Avoid These Common GST Mistakes Made by Small Business
A study released by MYOB Australia has highlighted a few surprising statistics about small business in Australia. Generally it states that businesses are now spending up to 10 hours per month on preparing BAS data for the ATO. Not to mention that 59% of small businesses also stated they feel like they are an administrative department of the ATO. The second aspect of this MYOB report into small business is the alarming statistic that only 35% of small businesses are actually putting money aside on a regular basis so that they can pay their monthly or quarterly BAS when it falls due. It is good business practice that by meeting your ATO obligations you will have a much better appreciation of your true cash flow position and be in a better position to plan your business finances for success.
With these statistics in mind, we decided to try and find out what were the more common GST mistakes made by small business. After scouring the net, we found this list to be consistent across the board with what GST errors businesses are making:
- Promotion – when a small business chooses to pay for the cost of promotions by instalments like for Yellow Pages, the entire GST is charged up-front. Businesses that account for GST on an accruals or invoice basis can claim this up-front amount in their next BAS, whereas businesses that use the cash basis can only claim a GST credit equivalent to 1/11th of each instalment.
- Bank Charges – Bank charges are treated as “input taxed” meaning the bank doesn’t charge GST to the customer. The exception is Credit Card Merchant Fees – GST is charged on these fees and therefore a GST credit can be claimed on these expenses.
- Entertainment Costs – 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.
- Government Charges – ASIC filing fees, council rates, water rates and motor vehicle registration are GST free.
- Insurances – for general insurance and premiums a GST component is listed on the invoice. The Stamp Duty component is not subject to GST, therefore a GST credit cannot be claimed for this portion. For Life and Sickness or Accident insurance these are not subject to GST, therefore no GST credit can be claimed.
- Interest Income – should have ITS (Input Taxed Sale) as the code.
- Motor Vehicles – if the purchase price is in excess of the luxury car limit then the maximum GST credit that can be claimed is limited (check ATO for current updates for latest limits and claimable GST).
- Financed Assets via Commercial Hire Purchase – while an up-front GST credit is available for businesses accounting for GST using the accruals or invoice basis, this is not available where the business uses the cash basis for CHP. When the cash basis applies 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.
- 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.
- Staff Amenities – basic food items, milk, coffee, tea and sugar are GST Free.
- Wages and Superannuation – these payments are non-taxable supplies.
- Other GST Free Expenses – donations, some first-aid supplies, some health services.
- Other Expenses that are Non-Taxable – depreciation, drawings, fines, loan repayments, income tax.
- Sole Traders and Partnerships – Due to partly private and partly business use of motor vehicles small business often fails to apportion input tax credits. 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, instead of each time the BAS is lodged.
As you can see, there are many pitfalls in the complex world of bookkeeping so if you are in doubt, please give us a call at Irena’s Bookkeeping as we can be there to help you get it right the first time. Call us today and we will be glad to assist.