You run a business. You make sales. You pay expenses. At the end of the year, you hear about income tax. Then, during the year, you hear about GST. Both are taxes. Both can affect your business. But they work in very different ways.
This is where many business owners get confused. “Am I paying tax on my sales or on my profit?” The answer depends on which tax we are talking about. Let’s make it simple.
What Is GST?
GST stands for Goods and Services Tax. In Australia, GST is generally charged at 10% on taxable supplies. If your business is registered for GST, you generally collect GST from your customers on taxable sales. You may also be able to claim GST credits on eligible business purchases.
So GST is mainly connected with your sales and purchases. It is not a tax on your business profit.
What Is Income Tax?
Income tax is different. Income tax is generally calculated based on your taxable income. In simple terms, you start with your business income. Then you deduct allowable business expenses. What remains contributes to your taxable income.
For example: Business income: $100,000.
Allowable business expenses: $60,000.
Business profit: $40,000.
The income tax calculation is based on your taxable income and the applicable tax rules. So income tax is much more closely connected with your income and profit than GST is.
GST Is Not the Same as Income Tax
This is the easiest way to remember it. GST: Generally collected on taxable sales and claimed on eligible purchases. Income tax: Generally calculated on taxable income.
Think of GST as money you collect and account for. Think of income tax as a tax on your taxable income. They are two separate systems.
Let’s Look at a Simple Example
Imagine you run a consulting business.
You make taxable sales of: $110,000 including GST.
The GST included is: $110,000 ÷ 11 = $10,000.
So your sales before GST are: $100,000.
Now imagine your eligible business expenses are: $55,000.
Your business profit before considering income tax is: $45,000.
You now have two different tax questions.
GST question: How much GST did you collect? How much GST can you claim as credits?
Income tax question: What is your taxable income?
These questions should not be mixed together.
GST Is Generally Collected From Your Customer
This is an important difference.
Suppose you provide a service for: $1,000 + GST.
The customer pays: $1,100.
The extra $100 is GST.
You are generally collecting that GST on behalf of the tax system.
It is not simply another $100 of business income for you.
You need to account for the GST through your BAS.
Income Tax Is Different
Now imagine your business earns: $100,000 before GST.
Your allowable business expenses are: $60,000.
Your profit is: $40,000.
That $40,000 contributes to your taxable income.
Income tax is then calculated based on the applicable tax rules. So you can see the difference. GST is connected with the transactions. Income tax is connected with the income you ultimately earn.
What Happens to GST on Your Expenses?
Suppose your business buys equipment for: $2,200 including GST.
The GST component is: $200.
If the purchase is eligible, you may be able to claim the $200 as a GST credit.
This can reduce your net GST liability. But the income tax treatment is a separate question. The equipment may also be deductible over time or treated as a depreciating asset, depending on the circumstances. So one purchase can have both GST and income tax consequences. They just aren’t calculated in the same way.
GST Is Reported Through Your BAS
If you are registered for GST, you generally report your GST through your Business Activity Statement (BAS). Your BAS can include: GST collected on taxable sales and GST credits on eligible purchases. The difference helps determine your net GST position.
For example: GST collected: $8,000.
GST credits: $3,000.
Net GST: $5,000.
This is separate from your income tax return.
Income Tax Is Reported Separately
Income tax is generally dealt with through your income tax return. The calculation considers your income, allowable deductions and other relevant tax rules.
- For a company, the company generally pays tax on its taxable income.
- For a sole trader, business income is generally included in the individual’s tax return.
- For partnerships and trusts, the tax treatment can be different again.
This is why your business structure matters.
Does GST Reduce Your Income Tax?
Generally, the GST you collect is not simply treated as business income. Similarly, GST credits you claim are not simply treated as business income. For income tax purposes, GST is generally excluded where the relevant GST rules apply.
So when preparing your accounts, it is important to record GST correctly. Otherwise, your income tax figures can become confusing.
What If You Are Not Registered for GST?
If you are not registered for GST, you generally don’t charge GST on your taxable sales. You also generally cannot claim GST credits on your business purchases. Your income tax obligations still exist.
So: No GST registration does not mean no tax. You may still have income tax obligations based on your taxable income. This is another reason why GST and income tax should not be treated as the same thing.
Can You Be Below the GST Threshold and Still Pay Income Tax?
Absolutely. Imagine your business makes: $50,000 in sales.
Your business expenses are: $20,000.
Your profit is: $30,000.
You may not be required to register for GST if you are below the relevant GST registration threshold and no other compulsory registration rule applies. But you may still have income tax obligations. GST registration and income tax are separate matters. Being below the GST threshold does not automatically mean your income is tax-free.
A Common Mistake
One mistake I see often is: “My business made $100,000, so I have to pay 10% GST and 10% income tax.”
It doesn’t work like that. GST and income tax use different calculations. GST looks at your taxable supplies and eligible purchases. Income tax looks at your taxable income. The rates and rules are also different. So don’t simply take your sales and apply two tax rates.
GST vs Income Tax: A Quick Comparison
GST
- Applies to taxable supplies.
- Generally charged at 10%.
- Collected from customers.
- Eligible GST credits may be claimed on purchases.
- Generally reported through the BAS.
Income Tax
- Based on taxable income.
- Takes allowable deductions into account.
- Applies to individuals, companies and other taxpayers under different rules.
- Generally dealt with through an income tax return.
- The applicable tax rate depends on the taxpayer and circumstances.
Let’s Put It All Together
Imagine your business has: Sales before GST: $100,000.
GST collected: $10,000.
Business expenses before GST: $50,000.
GST on eligible purchases: $5,000.
For GST: $10,000 − $5,000 = $5,000 net GST.
For income tax, you would generally look at the business income and allowable deductions under the income tax rules. In this simple example: $100,000 − $50,000 = $50,000. That is the starting point for considering the business’s taxable income. The two calculations are completely different.
Why Does This Difference Matter?
Because confusing GST with income tax can create problems. You might think you have more income than you actually do. You might record GST incorrectly. You might miss GST credits. Or you might put the wrong figures into your tax return.
Good bookkeeping helps keep the two taxes separate. Your accounting software should also be set up correctly.
The Bottom Line
GST and income tax are both important. But they are not the same. GST is generally about taxable sales and eligible business purchases. Income tax is generally about your taxable income. GST is usually reported through your BAS. Income tax is generally dealt with through your income tax return.
So the next time you see GST on an invoice, don’t think: “That’s my income tax.” It isn’t. And when you calculate your business profit, don’t assume: “That’s my GST turnover.”
That isn’t necessarily correct either. Keep the two separate. Understand what each tax is actually taxing. Because once you know the difference, GST and income tax become a lot less confusing.