TAX • 19 JANUARY 2022 • 5 MIN READ
10 common GST mistakes small business owners should avoid
SECTIONS
1. Not registering for GST at the right time, or not deregistering when the business ceases
2. Not putting money aside for GST
3. Reporting purchases of capital items with the wrong tax code
4. Claiming GST on all expenses
5. GST on leasing and hire purchase
6. GST on buying second-hand goods
7. Claiming GST on private expenses
8. Confusions on GST on motor expenses
9. Choosing the wrong filing and payment frequency and impacting cash flow
10. Not keeping records
Goods and services tax (GST) is a 10% tax on most goods, services and items sold in Australia, however there are always exceptions to the rules. GST can be tricky if you don’t deal with it on a daily basis. Fixing these mistakes can be expensive, so we’ve compiled a list of 10 common GST mistakes you should avoid as small business owners.
1. Not registering for GST at the right time, or not deregistering when the business ceases
If it’s looking like your business will earn over $75,000 per annum, you must register for GST - but it can be difficult for a new business to predict when that will happen.
As a small business owner, freelancer, or contractor, registering for GST too early means you might lose the competitive edge on pricing, as you are charging an additional 10% on top of your sale price for goods and services. On the other hand, If you register for GST too late, you may miss out on claiming GST on any start-up costs (such as the GST component on asset purchases). It’s also likely you face penalties and fines imposed by ATO.
If you’re earning under $75,000 per annum, GST registration is voluntary, so in what circumstances should you voluntarily register for GST?
- You want to claim back GST on a large asset purchase, and you’re fairly sure your sales will be over $75,000 at some point
- Most of your sales are to overseas entities – you won’t collect GST on this income, but you can claim GST on the expenses you incur in Australia
Completing your last GST activity statement
If you have deregistered your business, don’t forget to complete a business activity statement for the tax period your registration cancellation 'date of effect’ falls in. You’ll also need to make sure you lodge any outstanding business activity statements.
2. Not putting money aside for GST
For better cash flow, we recommend you put money aside for GST. A good suggestion is to keep 10% of your taxable goods and services in a separate bank account. If you’re GST registered, you’ll need to pay the GST collected from your customers minus GST paid to the suppliers in the same GST return period.
3. Reporting purchases of capital items with the wrong tax code
If you purchase a business asset costing more than $1,000, you need to report these in G10 under capital purchases in the BAS, and not G11 (Non-capital purchases). If you’re unsure, check with your accountant.
4. Claiming GST on all expenses
GST isn’t on all expenses, and you may have an invoice which is mixed with GST and GST-free items. GST is not included in land tax, council rates, water rates and ASIC filing fees. Most insurance policies include a stamp duty component which is exempt from GST, while the rest of the policy includes GST. Furthermore, bank fees, Stripe fees and Paypal fees are exempt from GST. The main thing here is to carefully check your invoice before claiming GST.
5. GST on leasing and hire purchase
When you enter a hire purchase agreement for any assets or equipment, you can claim all the GST upfront in the GST period, as you are taking ownership of the assets or equipment.
If you only have the right to use assets or equipment for a limited period of time, you can claim GST on each payment. Sometimes, however, GST can be applied to a part of the regular payment. Leasing and hire purchase agreements must therefore be carefully considered for GST purposes.
6. GST on buying second-hand goods
If you purchase a secondhand item from a GST-registered business, you may claim full input tax credits on your next BAS.
However, if you purchase these items from a private seller or non-registered business, there are special rules that apply:
- If the cost of the item is less than $300, then you may claim credits as per normal
- If the cost of the items is more than $300, you can only claim credits after you sell the item (there is more to this, so please speak to your accountant)
Got any questions about Beany?
Chat to one of our friendly problem solvers today.
7. Claiming GST on private expenses
If you buy goods or services that are for both business and private use, you can only claim a GST credit for the part of the purchase that relates to the business use.
If you find out later that the split was different to what you first anticipated, you may need to adjust the amount of GST credits you have claimed.
Small businesses should also be determining the business usage percentage of items like motor vehicles, telephone, internet, rent, power and gas. This is needed to claim the business portion of the GST.
Small businesses with an annual turnover up to 2 million also have the option to work out their business usage at the end of the financial year, rather than on each BAS. You need to make an annual, private apportionment election for this. Your accountant will be able to help you with this.
8. Confusions on GST on motor expenses
If you purchase a car to be used solely for your business and you have a tax invoice and are registered for GST, you’re generally able to claim an input tax credit.
If you purchase a car that is used for both business and private use, then you are entitled to claim a partial input tax credit for the business portion of the car.
If you purchase a car that is above the car limit, then you can only claim one-eleventh of that limit. For 2022–23, the maximum GST credit you can claim is $5,885 (that is, 1/11 × $64,741). This limit also applies to cars which are fuel efficient.
Kathy purchases a new car for $107,145 (including $9,000 GST and $8,145 luxury car tax) on 20 August 2022. Kathy plans to use the car 100% in carrying on her business. As the car limit for the 2022–23 financial year is $64,741, the maximum GST credit Kathy can claim is $5,885 (1/11 × $64,741).
A luxury car is a car that has a GST-inclusive value which is higher than the luxury car tax threshold. After the purchase of a luxury car, you can’t claim a credit for any luxury car tax you pay.
9. Choosing the wrong filing and payment frequency and impacting cash flow
In Australia, GST filing and payment frequency is monthly, quarterly or annually.
- Monthly – your GST turnover is $20 million or more.
- Quarterly – your GST turnover is less than $20 million
- Annually – you are voluntarily registered for GST. That is, you are registered for GST and your GST turnover is under $75,000 ($150,000 for not-for-profit bodies).
GST filing frequency has an impact on your cash flow. To be more precise, if your business purchases items with GST on a regular basis, it’s wise to register for the monthly GST filing period. This means you can receive GST refunds as early as possible from ATO. If your business makes sales with GST on a regular basis, you should consider registering for a longer GST period. Through MyGovID, you can change your BAS cycle via online services for businesses.
10. Not keeping records
ATO requires all businesses to keep accurate and complete records for 5 years. You must have a tax invoice to claim a GST credit for purchases that cost more than A$82.50 (including GST). After you request a tax invoice, your supplier has 28 days to provide you one. Wait until you receive this before you claim a GST credit, even if you’re in a later reporting period.
Who are Beany?
We’re an online accounting firm that is always right here for you, your accounting pain relief. The most advanced technology lets us work way more closely with you than a normal accountant world.
We have a dedicated team of certified accountants and a support team to take care of your business no matter where you are, so you can focus on growing your business. We take out the ‘fluff’, break down the barriers and get things done. Looking out for you is what we are all about. Get started for free today.
Tori Ma
Performance marketer
Performance marketer at Beany, and into true crime documentaries.
subscribe + learn
Beany Resources delivered straight to your inbox.
Beany Resources delivered straight to your inbox.
Share:
Related resources
The basics business owners need to know about GST
August, 2021GST is a tax everyone pays on goods and services while living out their day-to-day lives. Businesses collect this ...
Pricing your product or service
April, 2021This is your chance to think about how you have priced your product or service, and whether there are any other mod...
A simple guide on small business loan vs line of credit
November, 2022Small business loans may already be familiar to you, but what about lines of credit? Here is a simple guide to the ...