Retail

Retailers will need to develop information systems to deal with the new accounting requirements. They will also need to consider the effect of GST on their pricing. The impact on prices will vary considerably across the various retail sectors, depending on the margins involved.

Business implementation issues

Although the operation of a GST seems fundamentally simple at first, there are many issues for businesses to consider when developing their strategy to implement a GST.

Processes

Accurate records are a prerequisite to the smooth operation of a GST. This will create added complexity for clients that in the past have not been required to comply with transaction taxes. These clients will have to set up systems to account for the tax. After the first twelve months clients can pay a flat instalment amount and leave the actual calculation to us during year end account preparation.

As GST will be imposed on all transactions within a business, there are substantial effects on business processes and systems to comply with the detailed requirements of GST reporting. For instance, ensuring that correct GST invoices are issued through the billing system and that GST is brought to account on a timely basis. It is also essential that good systems exist to ensure clients claim the maximum credit available for GST on inputs.

Some clients may need to install software to help with the record keeping. As you know we are very experienced with accounting programs and are happy to assist you if you think you need accounting software.

(Article written Nov 98 & Dec 03 based on information publised by Australian Tax Practice)

The Australian Business Number (ABN)

Businesses can obtain a identifying number to enable them to be identified in all dealings with the Australian Government. It is used extensively for Goods and Services Tax  (GST) purposes.  

Any businesses with turnover greater than $50,000 must register for an ABN. Below this threshold, businesses may register if they wish to.

The purpose of the ABN   

In order to claim an input tax credit (which offsets your GST liability) you are required to issue a tax invoice. That tax invoice must include the ABN of your business.  

If the ABN is not stated, then the business receiving the invoice would be  expected to withhold tax from their payment of goods or services.

The Australian Business Register 

This register may be inspected by a member of the public on payment of a fee.

Who is entitled to an ABN? 

All companies registered under the Corporations Law, other entities who are ''carrying on an enterprise in Australia'' and other bodies which are required to be registered for GST purposes, such as charitable and religious institutions, will be entitled to an ABN.  

Applying and registering for an ABN 

We can prepare applications for you electronically.. Once registered, you are required  to inform the Registrar of changes.  

There are penalties for misuse of an ABN.     

How wide is its coverage expected to be? 

The government estimates the number of initial ABN registrations to be 2.1 million.   

Generally   

The ABN system is also available to State, Territory and local government regulatory bodies. 

(Article written Aug 99 & Dec 03 based on information publised by CCH Australia Ltd)

GST SURVIVAL GUIDE

What is GST?

Implementation  issues

GST impact on business

The final customer pays

Compliance Costs

Administration by participants

Registering for GST

Two rates of GST

GST-free supplies

Exempt supplies

Taxable supplies

Six steps to taxable supply

Step 1 - There must be a supply of something

Step 2 - There must be consideration

Step 3 - There must be an enterprise

Step 4 - There must be some connection with Australia

Step 5 - Supplier must be registered or should be registered

Step 6 - Thing supplied is not GST-free or input taxed

Who pays GST?

How to calculate GST

Credits for GST

Non-creditable costs

Requirements to claim input tax credits

ACCOUNTING FOR GST

Tax periods

Accounting methods

Cash method

Accruals method

Tax invoices

Adjustments

Annual turnover dictates obligations

What is annual turnover?

How is annual turnover calculated?

GST returns

Australian Business Numbers

TRANSITIONAL ISSUES

Which pre 1 July 2000 supplies will fall into the GST net?

When is a supply made?

GST-Free Concession

Construction Contracts

Action Plan

GST will affect and be a permanent feature of the way every business in Australia operates.

Familiarity with the concepts underpinning GST is essential for any business that wants to be fully prepared.

What is GST and what it does it mean for your business?  How can you gain maximum advantage for your business and minimize your GST risks in the lead-up to 1 July 2000.

What is GST?

Goods and services tax (GST) is a consumption tax that will apply to the supply of most goods and services in Australia.  The standard rate of GST is 10% of the price charged for taxable goods and services.

