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» Feature Article

7th March 1999

GST II, what you need to know about the proposed GST regime

What you need to know.

John Dymond takes a look at the legislation introduced into Parliament last December and finds that it is what is not being talked about by the press and the Government that business people need to be conscious of.

Introduction

The more you read this legislation the more you realise that the devil is in the detail and the more it becomes blindingly obvious why the Government has, since its introduction, dealt only with the "big picture". At this stage, it looks like the GST will be the biggest and best cash cow since income tax was introduced, and that a great many small businesses will end up paying more GST than absolutely necessary due to a combination of ignorance of steps needed to be observed to take advantage of the system and an inability and/or reluctance to attend to the exhausting array of administrative tasks required. A full explanation of the legislation is well outside the scope of this article and is in fact a task that the professional community is still grappling awkwardly with, but what I seek to give you below are some key points that are often overlooked by mainstream commentators and that can make a difference.

When and how does it apply?

GST will be levied at 10% from 1 July 2000. Only financial supplies for which there is no readily identifiable fee or charge (mainly banking services), residential rents, established home sales and established precious metal sales will fall outside the GST regime. Supplies which are outside the GST regime are called "input taxed supplies", because whilst no GST is charged on their supply to consumers, being outside the regime no credit may be claimed for any GST paid for anything purchased in the course of carrying out the business of supplying such supplies. Some forms of health, education, child care, religious services etc. are GST free, meaning that no GST is charged for the supply but a claim for a refund of GST paid on items purchased in carrying on the supply of the supply may be made.

How do I price my goods and services?

All registered business people will include the GST charged in the price shown to the consumer. The tax invoice required to be provided by the supplier (discussed below) will provide the consumer with sufficient information with which to determine the amount of GST charged by the supplier. Assuming the supply is fully subject to GST, 1/11th of the price is GST.

Should I register?

Unless you only supply input taxed supplies, yes. Whilst you are not required to register where your annual turnover is less than $50,000, without registering you are unable to claim a refund of GST paid on purchases relating to your business and you are unable to issue a tax invoice to a customer so that they may claim the GST included in your price (whilst you will not have specifically charged GST as you are not registered, your price would most likely take into account the GST you paid in making the supply to the customer). If you are a taxi driver, you should note that you must register.

An employee or other people subject to the Pay As You Earn system are not considered to be carrying on an enterprise and so cannot register. This means that regardless of the extent to which an acquisition is made for a business purpose, if it is done in your capacity as an employee a GST credit cannot be claimed.

Will my invoicing methods change?

Yes. You will need to issue a tax invoice for at least all supplies with a GST exclusive value of $50 or more. You may as well issue tax invoices for all supplies. The tax invoice is required by the customer in order for them to claim a GST refund. You can issue a tax invoice in addition to an ordinary invoice, or you may choose to issue tax invoices instead of ordinary invoices. Tax invoices must:

» show the Australian Business Number (you’ll get this when you register) of the supplier;
» show the price for the supply;
» contain such information as the regulations require; and
» be in a form approved by the Commissioner.

Whilst the regulations have not been released yet, it is suggested that an acceptable tax invoice would show:-

» the words "TAX INVOICE" in a prominent place on the first page of the tax invoice;
» the name or trading name of the supplier;
» the name and address of the recipient;
» the date of issue of the tax invoice;
» a brief description of what was supplied;
» the quantity or volume of what was supplied; and
» either the:

» if the whole supply is taxable, the total amount payable for the supply (including GST) and a statement that the amount includes GST; or
» the amount charged for the supply, the amount of GST and the total amount payable for the supply.

When can I claim a credit for GST paid?

GST credits may be claimed for acquisitions made solely or partly for a "creditable purpose". Broadly, a creditable purpose is a business purpose, so the availability of a GST credit arises more or less on the same basis as the availability of an income tax deduction. However, whereas an income tax deduction is available only for the allowable depreciation of a capital purchase (i.e. computer, machinery etc.), a GST credit may be claimed for the whole amount of the GST paid for the capital purchase made.

Any claim for a GST credit must be substantiated by a tax invoice. (Whilst the legislation excuses suppliers from having to issue tax invoices for supplies under $50, there is no specific exemption mentioned in relation to the customer claiming the credit.)

Are there special rules relating to the claiming of GST credits?

Yes. This is an extremely important and often undiscussed part of the legislation. As with income tax, the GST credit is allowed only to the extent of business use. However, the GST legislation imposes an extremely onerous record keeping requirement.

Estimating creditable purpose

A record of the business usage of all acquisitions with a GST exclusive value of $50,000 or less must be kept for a period of twelve months so that an adjustment from the estimated business purpose to the actual business purpose (if applicable) may be made. Where the GST exclusive value of an acquisition is over $50,000 and less than $500,000, a record of business usage must be kept for five years so that an adjustment from the estimated business purpose to the actual business purpose (if applicable) may be made at the end of each of the five years. For acquisitions over $500,000, a record must be kept for ten years to enable appropriate adjustments to be made at the end of each of the ten years!

