The starting point to whether , or not, you are required to be registered for Goods & Services Tax (’GST’) is found in Div23 Sec 23-5 ‘who is required to be registered’. The term who is required to be registered relates to whether,or not, you are carrying on an enterprise and your GST turnover is higher than the threshold. The term carrying on a enterprise, as specified in Div 9a Sec 9-20, is any form of business, or in the form of an adventure or concern in the nature of trade. This is a wide-ranging terminology to cover a vast scope of enterprises so that if you are operating any form of business, adventure of in the nature of trade then you are required to register for GST. The threshold turnover to be registered is $75,000 as stated in Div 23 Sec 23-15. The two criteria that must be meet in the carrying on an enterprise and a turnover greater than or equal to $75,000.
Section 23-10 applies to persons who are not required to be registered under Sec 23-5 as their enterprise does not meet the threshold test of Sec 23-15. However, as specified in Sec 23-10 a person may apply for voluntary registration as long as they meet the criteria that they are carrying on an enterprise.
You are required to register for an ‘Australian Business Number’ (’ABN’) if you are carrying on an enterprise that operates within Australia and in the course of furtherance of carrying on the enterprise you make supplies within Australia as specified in Sec 8(1)(a) & (b). Any business whether operating various structures such as a company, superannuation fund, trust, partnership or individual carrying on a business that is operated in Australia must have an ABN.
The GST is a multi stage valued added consumption tax. It is a tax imposed on suppliers when ever a taxable supply of goods and services is made along the supply chain. Furthermore, these entities along the supply chain may also qualify for input tax credits in respect to the GST paid by them on their inputs. However, not all supplies are taxable such as GST Free supplies i.e. sales of a going concern, medical and educational supplies, input taxed supplies i.e. financial supplies and the supply of residential premises to the rental market. In order to determine a taxable supply, we must first establish if a supply exists.
A taxable supply follows a similar path to registration in so far as the supply must be connected to Australia in the course or furtherance of an enterprise. The supply must be for consideration. Furthermore, the enterprise must be registered for GST or required to be registered Div 9 Sec 9-5. The entity, or person, making the supply, must provide a ‘tax invoice’ as specified in Div 29 Sec 29-70. A tax invoice must be in a preferred format as a document notifying an obligation on the payer to make a payment.
There are two methods of accounting for GST, either on a cash or accrual basis. To use a cash basis of accounting, an entity or person, must have an annual turnover that does not exceed $2m in any given year of income Sec 29-40(1)(ab). There is exceptions to this rule in Sec 29-40(1)(a) where an entity satisfies the meaning of ‘small business entity’ for the purpose of the Simplified Tax System not because of the actual aggregate turnover test. There are other entities that can use the cash basis of accounting system that are on a receipts method in declaring their income tax or entities of a kind specified by the Commissioner.
An accruals basis of accounting means that a GST liability or input tax credit occurs when the tax invoice is issued or a tax invoice is received Sec 29-5(1). The difference between the accruals basis of accounting and cash basis is that a GST liability or input tax credit occurs on receipt or creation of the invoice. However, the entity must have a annual turnover equal to or in excess of $2m. The problem of course with an accruals basis of accounting is that the GST liability falls due before the receipt of the cash. This means that the entity, in a similar manner to their debtors, must finance the GST liability, to maintain a consistent cashflow for the business.
The cash basis of accounting is appropriate for small to medium size business as most of these entities operate their income tax on a cash basis.Once applying the legislation to whether, or not, the entity should operate on either cash or accruals, the next step is to determine the period used to report the GST to the Australian Taxation Office (’ATO’). The normal procedure for reporting GST to the ATO is on a quarterly basis as specified in Sec 27-5. The Commissioner, however, has the discretion to change the reporting period to monthly where entities exceed the threshold test of $20m per annum Sec 27-15.
Each entity registered for GST is entitled to claim an input tax credit for any creditable acquisition that is made by the entity Sec 15-15. An entity must acquire a thing solely or partly for a ‘creditable purpose’ for that thing to be a creditable acquisition, therefore giving rise to an input tax credit entitlement Sec 11-5(a). The term ‘creditable purpose’ is defined by Sec 11-15. The general rule is that an entity acquires something for a creditable purpose to the extent that the entity acquires the thing in carrying on its enterprise.
Under the general GST rules, there are no other means by which an entitlement to an input tax credit can arise. thus, an input tax credit can only be claimed in respect of a creditable acquisition or a creditable importation.It is important to note that an input tax credit is not similar to an income tax deduction. apart from the fact that an input tax credit relates to a specific component of the price paid for an item, rather than being a tax offset for purchases, there are no capital/revenue distinctions for input tax credit purposes. Thus, an entity making a creditable acquisition that is a capital type (eg a block of land plant or equipment) is entitled to an input tax credit in the same manner as an acquisition that is a revenue item.
Therefore, in completing either a monthly or quarterly Business Activity Statement (’BAS’) the taxable supplies of the entity, including the GST collected, will be offset against the input tax credits claimed on the creditable acquisition made during the reporting period. The net amount of GST is then payable to the ATO as the net amount of GST collected in the period of activity.