Implementation  issues

GST will be fully operational from I July 2000 onwards, but there are 3 earlier important GST issues for business:

1. The ATO will want every business required to register to be registered prior to by I July 2000, so what are your best options for GST registration.

2. Some contracts and agreements entered into before 1 July 2000 will involve a GST liability.  How do you know?

3. What actions should a business take in the lead-up to 1 July 2000 to be well placed?

GST impact on business

GST affects business in 2 main ways:

1. Every time your business makes what is termed a "taxable supply", there is GST to be accounted for.
2. Every time your business incurs an expense that includes a GST cost, your business is usually entitled to a credit for the GST part of the cost, termed an "input tax credit".

The final customer pays

Simply, GST on taxable supplies and input tax credits offset each other when calculating the amount you owe in your quarterly or monthly (your “tax period”) GST returns.

Most of the things you sell are subject to GST, but not all your costs attract GST credits for offset.  The major exclusion would be salaries and wages, which have no GST applied.

In theory, the GST you charge on your taxable supplies is passed on until it reaches customers who cannot claim back GST.  This means that private consumers end up bearing most of the cost of GST.

Compliance Costs

GST is self-administered.  It will be necessary to determine the amount of GST payable on your taxable supplies, recognise when not to charge GST and work out how much GST you have incurred to be offset against the GST payable.

Although most businesses will not suffer a permanent GST cost, they will be required to charge it, collect it, account for it and claim it back. Meeting these obligations will constitute an ongoing cost of doing business.

Administration by participants

If your customers include other businesses then although you have to account for GST by a certain time they will want to claim the same amount as a GST credit at the earliest possible time.

Your aim may be to either delay the timing of the need to account for GST or delay the timing of the lodgement of the relevant GST return until the last possible moment.  However, the aim of your customer will be the exact opposite.  They will want to make their claim for the credit on that GST as soon as possible.

Therefore, delay by you can have an equal and opposite effect on your customer.  This is a particular aspect of GST that needs to be understood by all businesses because if it is not properly managed, business relationships can suffer. 

Registering for GST

Your business needs to be registered to be part of the GST system.  Some clients will need multiple registrations for example for your company, possibly your super fund, associated partnerships and trusts.

Some grouping provisions exist which means companies, partnerships and trusts with 90% common ownership can elect for one registration. The advantage of grouping is that supplies between group members are not subject to GST.

Any business not registered for GST when it should be faces several consequences including imposition of penalties and interest, prosecution and potential permanent loss of input tax credits.

Generally if annual turnover is less than $50,000, registration is optional otherwise registration is mandatory. Registration is also mandatory for:

Some businesses with an annual turnover of less than $50,000 may not want to registered for GST.  Some businesses in this category will not want to register for GST on the basis that their customers or clients are mainly private individuals unable to claim back any GST added to the cost of the goods and services they buy from those businesses.

If the costs of your inputs however are significant it may still be wise to register. If you are considering not registering, consider what impact the loss of input tax credits would have on your profit margins.

Consequences of not being registered for GST include:

To be registered for GST you must be carrying on at least 1 enterprise.  The meaning of "enterprise" is explained at step 3 below.

The act of seeking GST registration presents both risks and opportunities.  A rushed application can cost your business money.  A planned application will maximise available GST cash advantages. We will be available to discuss your options when the registration forms become available (probably from November 1999).

The risk that unregistered businesses face is not recognising when the annual turnover threshold is about to be reached.  The annual turnover test applies to future turnover as well as to turnover actually generated. (See below)

Registration for GST also requires an application for an Australian Business Number (ABN). Business not registering for GST will probably still need to obtain an ABN. (See below)

Two rates of GST

GST is charged at a rate of 10%, which applies to the price charged for a taxable supply  and a rate of 0%, which applies to the price charged for a GST-free supply.

GST-free supplies

Care needs to be taken that a 0% "rate" is applied to GST-free goods and that a 10% credit is not claimed for GST-free inputs. The format of tax invoices should help here.

GST-free business supplies will include medical and other health goods and services, education supplies and some food items.

Exempt supplies

Some supplies are exempt from GST, mainly confined to financial-type supplies, such as loans, investments, Superannuation, hire purchase, life insurance and residential rent.

