When your business generates a gross annual income of $75,000 you will be required to register and collect the Goods and Services Tax (GST) and complete a monthly, quarterly or yearly Business Activity Statement (BAS) and lodge it to the Australian Taxation Office (ATO).
A part of your obligations are to charge an additional 10% on your invoice to your customers on the goods and services you sell, which you will collect on behalf of the ATO.
Pro Tax Tip: When you collect your GST credits, it’s a good idea to put them into a separate bank account so that when the time comes, you have the funds ready to send to the ATO.
What are GST credits?
GST credits are defined as the GST you have incurred as a business expense to create your goods or services. They are called Input Tax Credits. The ATO will allow you to claim back the GST credits you have incurred as part of your expenses to provide your goods or service.
How do you calculate GST Input Tax Credits?
To calculate your input tax credits, you’ll need to add up the GST you have paid or are liable to pay on your business expenses which you will offset against the GST you have collected.
For example, you may have invoiced your customer $110, which includes $100 of your invoice plus the additional 10% GST. You’ll need to set aside $10 into a nominated bank account.
In order to provide those goods or services, you may have incurred expenses which equates to $3 of GST. You are able to claim back the $3 of GST paid as Input Tax Credits of $33, so that you will only need to send $7 to the ATO as a part of your GST obligations.
What are the GST credits I can claim?
There are certain rules when it comes to climbing GST credits. You must be able to demonstrate that you are in a business by:
- Striving to make a profit
- Keeping records on your invoicing and expenses
- Providing commercial goods or services
- Marketing and advertising
- Developing a business plan
If you’re indulging in a hobby, the claim GST credits on expenses relating to that hobby. A hobby is defined as:
- Not aspiring to make a profit
- Not carried out in a business type manner
- Is irregular in activity
- Done for enjoyment and satisfaction
If you do have a hobby, you may have to cancel your ABN and GST registrations. May also need to amend prior BAS forms where you have claimed GST credits for your hobby.
What are the restrictions on claiming GST Input Tax Credits?
There are strict rules that govern your eligibility to claim your GST credits. Your expenses must be business-related and have been incurred as a part of your expenses from which you have provided your goods or services. If your expenses have incurred a personal portion, you’ll need to work out and claim only the business-related portion of your expenses.
Your purchase price must include the GST (if over $82.50). If your invoice doesn’t list a GST component, check that your supplier is or is not registered for GST. If they are registered, and the invoice is not a standard tax invoice, you are allowed to request a proper tax invoice which shows the GST allocation. If you’re unsure that your supplier is obligated to collect GST, you can check the GST registration status of a business by searching the ABN Lookup Website.
To claim your GST credit, you must have paid, or already paid the GST on the item you purchased. You will be required to retain your tax invoice in either in hard copy or digital format as proof of purchase.
There are certain items that you won’t be allowed to claim any GST credits on, which include wages, GST free items, loan and interest fees, items bought for private use, residential accommodation, entertainment expenses and land purchases. Special rules apply when claiming GST credits for some motor vehicles.
Pro Tax Tip: If you’re unsure on what you can or can’t claim, it’s best to seek advice. Your tax agent will know exactly what you can claim and the correct portion you’ll be required to calculate.
Are there time limits on claiming GST credits and refunds?
To claim back GST input tax credits that you are legally entitled to, you’ll need to claim it within four years. Your entitlement to claim ends four years from the due date of your earliest BAS. You are entitled to claim on any BAS lodged in this period, which is called the Period of Review.
If you have discovered an error, you are entitled to revise the BAS, request an amendment in writing and to correct the error at a later date.
It is a good idea to have a dedicated bookkeeper for your business. Not only will they free up your time to work on important tasks other than your books, they will have the skills and knowledge to claim all of your eligible GST Tax Input Credits to minimise the GST you are obligated to make.
An added benefit of being up to date with your accounts, is that you’ll know the exact cash position of your business on any given day so you can work to keep your business profitable.
ITP are not just tax accountants. They help Australian businesses across the country with expert bookkeeping, account and financial advice. Whether you need help one day or five days a week, speak with a friendly ITP professional to discuss your exact needs today.