Goods and Services Tax (GST) is an integral part of the Australian taxation system. It is a value-added tax levied on most goods and services sold for domestic consumption. For small businesses in Australia, understanding and complying with GST regulations is crucial to avoid penalties and ensure smooth operations.
Small businesses often make unintentional errors in their GST reporting and compliance. These mistakes can lead to financial losses and legal complications. Let’s explore some of the most common GST mistakes made by small businesses so that you can avoid them.
Not registering for GST at the right time or forgetting to deregister when the business stops operating
If your business is expected to earn more than $75,000 a year, you have to register for GST. But for new businesses, predicting when they’ll reach that threshold can be tough.
As a small business owner, freelancer, or contractor, registering for GST too early can make your prices less competitive because you have to add an extra 10% to your sales. But registering too late means you might miss out on claiming GST back on things like buying equipment. Plus, you could face fines from the ATO (Australian Taxation Office).
If your income is under $75,000 a year, registering for GST is optional. But there are times when it’s a good idea:
- You want to claim back GST on a big purchase, and you think your sales will eventually go over $75,000.
- Most of your sales are to overseas customers, so you don’t charge GST on those sales. But you can still claim back GST on things you buy in Australia.
- When you cancel your registration, make sure to fill out a business activity statement for the period when your registration was still active. And if you have any overdue activity statements, make sure to lodge them, too.
Using the wrong tax code for reporting purchases of capital items
This is a mistake a lot of small business owners make due to the lack of knowledge. The ATO website states if you buy a business asset costing over $1,000, report it in G10 under capital purchases on your BAS (Business Activity Statement), not in G11 for non-capital purchases. This often confuses people, and they end up making this mistake.
If you also are not sure, it’s a good idea to double-check with your accountant. Or, you can contact Clear Tax Accountants who will help you ensure that everything is reported correctly.
Goods and Services Tax (GST) on buying second-hand goods
When you buy a second-hand item from a business registered for GST, you can claim full input tax credits on your next BAS.
But if you buy from a private seller or a non-registered business, there are special rules:
- If the item costs less than $300, you can claim GST credits as usual.
- If it costs more than $300, you can only claim credits after you sell it.
There are more details to this, so it’s best to talk to your accountant.
Claiming GST on private expenses
When you buy things that you use for both business and personal reasons, you can only claim the GST credit for the part that’s for business.
If you later realise that the split between business and personal use was different from what you initially thought, you might need to adjust the amount while claiming GST credits.
Small businesses should figure out how much they use things like cars, phones, internet, rent, and utilities for business. This helps them claim the right amount of GST for business use.
If your business makes less than $2 million a year, you can choose to work out the business use at the end of the financial year instead of doing it on each BAS. You need to make a special yearly election for this. To know more about this, you should reach out to your accountant.
Not choosing the right filing and payment frequency
In Australia, you have the option to file and pay GST monthly, quarterly, or annually.
You choose monthly if your GST turnover is $20 million or more. Quarterly is for businesses with a turnover under $20 million. And if you’re voluntarily registered for GST and your turnover is under $75,000 ($150,000 for not-for-profit organisations), you can file annually.
Your filing frequency affects your cash flow. If your business regularly buys items with GST, it’s smart to choose monthly filing. This way, you can get GST refunds from the ATO sooner. If your business regularly sells items with GST, you might prefer a longer filing period.
You can change your BAS cycle online using MyGovID.
Claiming GST on all expenses
Not all expenses include GST, and sometimes invoices have a mix of GST and GST-free items. For example, GST is not charged on expenses like land tax, council rates, water rates, and ASIC filing fees.
Stamp duty in most insurance policies is exempt from GST, while the rest of the policy includes GST. Additionally, bank fees, Stripe fees, and PayPal fees are exempt from GST. It’s important to carefully review your invoice before claiming GST to ensure accuracy.
Not keeping accurate and complete records
Keeping accurate records is crucial for small businesses to avoid common GST mistakes. Failure to maintain detailed and organised records can lead to errors in GST reporting and compliance. Without proper records, it’s challenging to accurately determine the amount of GST owed or to claim the correct GST credits.
The Australian Taxation Office (ATO) mandates that all businesses maintain accurate and complete records for at least five years. Once you request a tax invoice, your supplier has 28 days to provide it to you. It’s essential to wait until you receive the tax invoice before claiming a GST credit, even if it’s in a later reporting period.
To avoid this mistake, small businesses should implement effective record-keeping practices. This includes keeping track of all purchases, sales, and expenses related to GST, as well as maintaining supporting documentation such as invoices, receipts, and bank statements.
Not seeking professional help
Understanding GST regulations can be tough for small businesses, especially if they don’t have much experience or resources. Not getting advice from accountants or tax advisors can lead to expensive mistakes and problems following the rules.
Getting help from experts can give you peace of mind and make sure you’re doing everything right when it comes to GST. If you are looking for tax agents in Melbourne, look no further than Clear Tax Accountants. We are a team of professional tax accountants who commit to providing top-notch accounting services.
Conclusion
Avoiding common GST mistakes is crucial for small businesses in Australia to maintain financial compliance and success. By grasping the basics of GST, following reporting rules, and maximising input tax credits, businesses can reduce risks and improve financial results.
Seeking advice from professionals and maintaining strong record-keeping practices are key to handling the complexities of GST regulations and protecting business interests.
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