Any business making only exempt supplies is not allowed to claim any input tax credits on its costs.  This is why exempt supplies are known as input taxed supplies.

If your business makes a combination of input taxed and taxable or GST free supplies input tax credits will need to be apportioned.

Taxable supplies

GST of 10% is only ever applied to a transaction that is a taxable supply. Most normal daily or regular business transactions will involve a taxable supply. 

There are a number of transactions that, although only rarely entered into by particular business, will be taxable supplies for example an insurance claim, the grant of a franchise or sale of commercial premises.

Six steps to taxable supply

There are 6 steps to every supply being a taxable supply:

Step 1 - There must be a supply of something

A supply can be a supply of anything except money: e.g. goods, equipment, food, retail, wholesale, services, real estate, rights, trademarks, goodwill, obligations, release from obligations - anything and everything.  GST does not just apply to goods and services.

There are a few simple rules applying to any supply:

Step 2 - There must be consideration

If you give something away then this is not a taxable supply and there is no GST.  There must be some consideration - some form of payment, cash or in kind.

If someone other than your customer pays, your supply will still meet the consideration test.

Step 3 - There must be an enterprise

The test is only satisfied if any particular supply is made in the course or furtherance of an enterprise that you carry on.

This covers all the normal day-to-day income-earning activities done by a business. It also covers a supply made by a business in a capital transaction - so long as it is done in the course or furtherance of the business.

Some organizations not ordinarily considered businesses are GST enterprises e.g. charities, churches, landlords, government authorities.

Some things are specifically excluded from being an enterprise e.g. private recreational pursuits, hobbies, anything done by people, either alone or together with others, where there is no reasonable expectation of profit or gain. 

Step 4 - There must be some connection with Australia

Your business may need to actively distinguish certain supplies as not being taxable supplies because of a lack of a connection with Australia.

A  supply of goods by your business can only be a taxable supply if:

A supply of services by your business can only be a taxable supply if the services are performed in Australia.  If services are performed overseas, they are outside Australia's GST system.

Services performed in Australia can still be GST-free supplies and not taxable supplies if the services are performed for a non-resident customer, the non-resident is overseas when the services are performed  and the services do not relate to goods or real property (including rights in relation to real property)  in Australia.

Step 5 - Supplier must be registered or should be registered

Once registered for GST, this step in the process of making any particular supply a taxable supply is automatically satisfied.

Step 6 - Thing supplied is not GST-free or input taxed

This step is important because when a business or non-profit body supplies something that is not GST-free or input taxed, it will be a taxable supply if other 5 steps have been met.

Who pays GST?

The supplier has the liability for GST, not the customer. Unpaid GST will be recovered by the ATO from the supplier not the customer.

The only time that your business, as a recipient or customer, will be liable to GST is when it imports goods into Australia.  This liability will be 10% of the customs value of the goods.  Of course, once GST is paid, your business would ordinarily be entitled to an input tax credit for the same amount.

While you may increase your price to recoup the GST from your customer you are not legally obliged to do so. 

Your customer, if in business will be entitled to claim an input tax credit for any GST "component" of the price charged, regardless of whether you, as the supplier, have actually accounted the GST.

You are entitled to reverse your liability by adjustment for bad debts but this is not allowed for twelve months unless you have proof that the debt is unrecoverable.

How to calculate GST

 GST is equal to one-eleventh of the price charged for the taxable supply.

To fully recoup the tax in your price, first calculate the commercial price for the taxable supply and then add 10% GST.

If you forget to add on GST to your price, the GST liability will still be one-eleventh of the price charged.

When a price is stated as "GST-exclusive" it means that 10% of the amount stated will be added to the cost to represent the GST component.

However, when a price is stated to be "GST-inclusive", it means that GST of 10% has already been added to the cost and, therefore, represents one-eleventh of the total amount.

Credits for GST

"Input tax credit" is the term used to describe the entitlement to claim back the GST part of costs incurred by your business or enterprise.  Any business or enterprise making taxable supplies or GST-free supplies is entitled to input tax credits.

Input tax credits are offset against GST liability. 

