GST is one of those taxes that sounds more complicated than it really is. You make a sale. You collect some GST. You buy something for the business. You may pay some GST. At the end of the reporting period, you work out the difference.

Sometimes you pay the Australian Taxation Office (ATO). Sometimes the ATO owes you. That is GST in its simplest form.

Of course, tax law rarely allows anything to remain quite that simple. So get your coffee ready, and let us start at the beginning.

What is GST?

GST stands for Goods and Services Tax. It is a broad-based tax of 10% on most goods and services sold or consumed in Australia. The important word here is most. Not everything attracts GST.

That little exception is responsible for a surprisingly large amount of GST discussion. But we will come to that later.

For now, imagine you run a small computer shop. You sell a monitor for $1,100 including GST.

The price can be broken down like this:

Sale price before GST:	$1,000
GST:	$100
Customer pays:	$1,100

You have collected $100 of GST.

But that does not necessarily mean you hand the entire $100 to the ATO. Why? Because your business probably paid GST on things too.

GST is not really your money

This is probably the easiest way to understand GST. When your customer gives you $1,100, the whole $1,100 should not be thought of as business income. Part of it is GST.

Your business is effectively collecting that GST as part of Australia’s GST system. A GST-registered business generally includes GST in the price of taxable sales and can claim credits for GST included in eligible business purchases.

This distinction becomes very important when managing cash flow. It is surprisingly easy to look at a healthy bank balance and think: “Business is going well. We can afford that new laptop.” Then BAS time arrives. Suddenly, some of that money has another destination.

How does GST actually work?

Let us take a very simple example. Suppose you run Daniel’s Design Studio. During the quarter, you make taxable sales of: $22,000 including GST. The GST included in those sales is: $2,000

Now suppose you also purchased computers, software and other eligible business items during the quarter. Those purchases cost: $11,000 including GST. The GST included in those purchases is: $1,000

So we have:

Particulars	GST
GST collected on sales	$2,000
Less: GST credits on purchases	$1,000
Net GST payable	$1,000

Daniel’s Design Studio generally pays $1,000 to the ATO. That is the basic GST mechanism. GST collected – GST credits = Net GST. Keep that little equation in mind. We will be coming back to it often.

What is a GST credit?

You will hear the term GST credit quite a lot. You may also hear accountants call it an input tax credit. The idea is simple. If your business buys something and GST is included in the price, you may be able to claim that GST back.

Suppose your business buys a printer for: $550 including GST. That price contains: $500 + $50 GST. If the purchase meets the requirements for a GST credit, the business can generally claim the $50.

The ATO allows GST-registered businesses to claim credits for GST included in eligible business purchases, subject to the relevant conditions. But there is an important phrase in that sentence: eligible business purchases.

Buying a television for the office meeting room is one thing. Buying a television for your bedroom and putting it through the business accounts is another. GST has rules. And the ATO has heard most creative explanations before.

Do all Australian businesses need to register for GST?

No. This is one of the first things a new business owner should understand. For most businesses, GST registration becomes compulsory when GST turnover reaches $75,000 or more. For non-profit organisations, the threshold is $150,000.

There are also special cases. For example, businesses providing taxi, limousine or ride-sourcing services generally need to register regardless of turnover. Businesses wanting to claim fuel tax credits also need GST registration.

So the simple rule for an ordinary business is: Below $75,000? Registration may be optional. $75,000 or more? You will generally need to register. And if you become required to register, the ATO says you generally have 21 days to do it. Do not wait until the end of the financial year to think about it. GST turnover needs watching as the business grows.

GST turnover does not mean profit

This catches beginners surprisingly often. Suppose your business has:

Sales: $90,000
Expenses: $70,000
Profit: $20,000

You might look at the $20,000 profit and think: “I am nowhere near the $75,000 GST threshold.” Unfortunately, you are looking at the wrong number. The GST registration threshold is based broadly on GST turnover, not your business profit.

The ATO describes GST turnover broadly as business income, excluding GST and certain types of sales. So a low-profit business can still need GST registration. Turnover and profit are two very different creatures. Never let them share the same cage.

What happens once you register for GST?

Registration changes the way you run the books. Once registered, you will generally need to:

• charge GST on your taxable sales
• issue appropriate tax invoices
• keep records of GST paid on business purchases
• claim eligible GST credits
• report GST to the ATO
• lodge your Business Activity Statement, or BAS

The ATO notes that GST-registered businesses collect GST and report it through their BAS. And this is where bookkeeping suddenly becomes rather important. Because three months of untidy records have an extraordinary ability to become urgent on BAS day.

What is a BAS?

BAS stands for Business Activity Statement. Think of it as the regular report through which a business tells the ATO about certain tax obligations. GST is one of the main items reported through a BAS. Depending on the business, a BAS can also deal with things such as PAYG withholding, PAYG instalments and other tax obligations. For GST purposes, the BAS essentially helps answer:

How much GST did you collect?

and

How much GST can you claim?

The difference helps determine whether you have GST to pay or a refund to receive.

