Common GST mistakes

Here is a checklist of some common GST mistakes that are made by small businesses, and how to correct and minimise these errors in future. 

Common GST Mistakes

- Not using the correct accounting method. If the business is using the cash accounting method for GST, but not for income tax purposes, and the turnover of the business is expected to be $2 million or more, the business needs to change to the accruals or invoice basis.

- Incorrectly claiming a GST credit on the 'total cost' of a business insurance policy. Because there's a stamp duty component in the premium which is not subject to GST, a GST credit cannot be claimed on this portion of the payment. The actual amount of GST payable on an insurance premium is usually stated on the renewal form.

- Incorrectly claiming GST credits on bank fees. Bank fees are treated as 'Input Taxed' meaning that the Bank does not charge GST to the customer. eg monthly and annual fees, cheque book fees and loan establishment fees. Note that GST is charged on credit card merchants fees and therefore a GST credit can be claimed on these.

- Incorrectly claiming GST credits on government charges such as ASIC filing fees, land tax, council rates, water rates, and motor vehicle registration where no GST has been charged. 

- Not remitting GST on some government grants and incentives which are received inclusive of GST

- Not paying/remitting GST on the sale of cars and equipment including the trade of motor vehicles. The sale of a business asset is subject to GST just like any ordinary business transaction unless the going concern exemption applies.

- Incorrectly claiming GST credits on GST-free purchases such as basic food items, exports and some health services. Other GST Free items include Milk, tea, coffee, international travel, donations and some first aid supplies.

- Incorrectly claiming GST credits on wages and superannuation payments. 

- Incorrectly claiming the full amount of GST credits on entertainment expenses where the business has elected for fringe benefits tax purposes to use the 50/50 split method, in which case only 50% of the input tax credits can be claimed.

- Sole traders and partnerships are not apportioning input tax credits and making adjustments to expenditure that's partly private and partly business use (eg motor vehicle expenses). 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 that pay GST either quarterly or monthly can apply private use apportionment for GST purposes on an annual basis instead of each time the BAS is lodged.

- Claiming the entire GST credits on a car purchased for more than the luxury car limit (The car limit for the 2011-12 financial year is $57,466. This limit is reviewed each financial year and may change) The maximum GST credit that can be claimed is limited to $5,224 ( That is 1/11th of the car limit of $57,466).

- Incorrectly claiming an upfront GST credit on assets financed through a commercial hire purchase (CHP). While an up-front GST credit is available for businesses accounting for GST using the accruals or invoice basis, this isn't available where the business uses the cash basis. 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, (ie the credit is claimed progressively over the term of the CHP loan). In order to claim the total GST credit upfront, businesses operating on a cash basis would need to consider financing the asset by way of a chattel mortgage.

- Incorrectly claiming GST credits on payments for Yellow Pages advertising. If the business chooses to pay for the cost of advertising by instalments, the entire GST is charged up-front. Businesses that account for GST on an accruals or invoice basis can claim this 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.

- Interest Income should have ITS (Input Taxed Sale) as the code.

- Claiming a GST credit when the business does not have a valid tax invoice at the time of lodging the BAS. Businesses in this situation should contact the supplier for a duplicate tax invoice or to have the tax invoice re-issued with the correct information. If you have been unsuccessful in obtaining a valid tax invoice contact the ATO for permission to claim the GST credit.

Without an invoice or Tax invoice you will need to withhold 46.5% from any payment over $75 and pay it to the ATO. If the supply/service is made as part of a private recreational pursuit or hobby, you would need an invoice but not a TAX invoice, since the supplier may not be registered for GST. A tax invoice implies GST registration. It should be clearly stated on the invoice that there's no GST included in the amount. Therefore an invoice should be issued when a supplier doesn’t have an ABN and not GST registered. The invoice should have the following information:

1. Supplier's name,address and contact details
2. Description of the supply or service
3. Statement that the supply is either: private or domestic, or part of a hobby or private recreational pursuit (and, therefore, the supplier doesn't need to quote an ABN and you do not need to withhold from your payment to them), or not GST registered.
4. Amount, and statement that no GST is included in the amount.
5. Supplier's signature.

Correcting GST mistakes

If a business has made a clerical error or omitted a transaction on an earlier period BAS, there are two things to concider before correcting this error. That is the 'time' and 'dollar' thresholds. A business can make the change in the 'current' BAS if they meet all of the following conditions:

1. The turnover of the business is less than $20 million; and
2. The 'net' effect of the errors and omissions from the earlier BAS periods is less than $5,000 in GST credits; and
3. The original transactions occurred within 18 months of the end of the current BAS period.
   If the 'net' effect of the errors or omissions from previous BAS periods occurs outside the relevant time and dollar limits, the business must revise each of the original BAS periods where the errors or omissions occurred. This may lead to a general interest charge if the revision results in additional GST payable.

For more information please contact the ATO or follow this link to the ATO website – refer to points 1, 2 and 20 to 22: 

http://www.ato.gov.au/businesses/content.aspx?doc=/content/19178.htm 

ACK Bookkeeping provide bookkeeping services in the Gold Coast and South Brisbane, Australia. If you would like to talk to us about bookkeeping services please contact us by email ackbookkeeping@bigpond.com.