The GST has now been in effect since 1 July 2000, yet despite a massive Australian Taxation Office (ATO) education campaign there are still many errors and omissions being made by small businesses on their GST returns. Most of these errors relate to the over-claiming of GST credits.
If your bookkeeper is incorrectly classifying your expenditure or revenue for GST, you may be exposing yourself to future penalties and interest charges from the ATO. At Books Onsite we ensure that all transactions are correctly categorised. Below are some of the more common GST mistakes made by companies that do not have accurate bookkeeping systems in place:
- Bank Fees (e.g. monthly and annual fees, chequebook fees and loan establishment fees). Bank fees are treated as “input taxed” meaning the bank doesn’t charge GST to the customer. Note, GST is charged on credit card merchants fees and therefore a GST credit can be claimed on these expenses;
- Government Fees where no GST has been charged should be cosed FRE. Examples include land tax, council rates, water rates, ASIC filing fees and motor vehicle registration;
- Expenses relating to residential rental properties where the entity is registered for GST. Residential premises are input taxed and therefore GST credits cannot be claimed on the expenses paid;
- Business insurance policy. As there is a stamp duty component in the premium which is not subject to GST, a GST credit cannot be claimed on this portion of the payment. The actual amount of GST payable on an insurance premium is usually stated on the renewal form;
- Sale of cars and equipment, including the trade of motor vehicles. The sale of a business asset is subject to GST just like any ordinary business transaction unless the going concern exemption is claimed;
- Government grants and incentives which are received inclusive of GST;
- GST-free purchases such as basic food items, exports and some health services;
- Wages and superannuation payments are non-taxable supplies;
- Entertainment expenses where the business has elected to use the 50/50 split method for fringe benefits tax purposes. Only 50% of the GST credits can be claimed in this situation;
- Motor Vehicles with a purchase price in excess of the luxury car limit of $57,009 GST inclusive. The maximum GST credit that can be claimed is limited to $5,183;
- Sole traders and partnerships are not apportioning input tax credits and making adjustments to expenditure that is partly private and partly business use (e.g. motor vehicle expenses). To calculate their GST liability, small businesses are required to undertake this apportionment each time they prepare their BAS, though in practice the actual private use may not be accurately determined until the business is required to complete and lodge its annual income tax return. Sole traders and partnerships with an annual turnover of up to $2 million that pay GST either on a monthly or quarterly basis can apportion the private portion of GST credits on an annual basis, instead of each time the BAS is lodged;
- Assets financed by way of commercial hire purchase (CHP). While an up-front GST credit is available for businesses accounting for GST using the accruals or invoice basis, this is not available where the business uses the cash basis. When the cash basis applies the GST credit to be claimed is calculated as 1/11th of the “principal” portion of the total CHP payments made during the relevant month or quarter, (i.e. the credit is claimed progressively over the term of the CHP loan). In order to claim the total GST credit upfront, the business would need to consider financing the asset by way of a chattel mortgage;
- Yellow Pages advertising. Where the business chooses to pay for the cost of advertising by instalments, the entire GST is charged up-front. Businesses that account for GST on an accruals or invoice basis can claim this up-front amount in their next BAS, whereas businesses that use the cash basis can only claim a GST credit equivalent to 1/11th of each instalment; and
- No valid tax invoice at the time of lodging the BAS. Businesses in this situation should contact the ATO for permission to claim the GST credit.
- Interest Income should have ITS (Input Taxed Sale) as the code.
- Personal Income that isn’t really income (eg. a family loan, a gift or a tax refund) is non-taxable.
- Other GST Free items include Milk, tea, coffee, international travel, donations and some first aid supplies.
The ATO has now shifted its GST focus from an education to compliance phase. It is therefore very important for businesses to have the correct systems in place to ensure that GST is correctly accounted for on each transaction and that proper documentation is kept (e.g. valid tax invoices). Failure to comply with the GST rules may result in substantial penalties upon an audit by the ATO.