Non-creditable costs

Amounts that cannot be claimed as income tax deductions that cannot give rise to input tax credits either.  E.g. parking fines, private portion of expenses, entertainment.

Requirements to claim input tax credits

For your business to be able to claim input tax credits the following must apply: 

1. the transaction must be a taxable supply;

2.  your business must enter into the transaction for consideration;

3.  your business must be either registered for GST or required to be registered at the time of the transaction; and

4.  the transaction must be entered into in carrying on, to some extent, your enterprise and not for a private or domestic purpose.

ACCOUNTING FOR GST

Tax periods

GST has no balance date.  Instead, the year is broken up into shorter periods called tax periods either monthly or quarterly.

There are 4 quarterly tax periods in every calendar year:

If your turnover is less than 20 mil you may choose between monthly and quarterly tax periods. The choice should be made after examining the effect on your cash flows.

If for example you expect to normally receive refunds due to tax free sales etc then a monthly period would see you receive refunds quicker.

Your can withdraw the monthly election at any time but this will not take effect until at least 12 months have passed.

Accounting methods

The time of becoming liable to GST and of becoming entitled to claim input tax credits will depend on which method cash or accruals applies to you.

Cash method

This method can be used by businesses with annual turnover of no more than $1,000,000 and non-profit organisations.

Under the cash method GST liability will only arise when you receive payment for a taxable supply during the tax period and input tax credit will only arise when you make payments (including credit card or cheque payment) for supplies during the tax period.

If your annual turnover is, or will be, more than $1,000,000 application to the ATO can be made to use the cash method. The ATO will consider your application by having regard to:

 Adopting a cash method also means:

1. You will not be liable to GST on a payment you receive after 30 June, 2000 which relates to a taxable supply you made prior to 30 June, 2000. Therefore it appears there is an advantage in completing jobs for billing prior to 30 June, 2000. However be aware of any income tax effects.

2. You will not be able to claim an input tax credit in relation to supplies made to you before 1 July, 2000. Therefore it appears there is an advantage in delaying ordering supplies until after 30 June, 2000. However be aware of any income tax effects.

You can change to the accrual method from the first day of the next tax period by lodging a form and making adjustments in your first accrual return.

Accruals method

Any business can use this method.

Under the accruals method GST liability for each tax period will arise when you issue an invoice or receive any payment, if this occurs first. Input tax credit will arise when you receive, prior your lodging your GST tax return, a  suppliers invoice or when you make any payment if this occurs first.

Care is needed as any payment received before an invoice is issued is sufficient to trigger a GST liability for total amount of GST on the taxable supply, not just the part of the GST that relates to the prepayment (deposits, progress payments etc)

Note that in the absence of a prior payment, the input tax credit is attributed to the tax period in which an invoice was issued, not when it was received.

Tax invoices

You will not be entitled to a GST credit on any expense unless you possess the tax invoice relating to that expense.

Tax invoices must comply with strict requirements as to the information on the transactions to which they relate.  The exact content has yet to be regulated.

As a supplier, your business will not be legally obliged to give any customer a tax invoice unless:

1. the customer requests a tax invoice from you; and

2. the price of the particular transaction was more than $50 before GST was added.

Many businesses will find it easier, however, to simply redesign the form of their existing standard invoicing so as to both comply with the information disclosure requirements and remove the need for the customer to request a tax invoice. 

Adjustments

There will be many reasons for adjustments, for example:

In relation to GST adjustments:

Annual turnover dictates obligations

For a business, if your annual turnover is:

What is annual turnover?

There are 3 broad categories of revenue that combine to form the amount of annual turnover of your business:

How is annual turnover calculated?

Annual turnover is calculated daily.

Each day, 1 of the 3 turnover thresholds can be reached in 2 different ways.  The turnover threshold can be met combining turnover already generated in the current month with turnover likely during the rest of the month and adding:

1. turnover generated during the previous 11month period; or

2. turnover likely to be generated during the next 11 months.

Failing to take account of increases can bring with it penalties. If you calculate a turnover which takes you over one of the three thresholds then you have 21 days to adopt the change required.

GST returns

GST returns are the means by which your business will be reconciling GST liability against GST credits.

