It is not uncommon for an entrepreneur to be unsure of how to treat GST on the books. Brisbane bookkeeping and accounting rules do not classify GST as an expense, nor an income. Before we can proceed to the accounting of GST, let us first define what GST is.
GST or goods and service tax, also known as VAT or value added tax, is a form of consumption tax levied on the purchase or enjoyment of goods and services. The government mandates and requires businesses who meet the minimum GST turnover to collect the applicable tax from its customers. The business will then report and remit the collected amount to the ATO (Australian Tax Office). Australian GST is 10%.
Essentially, GST is not part of the business. The business is just acting as the collector, keeper, and recorder of the government’s tax earnings.
But since it is ultimately intertwined with the sales process, GST also has to be properly accounted and recorded.
Methods to Account for GST
There are three methods to account for GST – cash, non-cash, and the simplified accounting method applicable to food retailers. Each is designed and applicable to different businesses. Your Brisbane bookkeeper will recommend the one best suited for your type of business.
Cash Basis of Accounting for GST
This is accounting method is applicable only to small businesses with less than $2 million GST turnover, or if you are running an entity granted by government to account GST on cash basis. GST is applied according to the business cash flow. All cash received as payment for goods or services are considered sales, regardless if the goods was delivered in another accounting or tax period. GST credits are computed based on all purchases and applicable expenses paid, regardless if the goods were used in another accounting or tax period.
Cash basis computation of GST;
Sales and Expense Summary for 2014
Sales in Cash $1,000,000
Sales in Account $ 500,000
Total Sales $1,500,000
Accounts Receivable Paid $ 600,000
Purchases in Cash $ 200,000
Purchases in Account $ 400,000
Total Purchases $ 600,000
Accounts Payable Paid $ 100,000
Using the figures above, the GST payable using the cash basis of accounting is $160,000 which is 10% of $1,600,000 or the total cash received for the tax period. GST credits for this accounting method is $30,000 which is 10% of $300,000 or the total cash paid within the period.
Non-Cash Method of Accounting GST
This method accounts the GST on the sales within the accounting period, regardless of when you are paid, and on your purchases of the same tax period, regardless of when you paid for it. Most bookkeepers in Brisbane will recommend this type of accounting as it is the most logical and the correct amounts are applied on the appropriate business period.
Using the same figures above, the GST payable using the non-cash basis of accounting is $150,000 which is 10% of $1,500,000 or the total sales for the tax period. GST credits for this accounting method is $60,000 which is 10% of $600,000 or the total expenses incurred during the period.
SAM – Simplified GST Accounting Method
This is applicable to small food retailers whose GST turnover is below $2 million, who buy and sell products that are both taxed and GST-free at the same time, and do not have a reliable point-of-sale equipment. In this case, computing for the GST payable and credit is complicated.
There are five SAM options you can choose from;
1. Business norms method – uses standard percentages to both sales and purchases
2. Stock purchases method – uses a sample of purchases
3. Snapshot method – uses a snapshot of sales and purchases.
4. Sales percentage method – compute for the percentage of GST-free sales and apply
this to the purchases
5. Purchases snapshot method – uses a snapshot of purchases to calculate GST credits.
Click here for a more detailed discussion of SAM.
Call us to discuss more about the GST, BAS, and tax requirements of your business. We are here to help make your Brisbane bookkeeping, BAS lodging, and business taxation easy, done correctly and on time. We take away the time-consuming and complex part of running a business. So you have time for things that matter to you – like growing the business and spending time with your family.