With tax time just around the corner it is a good timing to review your GST status. There are some common GST slip ups that you need to be aware of.
1. Make sure you are actually in business!
This may seem silly, but those that are generating irregular income and not necessarily for profit aren’t in business as defined by the ATO. The ATO considers this as having a hobby, and as such can’t claim GST credits on purchases. If you are unsure if you have a business or a hobby here are a few factors that the ATO looks for when determining this.
- Do you have a current business plan?
- Repetition of the income producing activity
- Size and scale of the activity is consistent with other businesses in the industry
- Commercial sales
- Marketing and advertising their activity to attract clients
If you are still having doubts have a look at this ATO video called Tax basics for small business.
2. Using an incorrect accounting method
There are two methods for accounting and you would have chosen one when you registered for GST. The first is on a cash basis, this is where you account for income and expenses when you receive or pay the amount. The other is accrual and this is where you account for it at the time that it is invoiced. Using the wrong accounting basis when doing your BAS will result in incorrect figures being reported.
3. Not charging or reporting GST on sale of business assets
For example, if you sell a company asset such as a motor vehicle and you are registered for GST, you must include GST as part of the sale.
4. Claiming Input Tax Credits ("ITC’s") on expenses that are both private and business
If you are a sole trader or a partnership there will be some expenses that need to be apportioned to both business and personal usage. These include cars, phones, utilities etc. In these cases you can only claim the GST on the portion that you are claiming as business use.
5. Incorrectly claiming ITCs for some items
There are a number of business expenses that don’t include GST. You need to review your invoices and double check that they actually include GST. Some common examples of expenses that don’t include GST are:
- General bank fees (merchant fees are subject to GST)
- Gift cards are GST free as the GST will be included in the cost of what is purchased with the cards
- Donations are GST free
- Phone bills - some companies include some GST free items in the phone bill so check before claiming GST on the entire amount.
- Overseas purchases, such as software that you buy on the internet from another country. This will be GST free.
Make sure you keep your receipts and proper accounting records. If you have any doubts please talk to our business accounting specialists who can work with you to clean up any concerns with your accounts.
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