A simple BAS example

Let us return to Daniel’s Design Studio. For the quarter: Total taxable sales including GST: $55,000. GST collected: $5,000. Eligible business purchases including GST: $22,000. GST credits: $2,000

So:

GST on sales: $5,000
Less GST credits: $2,000
Net GST: $3,000

Subject to any other BAS obligations or adjustments, the business has $3,000 of net GST to pay. This is why accurate bookkeeping matters. One missing purchase invoice might mean losing a GST credit you were otherwise entitled to claim. One incorrectly classified sale might mean reporting the wrong GST. Small mistakes have a habit of inviting larger headaches.

Does everything have 10% GST?

No. And now we arrive at the interesting part. Australian sales can broadly fall into different GST categories. For a beginner, the three important ones are:

1. Taxable sales

These generally have GST. If something costs $100 before GST, the customer generally pays: $110 including GST. The business collects the $10 GST.

2. GST-free sales

No GST is charged on a GST-free sale. Certain foods, health services, education courses and exports can fall into this category when the relevant conditions are satisfied. But here is the important part: A business making GST-free sales may still be able to claim GST credits on eligible purchases connected with those sales. That makes GST-free different from our next category.

3. Input-taxed sales

No GST is generally charged on an input-taxed sale either. But the treatment of related purchases is different. GST credits generally cannot be claimed for purchases relating to input-taxed sales. Certain financial supplies and residential rent are common areas where input-taxed treatment can arise.

So, GST-free does not mean the same thing as input taxed. They may look similar to the customer because GST is not added. For the business owner, however, the difference can be significant. We will deal with taxable, GST-free and input-taxed supplies separately in another guide. They deserve some breathing room.

How do you calculate GST from a GST-inclusive price?

This is a useful little calculation. If the price does not include GST, calculating GST is easy. Take 10%. For example:

Price: $1,000
GST: $100
Total: $1,100

But what if someone gives you a GST-inclusive amount of $1,100? Do not calculate 10% of $1,100. That would give you $110, which is wrong. Instead, divide the GST-inclusive amount by 11. $1,100 ÷ 11 = $100 GST

Therefore:

GST-inclusive price: $1,100
GST: $100
Price excluding GST: $1,000

What is a tax invoice?

A tax invoice is an important document in the GST system. It provides details of a taxable sale and helps support GST credit claims. For business purchases above the relevant threshold, holding a valid tax invoice is generally important when claiming GST credits.

A proper tax invoice normally contains prescribed information. So when your supplier sends you an invoice, do not simply check the amount and throw it into a folder called Miscellaneous.

Check it. Is the supplier correctly identified? Is there an ABN? Is GST shown correctly? Does the invoice contain the information required? Good GST accounting starts with good documents.

Can I register voluntarily?

Yes. A business below the compulsory GST registration threshold may choose to register voluntarily. But voluntary registration should be a decision, not a reflex. Once registered, you take on GST responsibilities.

You generally need to charge GST on taxable sales, maintain the necessary records and lodge the required activity statements. The ATO also states that businesses voluntarily registering generally need to remain registered for at least 12 months.

There can certainly be advantages. You may be able to claim GST credits on eligible business purchases. But there is also administration involved. Sometimes registration makes sense. Sometimes remaining outside the GST system while legally entitled to do so is simpler. The answer depends on the business.

What if my customer is another business?

GST often feels easier in business-to-business transactions. Suppose you charge another GST-registered business:

Service fee: $1,000
GST: $100
Invoice: $1,100

Your customer pays you $1,100. You report the $100 GST.

Subject to the normal rules, your customer may claim that $100 as a GST credit. So the GST moves through the chain. Ultimately, GST is designed as a tax on final consumption.

The biggest beginner mistake: spending the GST

Imagine your business has a particularly good month.

Customers pay you $110,000 including GST. Your bank account looks wonderful. But included in that amount may be $10,000 of GST. That $10,000 should not be treated casually as available spending money. There may be GST credits to offset against it. But whatever net GST remains will eventually need to be dealt with through the BAS.

The ATO itself suggests that businesses may consider putting GST collected into a separate bank account to help manage cash flow. That is not a bad habit. GST money has an unfortunate tendency to look exactly like ordinary money while sitting in a bank account.

GST is really a bookkeeping system

Once you understand the basic idea, GST becomes much less frightening. For every transaction, you are essentially asking a few questions:

• Was there a sale or purchase?
• Does GST apply?
• How much GST is involved?
• Can the business claim the GST?
• Has the transaction been recorded correctly?

Do that properly throughout the month or quarter and BAS preparation becomes much easier. Ignore it for three months and BAS preparation becomes archaeology. You start digging through emails, bank statements and old receipts hoping to discover what happened. Good bookkeeping prevents that.

The GST journey in one minute

If you remember nothing else from this guide, remember this:

• A business makes sales.
• Some of those sales may have GST.
• The business collects that GST from customers.
• The business also makes purchases.
• Some of those purchases may contain GST that the business can claim as a credit.
• At BAS time, the business works out the GST collected and the GST credits available.
• The difference generally becomes GST payable or refundable.

And that is the basic Australian GST system. Not quite as terrifying as the legislation makes it look.