You make a sale. You prepare the invoice. Then you notice there is no GST to add. You might think: “So, this must be GST-free.” Not necessarily. The sale could be GST-free. Or it could be input-taxed.
Both can mean you don’t charge GST to your customer. But there is one very important difference. It affects the GST credits you can claim on your business expenses. Let’s make it simple.
What Is a GST-Free Sale?
A GST-free sale is a sale where you generally don't charge GST to your customer.
For example, you make a GST-free sale worth: $1,000.
You don't add another $100 GST.
The customer pays: $1,000
But there is a benefit. You may still be able to claim GST credits on eligible business purchases that relate to making those GST-free sales. This is what makes GST-free sales different from input-taxed sales.
What Is an Input-Taxed Sale?
An input-taxed sale is also a sale where you generally don’t charge GST. But there is a catch. You generally cannot claim GST credits on purchases that relate to making those input-taxed sales. So the basic rule is: GST-free: No GST charged, but GST credits may still be available. Input-taxed: No GST charged, and related GST credits are generally not available.
That is the main difference.
Let’s Look at a Simple Example
Imagine you make a GST-free sale worth: $1,000.
You don't charge GST.
You then buy business supplies for: $550 including GST.
The GST included is: $550 ÷ 11 = $50.
If the purchase is eligible, you may be able to claim the $50 GST credit.
Now let's change the same sale to an input-taxed sale.
You still charge: $0 GST.
But if the $550 expense relates to making that input-taxed sale, you generally cannot
claim the $50 GST as a credit.
Same expense.
Same $50 GST.
Different result.
Why Is This Difference Important?
Because it can directly affect your BAS. With GST-free sales, you may have no GST to collect, but you can still have GST credits from eligible purchases. With input-taxed sales, you may have no GST to collect, and you may also have no GST credits for related purchases. So the GST treatment of your sales can affect the GST treatment of your expenses.
Common Examples of GST-Free Supplies
There are specific categories of GST-free supplies. Some common examples include certain:
- Basic food
- Health services
- Education services
- Childcare services
- Exports
The exact rules can be quite specific. For example, not every food item is automatically GST-free. Not every health service is automatically GST-free either. You need to check whether the particular supply meets the requirements.
Common Examples of Input-Taxed Supplies
Input-taxed supplies include certain:
- Residential rental activities
- Financial supplies
For example, if you rent out an ordinary residential property, the rent is generally input taxed. You generally don’t charge GST to the tenant. But you generally cannot claim GST credits for expenses that relate to making that rental income. This is very different from a GST-free activity.
Residential Rent: A Simple Example
Imagine you own a residential investment property.
You receive: Monthly rent: $2,000.
You generally don't add GST. The tenant pays: $2,000.
Now your property manager charges: $550 including GST.
The GST component is: $50.
You might think: “I'll claim that $50 on my BAS.”
But if the expense relates to the input-taxed residential rental activity, you generally cannot claim it as a GST credit.
So: Rent received: $2,000.
GST charged: $0.
GST credit on related property management expense: Generally $0.
This is the key idea behind input-taxed supplies.
GST-Free Health Services: A Different Result
Now imagine you provide a qualifying GST-free health service.
You charge your customer: $1,000.
GST: $0.
You then purchase eligible business supplies for: $1,100 including GST.
GST included: $100.
If the purchase is creditable and relates to your business, you may be able to claim the
$100 GST credit.
GST-free sale: No GST charged.
Eligible business purchase: GST credit may still be available.
GST-Free Does Not Mean Input-Taxed
This is probably the biggest thing to remember. A lot of business owners see: GST = $0 and stop there. But you need to ask another question: “Why is there no GST?” If the supply is GST-free, eligible GST credits may still be available.
If the supply is input-taxed, related GST credits are generally not available. The reason for the $0 GST matters.
What If Your Business Has Both?
This happens. A business can make both GST-free and input-taxed supplies. It can also make taxable supplies at the same time.
For example, a business may have: Taxable sales: $50,000.
GST-free sales: $30,000.
Input-taxed sales: $20,000.
Now imagine the business has shared expenses. Some expenses may relate to taxable sales. Some may relate to GST-free sales. Some may relate to input-taxed sales. Some may relate to all three. You may need to apportion the GST credits. You cannot simply claim 100% of the GST on every expense.
A Simple Example of Apportionment
Suppose you pay: $1,100 including GST.
The GST is: $100.
The expense relates: 60% to taxable and GST-free activities.
40% to input-taxed activities.
The GST credit may potentially be: $100 × 60% = $60.
The remaining $40 would generally not be claimable.
The actual method used to apportion the credit depends on the circumstances.
Do GST-Free and Input-Taxed Sales Count Towards GST Turnover?
This is another area where people get confused. The GST treatment of a sale and the GST turnover rules are not the same question. GST-free sales can generally be included in GST turnover. Input-taxed supplies are generally treated differently.
So don’t assume: “I didn’t charge GST, so this sale doesn’t count.” It may still matter when working out whether your business needs to register for GST.
What About GST on Business Expenses?
This is where you really see the difference.
Imagine you have: Business expense: $2,200.
GST included: $200.
If the expense relates to a GST-free activity and the other requirements are met, you may be
able to claim the $200.
If the same expense relates to an input-taxed activity, you generally cannot claim that GST. So when reviewing your expenses, don’t only ask: “Was GST charged?” Also ask: “What does this expense relate to?”
A Common Mistake
A common mistake is saying: “There is no GST on my sales, so I can’t claim any GST.” That isn’t necessarily correct. If your sales are GST-free, you may still be able to claim eligible GST credits.
Another common mistake is saying: “GST was charged on my expense, so I can claim it.” That isn’t necessarily correct either. If the expense relates to input-taxed supplies, the GST credit may not be available.
A Quick Comparison
GST-Free
GST charged to customer: No.
GST credits on eligible related purchases: Generally yes.
Examples: Certain food, health, education and exports
Input-Taxed
GST charged to customer: No.
GST credits on related purchases: Generally no.
Examples: Certain residential rental and financial supplies
This is the easiest way to remember the difference.
How Do You Know Which One Applies?
Start with the sale. Ask:
1. What exactly am I selling?
2. Is it covered by a GST-free rule?
3. Is it an input-taxed supply?
4. If neither applies, is it taxable?
Don’t make the decision based only on whether you are charging GST. Look at the reason behind the GST treatment. If you are unsure, check the specific GST rules for your industry and transaction.
The Bottom Line
GST-free and input-taxed supplies can look very similar. In both cases, you generally don’t charge GST to your customer. But there is a major difference.
With a GST-free supply, you may still be able to claim GST credits on eligible purchases.
With an input-taxed supply, you generally cannot claim GST credits for purchases that relate to making those supplies.
So the next time your invoice shows: GST: $0. Don’t stop there. Ask: “Is this GST-free or input-taxed?” That one question can make a big difference to your GST reporting. Because in the GST world, $0 GST on a sale does not always mean the same thing.