Whaaaat is GST?
Today we are going to tackle another of the big questions. That question is:
What is GST and how does it work?
In this article I am going to break it down simply, give you examples of who needs to be concerned by GST and, at the very end, I’ll give you my favourite tip for collecting GST from your clients or customers.
But before we get started, I want you to know that I get this question ALL the time, so don’t feel for asking. It’s a term that gets thrown around a lot – no doubt you’ve seen it on an invoice or receipt before – but it is completely reasonable not to fully understand what it is. There is so much to know when running your own business and a whole dictionary of crazy tax terms out there, you can’t possibly know them all. That is why people like me exist!
So, let’s get into it!
“GST stands for Goods and Services Tax and is a tax of 10% on most goods, services and other items sold or consumed in Australia. ”
You need to register for GST when your business has a turnover of $75,000 or more. If you are already in business and have reached this threshold, then you have 21 days to register with the ATO.
Unfortunately, if you do not comply with the time fame, then you may have to pay the GST on any sales made since the date you were meant to register from, even if you did not include GST in your own prices. Depending on the circumstances, there may also be additional penalties and interest charges. Yucky.
(Pssst. This is why it’s good to have a bookkeeper on hand to keep track of your records and let you know when you’re nearing or above the threshold.)
To register for GST you must have an Australian Business Number (ABN). You can register with the ATO online, by phone, or through a sanctioned tax or BAS agent (that’s me, hi).
Without getting too technical, you may need to choose an accounting method: cash or accrual. If you turn over under 2 million dollars in revenue per year, you can choose either option but large businesses must use the accrual method.
Once you register for GST, the rules are you stay registered for at least 12 months.
So, to assure you’re not ripping your own business off, this is how I like to look at the inclusion of GST in my own goods and services: You add another 10% onto the price you business is already selling a service or product for. Remember, this isn’t you being greedy, this is you (/your business) collecting the GST for the ATO.
The same goes when you purchase something as an expense to your business. You pay a GST on that item, and the amount you pay gets deducted from the amount you’ll be collecting from your own customers. Ultimately, it works out that you pay the ATO the difference.
Let’s look at an example:
Meet Jessica. Jessica has her own ecommerce business that she works on full time. She makes and sells ecofriendly face masks; her business is called Earth Face. She sells a pot of her face mask to a customer for $220 incl. GST ($200.00 for the mask and then 10% GST on top, $20.00 = $220.00)
Jessica has now collected $20.00 for the ATO. Jessica then needs to pay a supplier for some ingredients to make the masks. Those ingredients cost $55.00 incl. GST ($50.00 for the product and $5.00 GST).
The $5.00 she has paid to the supplier can be claimed back. So, she now owes the ATO $15.00.
It also works the same way if you own a service-based business. Need another example? Sure!
Meet Lewis. Lewis is a graphic designer. While he doesn’t sell a physical product, he sells his time and skill. Lewis has just invoiced a client $550.00 incl. GST ($500 for the service ie. his time, plus 10% GST at $50.00)
He has now collected $50 for the ATO. He then needs to pay $110.00 incl. GST for his rented desk at a co-working space ($100 rent plus $10 GST).
The $10.00 he paid in GST on the invoice for his rented desk can now be offset against that $50.00 GST he has collected from his client. This leaves him owing $40.00 to the ATO.
So, by now you might be thinking, woah, that is an abundance of calculations just to stay on track. And it’s true! You want it to be because that’s a sign your business is ticking over well.
As a GST registered business, it is my recommendation that you invest in an accounting software like Xero (tax deductible, of course). This software makes life a whole lot easier, and saves you so much time because you can generate ‘GST Liabilities and Credits’ reports on the spot when it comes time to present them to the ATO (and pay up that money you’ve been collecting for them). Most businesses report every 3 months (that is, every quarter) and you can report online through myGov, by mail, or the most seamless way, through a BAS agent (again, hi!) on your business’ behalf.
A BAS agent will also be able to quickly identify if things have been recorded incorrectly, and ensure that you are claiming back the correct GST amounts.
Now… for a tip!
We’ve talked about remembering that when you are collecting GST from your clients and customers, it’s not your money. You are collecting for the ATO. Depending on your business, each week or every time you are paid, the amount you have charged for GST should be put into a separate account. Call it your BAS or GST account. As it never was your money to begin with, I advise moving it straight out of your business’ account and into this account. If you do this consistently (and from the very beginning of setting up your business), you will always have the money set aside to pay the ATO on time. AND you won’t be attached to it.
As an added surprise, if you follow this simple step, more often than not you may even have MORE than you need to pay the ATO since the GST you’ve paid on expenses will already be offset. Think of this as a little bonus for being so honest!
Hope this helps! Shoot me an email if you’d like to know if you’re business needs to be registered for GST.
