ACCOUNTING AND FINANCE 2A

ACCOUNTING AND FINANCE 2A
TOPIC 3 – Principles and Features of the GST

Principles and features of GST
ACCOUNTING FOR THE GST What is the GST? Goods and Services Tax It is a broad based tax of 10% on the supply of most goods and services consumed in Australia. The GST was introduced by the Australian Government on July 1, 2000.

Goods which have the tax levy applied to them are referred to as “Taxable supplies/sales” For a good/service to be a “Taxable supply/sale” (and therefore include GST) the transaction must: involve a business transaction involve an exchange of money Be a transaction in Australia Involve a good which is subject to GST

For GST to be charged the transaction must - involve a business transaction for example…


For Example… X

For GST to be charged the transaction must - involve a monetary exchange, for example…


For example X

For GST to be charged the transaction must - involve a transaction in Australia.


For GST to be charged the transaction must - involve a transaction in Australia,
X

A businesses obligation for collection of GST business must collect GST on behalf of the ATO (Australian Tax Office) when it sells goods and then the collected tax, must be passed on to the ATO at regular intervals. Accounting records kept by small businesses must be able to account for and record GST accurately. A “Business Activity Statement” (BAS) is a detailed document used to record GST to be remitted to the ATO.

When does a business need to be registered for the GST? The Current Legislation states that a business must register for the GST if: It has annual income of $75,000 or more Videos:

The $75,000 turnover figure is the gross income (not profit) – this figure must not include: GST charged to customers Sales that are not for payment Sales that are not taxable supplies Sales not connected with that business Sales not connected with Australia

Registering for the GST: An application must be completed by a business to register for the GST. This is the same as the application a business uses to register for an Australian Business Number (ABN). An ABN is required before a business can be part of the GST system. If a business has an ABN does this mean it is registered for the GST. Can a business be registered for the GST but not have an ABN? Only registered entities are able to charge customers GST and claim back the GST they have paid on their (purchases) If a business is not required to be registered for the GST and chooses not to be, they cannot add GST to the price of the sales. If a business is not registered for the GST, it is illegal to charge GST.

Yes – they are earning over $75,000 No, when you exclude the $20,000 they are under the $75,000 amount No, this is their profit not their income

How does the GST system work? When a business sells a good or service to a customer (which is a taxable supply – (a good or service to which GST applies), they charge the customer for the good or service and add 10% to the price. The business then owes that 10% to the ATO and must pay all GST collected to the ATO at regular intervals.

$5,060 $5,060 $4,600 $460

The system of a business working out its GST obligation to the ATO is more complicated than this however because of Input Tax Credits or GST Outlays. Input tax credits or GST Outlays are amounts claimed back from the government for the GST paid on acquisitions used by a GST registered business. Another way of describing them, is that they are a reduction in the amount of tax payable to the ATO because of tax already paid on the purchase of that item. If a business sells a good, they must charge the purchaser 10% GST and pass this onto the government. If however the business selling the good has already paid GST when purchasing a good for resale, they can claim this % back on the amount payable to the government. The consumer is at the end of this buying and selling process.

Acquisitions or Inputs are those goods and services bought by an enterprise in order to conduct its business activities. They include purchases of good or services, expenses, and capital expenditure items. An input tax credit can be claimed for the purchase of all taxable supplies. In Example 1 above the ATO received the $460 from Couch’s Galore, in Example 2, the GST system and Input Tax Credits (or GST Outlays) is illustrated

Example 2: Let’s imagine that the couch sold by Couch’s Galore in Example 1 has been purchased in the first place by Couch’s Galore from a manufacturer called Deluxe Couch Manufacturers (this store makes the couches and then sells them at a higher price to furniture stores like Couch’s Galore) .

$3,850 $3,850 $3,500 $350

$5,060 $460 $350 $110

Need to divide by 11 to find amount of GST included in 5,060 = $460 $350 $110 $460

Other important definitions and information you need to know about the GST system
GST free sales/supplies are those supplies that not taxed For example basic food (unprocessed), education, water and sewerage,

GST Free Sales Sometimes a business cannot add GST to the price as the goods are not subject to GST, however, a business can still claim credits for the GST included in the price of its taxable purchases relating to these GST free sales.

