Common Gst Mistakes Made By Small Business
The GST has been in effect since 1 July 2000, yet despite an 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.
Below are some of the more common GST mistakes made by small business that do not have accurate accounting systems or professional Accounting personnel in place:
- Advertising – when a small business chooses to pay for the cost of advertising by instalments like for Yellow Pages, 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.
- Bank Fees - monthly and annual fees and loan establishment fees. Bank fees are treated as “input taxed” meaning the bank doesn’t charge GST to the customer. The exception is Credit Card Merchant Fees – GST is charged on these fees and therefore a GST credit can be claimed on these expenses.
- 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.
- Government Fees - ASIC filing fees, council rates, water rates and motor vehicle registration are GST free.
- Insurances – for general insurance and premiums a GST component is listed on the invoice. The Stamp Duty component is not subject to GST, therefore a GST credit cannot be claimed for this portion. For Life and Sickness or Accident insurance these are not subject to GST, therefore no GST credit can be claimed.
- Interest Income – should have ITS (Input Taxed Sale) as the code
- Motor Vehicles – if the purchase price is in excess of the luxury car limit, currently $57,009 GST inclusive, then the maximum GST credit that can be claimed is limited to $5,183 (check ATO for current updates for latest limits and claimable GST)
- Financed Assets via Chattel Mortgage or Commercial Hire Purchase – 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 for CHP. 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 finance the asset by way of a chattel mortgage.
- Sale of Assets – Motor Vehicles and Equipment – including the trade-in 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.
- Staff Amenities – basic food items, milk, coffee, tea and sugar are GST Free.
- Wages and Superannuation – these payments are non-taxable supplies.
- Other GST Free Expenses – donations, some first-aid supplies, some health services
- Other Expenses that are Non-Taxable – depreciation, drawings, fines, loan repayments, income tax.
- A Special Note for Sole Traders and Partnerships:
Due to partly private and partly business use of motor vehicles small business often fails to apportion input tax credits. 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 dollars 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.
IMPORTANT DISCLAIMER: This article does not constitute advice. This article is to be used as a general guide for our clients for their own private information. Clients should not act in isolation or solely on the basis of the material contained herein. We therefore recommend that formal advice for your situation be sought before taking action in any of these areas.