We will assist you to either lodge pre-printed return forms from the ATO, or can  lodge your returns electronically.

A GST return will be required in respect of each and every tax period.  The due date for all GST returns will be the twenty-first day following the end of the previous tax period.

If your net amount is greater than zero, it must be paid to the ATO by the twenty-first day of the month following the end of your tax period. The Federal Government wants all other tax payment dates to be aligned with the GST payment date.

If your net amount is negative, this represents a refund to you.  The ATO is obliged to pay you interest on any refund not paid within 14 days of lodging your GST return however if your business is expecting a refund of GST, it won't be paid if, for example, you have a greater amount of income tax currently outstanding.  Instead, the refund will be offset against the income tax liability.

This means that your business will have a running balance account with the ATO that encompasses all the taxes you pay that are administered by the ATO.  It is also proposed to include PAYE.

Refunds will only be paid into a bank account that is nominated by you.

Tax invoices relating to claims for input tax credits do not need to be attached to the GST return but should be retained.

Australian Business Numbers

Every business registered for GST must have an Australian Business Number (ABN).  The Federal Government intends that the ABN will be the single business identifier for all dealings with the government.  GST is the first compliance system to run off the ABN.  For example, every tax invoice for GST purposes will be required to display the supplier's ABN.

If you are holding an invoice from one of your suppliers that does not show the supplier's ABN, it is not a valid tax invoice for claiming your input tax credit for the GST part of that invoice (if any).

Any small business not electing to register for GST should still consider applying for an ABN. This is because a company receiving an invoice payment that does not show an ABN will be required to withhold income tax from the payment at the highest individual rate, which from 1 July 2000 is proposed to be 48.5%.

The ATO will be administering the ABN system.  An official register of all ABNs will be created, and this will be accessible to anyone.  The register will show your businesses:

The register will also show other details about your business, but only details prescribed by regulation.

The main reason for making the ABN register accessible to anyone is that it will allow all other bureaucracies and organisations to obtain information about your business.

TRANSITIONAL ISSUES

Although GST does not start until 1 July, 2000, many contracts and agreements being made now, involving supplies after that date, will involve a GST liability. It  is important to take steps to ensure you can pass on any additional costs involved.

The only way in which the additional costs of GST can be recovered is for you to negotiate a GST inclusive price with your customers. There is no automatic right under the GST legislation to pass on a charge for GST.

If your contracts span over 1 July, 2000 it is essential that the GST costs applicable be covered.

Which pre 1 July 2000 supplies will fall into the GST net?

After GST starts, when invoices are raised and received or payment made or received will determine when GST liability and GST credits arise. However for the introduction of GST the focus has been shifted to look at when a supply is actually physically made.

Supplies invoiced before GST but supplied after will be subject to GST.

When is a supply made?

If you supply delivered goods, supply occurs when the goods are removed. For other goods and services it is when they are made available or performed Progressive services are deemed to have been performed on a uniform basis. On approval goods are supplied when it is certain they have been sold. Real estate is supplied when it is made available.

GST-Free Concession

This concession applies to written agreements entered into before 8 July 1999 which specify the price or a way of calculating the price.

If the agreement doesn’t contain a right to review, renegotiate or change the price then it will be GST free until 1 July 2005. If there is a review opportunity then the agreement is only GST free up to that review.

Construction Contracts

Some contracts spanning 1 July, 2000 and entered into before that date qualify for  concessional treatment. The ATO will publish some guidelines on valuation methods that can be used to value construction work in progress as at 30 June, 2000 and this value will be GST free.

Action Plan

Adapt the following plan to your business:

1. Ascertain the cash flow effect of GST on your business and plan for any extra working capital requirements.

2. Consider existing relations with customers and suppliers and consider any changes to business practices, which could be beneficial.

3. Plan to claim any Sales Tax credits which may arise on transitional trading stocks held for sale.

4. Consider accelerating or deferring capital expenditure as appropriate.

5. Review your standard business contracts or forms and plan to include GST clauses.

6. Review the GST consequences of supply contracts.

7. Design you tax invoices.

8. Plan for any amendments required to your accounting software and systems.

This Page Last Updated: 06 December, 2003 08:36 PM

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