Example… Jo runs a Fruit and Vegetable market
His business is registered for GST He cannot charge GST on sales of fresh fruit and vegetables He can charge GST on sale of platters for the fruit He can claim for the GST he has paid when buying shelving for his store.

Input Taxed Supplies include financial supplies (most transactions relating to money, including interest and bank charges), sale of residential premises, residential rent, and the sale of food in school tuckshops and canteen. The GST is not charged on input tax supplies, and input tax credits cannot be claimed for anything acquired to make the supply of these items.

GST Inclusive indicates the price for a given product includes the GST component To calculate the GST component of a price – simply divide the price by 11 For example if a computer’s GST inclusive price is $2200, the GST paid on the computer is $200 (2,200/11)

GST Exclusive indicates that the price for a given product has not had the GST component added. To add GST work and 10% if the GST exclusive price and add onto the price.

Accounting and Reporting for the GST Business Activity – in order to report for the GST a business must: Decide on a Tax Period – monthly, quarterly or annually Decide on basis for accounting cash or accrual Account for: GST payable collected from GST input Tax credits on purchases Complete a Business Activity Statement (BAS) with details of all other taxes Lodge the BAS with the ATO within 21 days of the end of the Tax Period

Business Activity Statement: Form through which information on many taxes will be entered before filing with the ATO at the end of each tax period. If paying quarterly (which most businesses do) payment is made on 28 October, 28 February, 28 April and 28 July each year. Businesses use the Business Activity Statement to calculate the amount of GST owing to the ATO – this is equal to GST collected less GST paid (input tax credits) An example of a Business Activity Statement is shown on the next page

Example of BAS Statement…

Tax Invoices and other documents The concept of proper documentation as with all other accounting is of utmost importance to the transaction trail of the GST. One of the most important documents for GST purposes in a Tax Invoice. Because the GST affects most goods and services, most invoices prepared, and many cash receipts, and now tax invoices, show details of any GST included in the transaction. A tax invoice is essential if a supplier makes a taxable supply and in order to claim back input tax credit a tax invoice must have been made. If a business wishes to claim input tax credits on their Business Activity Statement, they must have evidence of this through tax invoices.

Example of tax invoice…

GST Collected: Sale 90 Sale 50 Sale 200 340 GST Outlays: purchasing Purchase 60 Purchase 28 Purchase 13 Purchase 117 16 223

Solutions to activities page 15-23
Question 1

(3) You are registered for GST and charge three customers a total of $20,790 (including $1,890 GST) for services provided in the March quarter (January, February and March). You are entitled to a GST credit of $500 for the same quarter for the GST included in the $5,500 you paid for business purchases (including paper, electricity, postage and phone services). Required: Calculate the amount of GST payable to the ATO 1,890 – 500 = $1,390

(4) If a business has collected $14,000 in GST and has paid $8,000 in GST (GST outlays) what amount will be payable to the ATO? 14,000 – 8,000 = $6,000 (5) If a business owes the ATO $10,000 and their Input Tax Credits are $5,000 what must their GST collected figure have been for a quarter? $5,000

Question 2 (b)

Question 5

Question 5 cont…

Question 5 cont..

Question 5 cont….

Question 6

Question 6 cont…

Question 7 Watch World, a retail watch shop, is located in Perth and is registered to collect GST. In March 2021 Watch World sold a watch to Ben for $800. GST was charged on this transaction. In June 2021 Ben sold the watch on eBay for $600. GST was not charged on this sale. Ben is employed as a plumber. Required Why was GST charged on the sale of the watch by Watch World but not charged on the sale of the watch by Ben? Watch World is registered to collect GST. The sale of the watch is a taxable supply. Therefore, GST is charged on the sale of the watch by Watch World. Ben is not registered to collect GST. The sale of the watch by Ben is not subject to GST.

Question 8

Question 9 (1)

Question 9 (2)

Question 9 (3)

Question 9 (4)

ACCOUNTING AND FINANCE 2A

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