The GST has now been in operation for 10 years, yet, despite a massive education campaign by the Australian Taxation Office (ATO) over the years, there are still common errors and omissions that are being made by many small businesses on their BAS returns. Most of these errors relate to the over-claiming of GST credits.
Below, I have explored some of the more common GST mistakes that are made by small and micro businesses and, where appropriate, identified the correct GST treatment so that these errors are minimised in the future.
1. The correct accounting method
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.
2. Bank fees
Incorrectly claiming GST credits on bank fees (e.g. monthly and annual fees, cheque book fees and loan establishment fees). Bank fees are treated as 'input taxed', meaning that the Bank does not charge GST to the customer. Note that GST is charged on credit card merchants’ fees and, therefore, a GST credit can be claimed on these.
3. Government charges
Incorrectly claiming GST credits on government charges, such as land tax, council rates, water rates, ASIC filing fees and motor vehicle registration, where no GST has been charged.
4. Business insurance policies
Incorrectly claiming a GST credit on the 'total cost' of a business insurance policy. As there is 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.
5. Cars and equipment
GST is not paid 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.
6. Government grants
Not remitting GST on some government grants and incentives, which are received inclusive of GST.
7. GST-free purchases
Incorrectly claiming GST credits on GST-free purchases such as basic food items, exports and some health services.
8. Wages and superannuation
Incorrectly claiming GST credits on wages and superannuation payments.
9. Entertainment expenses
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 per cent of the input tax credits can be claimed.
10. Luxury car limit
Claiming the entire GST credits on a car purchased for more than the luxury car limit ($57,466 GST inclusive for the 2010/11 year). The maximum GST credit that can be claimed is limited to $5224 (one-eleventh of $57,466).
11. Fringe benefits
Not remitting GST on the taxable value of fringe benefits provided where an employee contribution is made.
12. Valid tax invoices
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 ATO for further advice.
13. Private and business use
Sole traders and partnerships are not apportioning input tax credits and making adjustments to expenditure that is partly private and partly business use, such as motor vehicle expenses). To calculate their GST liability, small businesses are required to undertake this apportionment each time they prepare their BAS. 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.
14. Commercial hire purchase
Incorrectly claiming an upfront GST credit on assets financed by way of commercial hire purchase (CHP). 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. When the cash basis applies, the GST credit to be claimed is calculated as one-eleventh of the 'principal' portion of the total CHP payments made during the relevant month or quarter, (i.e. 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.
15. Yellow pages advertising
Incorrectly claiming GST credits on payments for yellow pages advertising. Where 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 one-eleventh of each instalment.
Where a business has made a clerical error on an earlier period BAS or omitted a particular transaction, there are both 'time' and 'dollar’ thresholds for determining the particular BAS in which the error or omission needs to be corrected. A business can make the change in the 'current' BAS where all of the following conditions are satisfied:
Where the 'net' effect of the errors or omissions from previous BAS occurs outside the relevant time and dollar limits, the business must revise each of the original BAS that the errors or omissions occurred in. This may lead to the imposition of a general interest charge where the revision results in additional GST payable.
Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.
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