One of the milestones you may encounter as your business grows is the need to register for Goods and Services Tax (GST). This tax framework has implications for your pricing, accounting, and even your cash flow. While it might sound daunting, it’s all quite manageable with the right information. So let’s unpack the world of GST, shall we?
What is GST?
The Goods and Services Tax (GST) is a broad-based tax of 10% on the supply of most goods, services, and other items in Australia. Think of it like an extra layer on your revenue cake. But why does it exist? Essentially, GST helps to provide revenue to federal and state governments for public services like healthcare, education, and infrastructure.
Why Register for GST?
Being GST-registered means that you will add a 10% tax charge to your goods and services. In turn, you pass this collection to the Australian Tax Office (ATO).
However, this is a two-way street! When you incur business expenses, you usually pay GST on those as well. The silver lining? You can claim ‘GST credits’ for these expenses when you lodge your Business Activity Statements (BAS).
If you don’t get this right now, that’s OK – we will run through a worked example later in this article.
One thing to note though, while GST applies to most goods and services in Australia, it’s worth noting that some are GST-free. These include essential items like basic food, healthcare, and education services.
For business owners, it’s crucial to be aware of these exceptions, especially if your business deals with these types of goods or services. Accurate GST categorization can impact your tax obligations and reporting. For a comprehensive list of GST-free items and more details, you can refer to the Australian Taxation Office’s GST-free sales section on their website.
Another factor to consider is how being GST-registered might affect your business image. Customers often associate GST registration with business legitimacy and size. If you’re striving to scale your business or work with larger clients, being GST-registered can bolster your professional image.
When to Register for GST
You are legally obligated to register for GST when your annual business turnover (revenue, not profit!) crosses $75,000 over a rolling 12 month period. This means if the total sales of your current month and the 11 months beforehand exceed $75,000, you should be registered for GST.
Worked Example: How Does GST Impact You?
Imagine you sell custom-designed t-shirts. You sell them for $40 each and buy them for $22 each. Let’s run through two scenarios:
- Adding GST on Top – You adjust your prices for GST
- Absorbing the GST – You don’t adjust your prices for GST
Case Scenario 1: Adding GST on Top
Imagine you sell custom-designed t-shirts. Previously, you sold them for $40 each. After GST registration, you’ll charge $44 (that’s $40 + $4 GST which is 10% of the original price). This additional $4 is what you owe the ATO. You are collecting the GST on behalf of the ATO.
Let’s say it costs you $22 to produce one t-shirt, which includes $2 in GST . You can claim this $2 back when you lodge your BAS, effectively reducing the net GST you owe to the ATO from $4 to $2 per shirt.
Case Scenario 2: Absorbing the GST
In another scenario, you decide to absorb the GST costs yourself, keeping the price of the t-shirt at $40. This means the $40 includes the GST that you need to set aside for the ATO. In this case, you would only get to keep $36.36 from each sale, with the remaining $3.64 going to the ATO as GST.
While absorbing the GST can make you appear more competitive, it erodes your profit margins. Here, your profit per t-shirt decreases by $3.64 per T Shirt. Over time and scale, this could significantly impact your bottom line.
We understand that calculating GST can sometimes get a bit confusing so we’ve put together a calculator for you to use here.
Cash Flow Consideration
Remember that GST can impact your cash flow. While it’s tempting to view the extra 10% as added revenue, it’s crucial to set it aside for your BAS payments. We collect GST on behalf of the ATO, it’s not our income.
Once GST-registered, you’ll need to lodge a Business Activity Statement (BAS) either monthly, quarterly, or annually. This isn’t just a tax document; it’s an overview of your business’s financial status.
You’ll report your total sales, GST collected, and GST credits from business purchases. Missing the deadlines for BAS lodgement can result in penalties, so maintaining regular accounting practices is crucial.
The Business Activity Statement, commonly referred to as BAS, is essentially your business’s tax (for some taxes) report card to the Australian Taxation Office (ATO).
Think of it as a regular check-in that keeps you and the tax office on the same page. When you’re registered for GST, the BAS becomes a critical part of your tax obligations.
It’s a form that you need to fill out periodically—usually quarterly, but sometimes monthly or annually, depending on your business circumstances.
The BAS allows you to report the GST you’ve collected from customers and any GST credits you’re claiming. You’ll also report other tax obligations through the BAS, such as Pay As You Go (PAYG) withholdings, but for the purpose of this blog, we’re focusing on its role in GST management.
Understanding GST isn’t just a legal obligation; it’s a cornerstone of effective cashflow management for businesses in Australia. The sooner you familiarize yourself with it, the sooner you can optimize your money management to navigate this tax landscape efficiently.
We hope you’re enjoying our blog, just a note though. The information provided here is intended for general informational and educational purposes only. While we aim for accuracy, we can’t guarantee that this content will apply to your specific situation—every business owner’s circumstances are unique.
This blog is not a substitute for personalized advice from a qualified accountant, tax advisor, or any other professional. If you have questions specific to your individual circumstances, we strongly recommend consulting a professional for tailored advice.