Adjustment events

An adjustment event can arise where:-

» all or part of the supply or acquisition is cancelled or returned;
» the consideration of the supply or acquisition is altered, such as through a volume discount;
» a supply becomes, or stops being taxable; or
» an acquisition becomes or stops being creditable.

Adjustment events affect both the GST credit claimable by the customer and the GST payable by the supplier. The likelihood that GST amounts payable and claimable will undergo adjustment subsequent to the lodgment of GST returns means detailed records of the GST charged on each and every supply and the tax period of remittance and detailed records of the GST claimed for each and every acquisition and the tax period of claim must be kept. The process may best be illustrated by an example.

Mr S Gonzales is a courier and registered. He undertakes to courier documents for Mr S Katt who is also registered. Mr Gonzales sends Mr Katt a bill of $2,200 for the courier services provided in a quarter. Mr Katt pays the bill. Mr Gonzales accounts for $200 in GST. Later Mr Katt talks about the huge cost of couriers to a friend who assures Mr Katt that he has paid too much. Mr Katt complains to the Master Couriers Association who persuade Mr Gonzales to reduce his bill and refund Mr Katt $550.

Assuming Mr Gonzales has already lodged his GST return for the tax period within which the original bill was issued, he needs to make an adjustment. As the corrected GST amount is smaller than the previously attributed GST amount Mr Gonzales has paid too much GST and has a "decreasing adjustment", reducing the net amount of GST payable. The amount of the adjustment will be 1/11 of $550, which equals $50.

Assuming Mr Katt has already lodged his GST return for the tax period within which the original bill was received, when he is refunded $550 he needs to make an adjustment. As the corrected input tax credit amount is smaller than the previously attributed input tax credit amount MR Katt makes a "increasing adjustment", increasing the net amount of GST payable. The amount of the adjustment will be 1/11 of $550, which equals $50.

Bad debts written off - Supplies

If you account for GST other than on a cash basis (you have a choice if your turnover is under $500,000, but where you account on an accruals basis for tax purposes you would most likely account for GST in the same way) you may account for the GST on a taxable supply before you receive payment. If you provide for the GST but end up writing off the debt and not receiving payment you will have accounted for too much GST. You therefore have a decreasing adjustment to reduce the net amount of GST payable. You will have accounted for GST of 1/11 of the amount you were due to receive. Therefore, if you write off the entire amount as bad, the amount of the decreasing adjustment is 1/11 of the amount written off. Clearly, full details of all accounts receivable will need to be maintained and any bad debt write offs will need to be detailed and specifically allocated to customers. Furthermore, your decreasing adjustment will give rise to an increasing adjustment on the part of the customer concerned, as explained below, and so this customer will need to be informed by you of the debt write off!

Recovering bad debts - Supplies

If you previously wrote off a bad debt for a taxable supply, had a decreasing adjustment, and later recover some or all of the debt, you will not have paid GST on the amount recovered. You will not have accounted for all of the GST on the supply. You therefore have an increasing adjustment to increase your net amount of GST payable in the tax period in which you recover some or all of the debt. The previous decreasing adjustment was 1/11 of the amount written off. The increasing adjustment is 1/11 of the amount recovered. This is the amount of GST on the amount recovered.

Bad debts - Acquisitions

If you account for GST other than on a cash basis you may account for the input tax credit on a creditable acquisition before you pay any or all of the amount due. If you have accounted for the input tax credit on an acquisition and the supplier later writes off as a bad debt all of the consideration you were liable to pay for the supply, you will have accounted for an input tax credit in relation to an acquisition for which GST has not been paid. You are only entitled to input tax credits for GST included in the consideration for acquisitions you make. If the supplier writes off some of the consideration as a bad debt you will have accounted for an amount of input tax credit for an amount of GST that the supplier has had refunded. In either case you will have accounted for too much input tax credit. You therefore have an increasing adjustment to increase your net amount of GST payable, in the same way as the supplier has a corresponding decreasing adjustment.

Recovering bad debts - Acquisitions

If you previously had a decreasing adjustment because of a bad debt written off, and you later pay some or all of the debt, you will not have received enough input tax credit for the GST paid on the amount recovered. You will not have accounted for all of the input tax credit on the acquisition. You therefore have a decreasing adjustment to decrease your net amount of GST payable in the tax period in which you pay some or all of the debt, in the same way as the supplier has a corresponding increasing adjustment..

Which tax period applies to me?

Generally, your tax periods will be three months long and end on 31 March, 30 June, 30 September and 31 December. If your annual turnover exceeds $20 million, you must use one month tax periods.

Conclusion

Above I have highlighted what I think are the key practical aspects of this legislation which are bound to have wide application. A great deal more requirements apply to other specific situations. I believe that the nature of these requirements are such that small businesses need to make good use of the lead up to the start of this legislation becoming acquainted with the significant changes in work practices which will be forced upon them from day one of the operation of this legislation. The accounting and administrative requirements are such that real planning needs to start now. Neglect of the implications of the GST regime could lead to loss of profits or worse for the huge numbers of self employed people and micro businesses now actively participating in the market place.