Every day Startups ask these common GST questions because they know they want to get it right.
In 2000 GST was introduced into Australia. For the past 7 years I have been working with Small Business owners and Startups and GST is one of the tricky aspects of the Numbers that many people find difficult.
People who have spent most of their lives as end-customers in Australia where the “sale price” or “sticker price” is the final price, it can be a shock to find the business to business world plays by slightly different rules.
These are the 7 most common GST questions I am asked on a regular basis, and my responses.
- I’ve heard of GST, what does it stand for?
GST stands for Goods and Services Tax
- How does GST work?
GST is a broad based tax that is applied to most Goods and Services in Australia. When a business that is registered for GST sells their product they include GST in the price they charge.
At the end of each quarter the GST registered business calculates how much GST they have collected from sales. They also calculate how much GST they have paid through purchases; they claim credits for the GST included in purchases. (Some businesses do this on a monthly basis.)
If the amount of GST collected is greater than the amount paid, then the business only pays the net amount to the ATO (Australian Tax Office)
If the business has paid more GST trough purchases than they have collected through sales, then the ATO refunds that amount to the business.
FYI: this latter would be the exception rather than the rule otherwise said business would go out of business!
- Does everything have GST?
No. There are some products and services that are ‘GST-free’ items including:
- most basic food
- some education courses, course materials and related excursions
- some medical, health and care services
- some medical aids
- some medicines
- some goods produced for export
- some childcare
- some religious services and charitable activities
For more information about when to charge GST and when not to click here.
- How much is the GST?
The current rate is 10% and is included in the sale price of charged by a business to their customer. As a customer in Australia, you see a sale price and know that is the final price you will be charged at the cash register. Sale price includes GST in Australia. In some countries the “sales tax” is added on at the cash register.
- I’m a Startup, so I don’t really need to know about GST, do I?
Yes you do need to know about GST. Right from the very start of your business having an understanding GST is part of being a business owner in Australia.
- When do I need to start charging GST?
As a startup you have a choice to register from the start or delay registering fro GST – unless you are a taxi company, in which case you need to register and charge GST right from the start.
In Australia you must register for GST if any of the following apply:
- you are in business and your annual business income is $75,000 or more a year (or you think it will be) or $150,000 or more for non-profit organisations
- you provide taxi travel as part of your business. Taxi travel means transporting passengers by taxi or limousine for fares
- you want to claim fuel tax credits.
If your annual business income is less than $75,000 (or $150,000 for non-profit organisations), you don’t have to register for GST but you can choose to register.
This is the technical answer.
The real “when?” question is “when in my business?” See Case Study at the end of this report.
- When I’m buying from another business am I paying GST?
Yes, in Australia GST applies to all Goods and Services except businesses that are under the threshold as in Q6 above and those Goods and Services mentioned in Q3 above and can be checked here.
It is common however, in business to business transactions for a business to quote their price as “ex-GST”.
This only applies to transactions that are business to business and it must be explicit in making it clear whether “includes GST” or is “ex-GST”. This can be a trap for many business owners – especially at StartUp stage.
I have seen clients mistakenly accept proposals from another business believing a price to be the final price and not realizing the quote is “ex-GST”.
This can cause cash flow issues for the business.
People who have spent most of their lives as end-customers in Australia where the “sale price” or “sticker price” is the final price may not think to check about GST.
It is always good practice to clarify whether the price you are quoted is including GST or ex-GST.
Case Study for one of the most common GST questions “When do I charge GST in my business?”
Do I charge GST from the beginning? Or do I wait till I reach the threshold?
Let’s take Sarah who is a client of mine who makes candles and she knows her candles sell easily at the $25 price point.
When does she start charging GST?
As a Startup she will be well under the $75 000 threshold so technically she doesn’t need to register for or charge GST.
However, what happens when she does reach $75 000?
If she continues to charge $25 for each candle then $2.27 is GST and her revenue drops to $22.73 per candle. Overall this would result in at least $6 810 less revenue for Sarah’s business
Alternately, Sarah could add the GST to the current sale price $2.50 + $25 = $27.50 The question at this point is, will the market wear the 10% price increase?
If Sarah charges GST from the start she is also able to claim the GST credits on the purchases.
Sarah may be building a business that may never reach the $75 000 threshold. At $25 per candle she would need to sell 3 000 candles a year which is almost 60 candles a week. This might seem like a lot of candles if she is only selling them as individual candles.
What happens if she partners with a company that could sell that many candles per day?
Understanding GST and the implications of whether to register or not register for GST is important for each and every Startup.
For further information about Tax Invoices in Australia visit the ATO https://www.ato.gov.au/business/gst
Thanks for reading – I trust it is helpful in answering the most common GST questions and encourages you to take action. Taking action is a key characteristics of successful business owners.
I’m Ingrid Thompson and as a Trainer, Business Coach and the Founder of Healthy Numbers I help people take action to build their own business – whether from scratch or build an existing business.
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