You make a sale. You send an invoice. Then comes the question: “Do I add GST?”
You might think the answer is always 10%. It isn’t. In Australia, supplies can generally fall into different GST categories. They can be: Taxable / GST-free / Input-taxed. The difference matters. It affects whether you charge GST. It can also affect whether you can claim GST credits on your business purchases. So let’s make it simple.
What Is a Taxable Supply?
A taxable supply is a supply where GST generally applies. If you are registered for GST and the relevant requirements are satisfied, you generally charge 10% GST on the sale. For example, you run a marketing business.
You provide a service for: $1,000 before GST.
GST: $100.
Your customer pays: $1,100.
The $100 is GST collected from your customer.
You then account for it through your BAS. This is a typical taxable supply.
What Is a GST-Free Supply?
A GST-free supply is different. You don’t generally charge GST to your customer. But there is an important difference. You may still be able to claim GST credits for eligible business purchases related to making GST-free supplies. Some common examples can include certain:
- Basic food.
- Medical services.
- Health services.
- Education services.
- Exports.
The rules depend on the particular supply. So don’t assume that something is GST-free just because it sounds like it should be.
Let’s Look at a GST-Free Example
Imagine you operate a business that makes a GST-free supply worth: $1,000.
You generally don't add another $100 GST.
The customer pays: $1,000.
So: Sale: $1,000.
GST: $0.
Total: $1,000
But your GST treatment doesn’t necessarily end there. If you have eligible business purchases connected with making that GST-free supply, you may still be entitled to claim GST credits. This is one of the key differences between GST-free and input-taxed supplies.
What Is an Input-Taxed Supply?
Input-taxed supplies are another category. With an input-taxed supply, you generally don’t charge GST to your customer. But there is a catch. You generally cannot claim GST credits for purchases that relate to making those input-taxed supplies.
Certain financial supplies and residential rental activities are common examples of input-taxed supplies, subject to the relevant rules. This is why input-taxed supplies can have a very different effect on your business.
Let’s Look at an Input-Taxed Example
Imagine you own a residential rental property. You receive: Rent: $2,000. Generally, you don’t add 10% GST to the rent. So the tenant pays: $2,000. But you also need to consider the GST treatment of expenses related to the rental activity.
You cannot simply assume: “There was GST on my expense, so I’ll claim it.” If the expense relates to making input-taxed supplies, the GST credit may not be available. This is where input-taxed supplies are different from GST-free supplies.
The Big Difference Between GST-Free and Input-Taxed
This is probably the most important point to remember. Both can mean: You don’t charge GST. But they don’t necessarily give you the same treatment for GST credits.
GST-Free: You generally don’t charge GST. You may generally still claim eligible GST credits on related purchases.
Input-Taxed: You generally don’t charge GST. You generally cannot claim GST credits for purchases related to those input-taxed supplies. That one difference can have a big impact.
Let’s Compare All Three
Here is the simple version.
Taxable supply: You generally charge GST. You may claim eligible GST credits.
GST-free supply: You generally don’t charge GST. You may still claim eligible GST credits.
Input-taxed supply: You generally don’t charge GST. You generally cannot claim GST credits for related purchases.
Once you see it like this, the difference becomes much easier to understand.
Example: The Same $1,000 Sale
Business A – Taxable Supply
Sale: $1,000.
GST: $100.
Customer pays: $1,100
Business B – GST-Free Supply
Sale: $1,000.
GST: $0.
Customer pays: $1,000.
Eligible GST credits may still be available on related purchases.
Business C – Input-Taxed Supply
Sale: $1,000.
GST: $0.
Customer pays: $1,000.
GST credits on related purchases are generally not available. The customer pays the same $1,000 in the last two examples. But the GST treatment of the business is different.
Why Does This Matter?
Because GST is not just about what you charge your customer. It also affects your business purchases. Imagine you operate an input-taxed business.
You purchase equipment for: $11,000 including GST. The GST component is: $1,000. You might naturally think: “Great. I’ll claim the $1,000 GST credit.”
But if the equipment relates to making input-taxed supplies, you may not be entitled to that credit. Now imagine the same purchase relates to a GST-free business activity. The GST credit may be available if the other requirements are satisfied. Same purchase. Same $1,000 GST. Different GST treatment.
What About a Business That Makes Both Types of Supplies?
This happens more often than you might think. A business can make both taxable and input-taxed supplies. For example, a business may have different income streams.
Some activities may attract GST. Others may not. In these situations, you may need to work out which business purchases relate to which activities. Some expenses may relate entirely to taxable supplies. Others may relate entirely to input-taxed supplies.
Some may relate to both. This can affect how much GST credit you can claim.
A Common Mistake
One common mistake is: “There is no GST on the sale, so there is no GST credit.” That is not necessarily true. If the sale is GST-free, eligible GST credits may still be available. But if the sale is input taxed, GST credits on related purchases are generally restricted.
So don’t stop at: “No GST was charged.” Ask the next question: “Why wasn’t GST charged?” That is what really matters.
Another Common Mistake
The opposite mistake happens too. You buy something for your business. GST is shown on the invoice. You immediately claim it. But the expense may relate to an input-taxed activity. Or it may be partly private. Or there may be another restriction. So seeing GST on an invoice does not automatically mean you can claim it. You need to look at the whole transaction.
How Do You Know Which Category Applies?
Start with the supply itself. Ask:
What am I selling?
Who am I selling it to?
Where is the supply connected?
Is the supply covered by a GST-free rule?
Is it input taxed?
If neither applies, is it taxable?
Some industries have specific GST rules. Property, health, education, financial services and exports are good examples. If the transaction is unusual, it is worth checking the GST treatment before you issue the invoice.
A Simple Way to Remember It
Think about the three categories like this: Taxable = Charge GST GST-free = Don’t charge GST, but GST credits may still be available Input-taxed = Don’t charge GST, and related GST credits are generally not available. That is the basic difference.
What About GST Turnover?
There is another useful point. GST-free supplies can still count towards your GST turnover. So don’t assume: “It’s GST-free, so it doesn’t count towards the $75,000 threshold.” That is not necessarily correct.
GST treatment and GST turnover are two separate questions. A sale can be GST-free and still be relevant when working out whether you need to register for GST.
The Bottom Line
Not every business sale is treated the same way for GST. A taxable supply generally means you charge GST. A GST-free supply generally means you don’t charge GST, but you may still be able to claim eligible GST credits.
An input-taxed supply generally means you don’t charge GST and usually cannot claim GST credits for related purchases. So the next time you are about to send an invoice, don’t automatically add 10%. Take a moment. Ask what you are actually supplying. Work out whether it is taxable, GST-free or input taxed.
Because knowing when not to charge GST is just as important as knowing when to charge it.