, there is the question of whether it is a business or a hobby. If you are not sure, use these guidelines to determine if it is considered a business or hobby.

For businesses that expect to remain below the threshold, registration is optional. However, a business that decides to register and continues to remain below the threshold amount will be required to report and pay GST.

Create the right impression

One reason to register from the beginning is the impression you create. If you are a new business offering services to larger businesses, you probably don’t want to emphasise that your turnover is less than $75,000, which will be obvious if you don’t charge GST.  So for your professional image, it often makes sense to register from the beginning.

Claim back GST for from business expenses

Another advantage of registering for GST is that you can claim back the goods and services you have paid as input tax credits. So if your your expenses will be substantial in the beginning, it can make sense to register for GST so that you can claim back what you have paid.

A new business needs to have an ABN (Australian Business Number) to register for the goods and services tax. You can register for an ABN online. As part of the application process, you can choose to register for the goods and services tax as well. The ABN is part of the GST system, so the ABN is the same as the GST registration number.

The goods and services tax rate of 10% is added to the price of goods and services. For example, if you charge $1,000 for your product or service, you will charge your customer $1,100. The $100 that was added is the goods and services tax that you are required to pay to the ATO.

You can use this calculator to determine the amount of goods and services tax. The calculator gives you the option of the price excluding GST and the total cost including GST.

While you are required to pay the goods and services tax charged on your products and services, you can claim back the amount you pay in GST when purchasing goods and services for your business. For example, if your quarterly sales are $110,000 including GST and your business expenses are $55,000 including GST, you will need to pay $5,000 in GST for that quarter ($10,000 GST collected minus $5,000 spent). The amounts subtracted from the amounts of tax collected are called ‘input tax credits’, as these goods and services are inputs into your business. In this example, you claim GST credits of $5,000.

When charging goods and services tax, remember that some items are not subject to the tax. This includes some food items, some education courses, some medical services and exports. See a detailed list of items not subject to goods and services tax.

For sales over $82.50 (including GST) you are required to provide a tax invoice. For sales under $1,000, a tax invoice must include:

• that the document is intended to be a tax invoice
• the identity of the seller
• the Australian business number (ABN) of the seller
• the date when the invoice was issued
• a short description of items that were sold, including the quantity (if applicable) and the price
• the GST amount payable (if any)  – 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).

Tax invoices for sales of $1,000 or more also need to identify the buyer or include their ABN.

Fortunately, popular accounting programs have invoice templates that make it easy to include all the required information.

For more information about creating tax invoices, visit the ATO’s Issuing Tax Invoices page. Also, if you are a sole trader, check out Sole Trader Tax: A Short Guide.

The two ways to account for GST are cash and (non-cash) accrual.  

Cash basis

Business with less than $2 million in annual sales (and that meet other criteria) can account for GST on a cash basis. Under this method of accounting, you account for GST for payments you receive in the reporting period (usually a quarter) for goods and services delivered. For purchases, you account for the goods and services tax based on the funds you spend on these during the reporting period.

For example, if you received $66,000 (including goods and services tax) in the quarter and purchased $22,000 of goods and services for the business, you would need to pay the ATO $4,000 in goods and services tax ($6,000 received and $4,000 spent on goods and services tax).

Non-cash (accrual) basis

Using the non-cash (accrual) method of accounting for the goods and services tax, you account for GST on the sales you make. This can include issuing a tax invoice or receiving full or partial payment for goods and services. So when using this accounting method, you might need to pay the goods and services tax before you actually receive these funds.

For purchases, you can claim input tax credits for amounts invoiced to you and if you make some payments (whichever comes first), but you are not required to as you can wait up to four years to claim input tax credits.

Most small businesses use the cash accounting method for GST. With this method, the money flowing through your business is more closely connected with good and services tax liabilities, so it makes it easier to manage cash flow.

Whatever method you choose, an accounting program is essential to manage your GST. Using an accounting program – on your computer or in the cloud – makes it easier to track you GST obligations. For example, it enables you to categorize your sales and purchases according to correct goods and services tax categories, such as GST-free sales when exporting products.

In addition to simplifying your tax obligations, using an accounting program will make it easier to get access to business finance. According to research by the Australian Small Business and Family Enterprise Ombudsman up to 45% of small businesses do not use accountancy software to maintain up-to-date and accurate financial records. Business lenders have suggested that these businesses could more easily produce evidence of their financial performance when they apply for a loan.

If you are not comfortable doing your own bookkeeping, you can hire a bookkeeper who is a registered tax agent to simplify the process. In addition to simplifying the goods and services tax compliance, you will have financial records that can help you when seeking business finance. Doing this soon after you start a business will help you avoid the challenge of having to go back and correct mistakes or add missing information. 

Your GST payment or refund is calculated using a Business Activity Statement (BAS). When you register for the goods and services tax, you will get blank BAS around one month before the due date. Alternatively, you can submit a BAS electronically using accounting software. If you are reporting and paying quarterly, accounting details to fill in include:

• Total sales
• Export sales
• Other GST-free sales
• Capital purchases
• Non-capital purchases.

On the back of the form, there are spaces for including the amount of goods and services tax you have received from sales and the amount you have paid for purchases. The difference between these two figures is the amount of goods and services tax you owe. Usually, this will be a positive number. However, if you have spent more than you have taken in during the quarter, you could receive a refund from the ATO.

There are several options for GST payment. Businesses with under $20 million in annual turnover will usually report and pay quarterly unless otherwise specified by the ATO. Businesses that have over $20 million in annual turnover are required to report and pay monthly. Organisations that have voluntarily registered for the goods and services tax (with under $75,000 in annual turnover) can report and pay annually.

Once you have completed a hard copy or online version of the BAS, you will need to pay that amount to the ATO. Payment can be made by Bpay online or by credit card over the phone.

If you can’t pay on time, you will still need to lodge your BAS, otherwise you could be subject to a penalty. The ATO recommends you set up a payment plan. If the GST debt is less than $100,000, this can be done over the phone using an automated system. It can also be done online if you have a MyGov account linked to the ATO. If you don’t have a MyGov account, learn how to set one up and link departments such as Medicare and the ATO.

One of the problems with ATO tax payment plans is that it could hinder your ability to get business or personal finance. This is because many lenders have an unfavourable view of ATO tax debt and will not provide finance to businesses or individuals that are in debt to the ATO.

Not being able to pay your GST obligations is a sign that your business is having cash flow challenges. In addition to taking steps to overcome a cash flow crunch, unsecured business finance could be an option. These types of business loans assist with short-term cash flow challenges. The application process is quick and simple. With Moula, for example, you can complete the application online in around 10 minutes. In addition to your application, your financial data is safely and securely analysed online to determine your eligibility and the amount of the loan. If approved, the funds will be available in your account within 24 hours.

Learn more about unsecured business loans from Moula.