It’s no wonder that John Hewson had trouble explaining the intricacies of GST to Mike Willesee in
1993 because there is still confusion today over the treatment of many items when it comes to
recording GST in your accounts and preparing your BAS Activity Statements. For example, what is
the difference between something that is ‘Tax Free’ and something that is ‘Input Taxed’? Not much
as it turns out because GST doesn’t apply to both.
The following is a list of the items that cause the most confusion and are mistakenly treated when
preparing the quarterly or monthly BAS Activity Statement.
Bank charges are classed as “input taxed” meaning the bank doesn’t charge GST to the
customer. This is not to be confused with Credit Card Merchant Fees – GST is charged on
these fees and therefore a GST credit can be claimed on these expenses.
Government and Semi-Government Charges
Items like council rates, water rates and ASIC filing fees, are GST free. However, whilst
motor vehicle registration fees are GST free, the compulsory third party insurance that is
normally paid at the same time includes a GST component and can be claimed.
General business type insurance premiums including professional indemnity include a GST
component and can be claimed however the Stamp Duty component is not subject to GST
and therefore can’t be claimed. Life and Sickness or Accident insurance are not subject to
GST and therefore no GST credit can be claimed.
Basic food items like milk, coffee, tea and sugar are GST Free.
Wages and Superannuation
There is no GST associated with payments in respect of wages and/or superannuation.
GST can be claimed on the purchase of a motor vehicle but where the purchase price is in
excess of the luxury car limit then the maximum GST credit that can be claimed is limited to
the GST calculated on that limit.
Financed Assets via Commercial Hire Purchase (CHP)
If a business is using the ‘Accrual’ method of accounting, an up-front GST credit can be
claimed for the purchase of an asset (like a motor vehicle) using a Commercial Hire Purchase
agreement. However, this is not available for businesses using a ‘Cash’ basis for accounting
(speak with your accountant or bookkeeper to explain the difference). In this case, the GST
credit to be claimed is calculated as 1/11th of the “principal” portion of the total CHP
payments made during the relevant month or quarter. In order to claim the total GST credit
upfront, the business would need to finance the asset by way of a chattel mortgage.
Where the business has elected to use the 50/50 split method for fringe benefits tax
purposes, only 50% of the GST credits can be claimed.
No GST applies to interest either as an expense or as income.
Sale of Assets
Motor Vehicles and Equipment – including the trade-in of motor vehicles. The sale of a
business asset is subject to GST just like any ordinary business transaction unless the going
concern exemption is claimed.
Other GST Free Expenses
There are a number of other GST free expenses to be aware of e.g., donations, some first-aid
supplies, some health services.
Other Expenses that are Non-Taxable
Other types of expenses that do not attract GST include depreciation, drawings, fines, loan
repayments, income tax.
Sole Traders and Partnerships
Due to partly private and partly business use of motor vehicles, small businesses often fail to
apportion input tax credits correctly. To calculate their GST liability, small businesses are
required to undertake this apportionment each time they prepare their BAS, though in
practice the actual private use may not be accurately determined until the business is
required to complete and lodge its annual income tax return. Sole traders and partnerships
with an annual turnover of up to 2 million dollars that pay GST either on a monthly or
quarterly basis can apportion the private portion of GST credits on an annual basis rather
than each time their BAS is lodged.
As you can see, there are many pitfalls in the complex world of bookkeeping so if you are in doubt,
please consult a professional.