Should You Register Your Small Business for GST? The Answer May Surprise You!
The Goods and Services Tax, or GST, is a general tax of 10% on most goods and services sold in Australia. To reduce the burden of tax compliance on smaller businesses, the ATO introduced a threshold that made it mandatory to register for GST only once your revenue was over $75,000 a year. Due to this, for small businesses earning under the threshold, one of the critical decisions you must make is whether you should register your business for GST even if you don't have to. This decision depends on several factors, such as your business model, who supplies your goods, and the types of goods and services you provide. In this blog, we will explore the pros and cons of registering for GST as a small business and provide practical guidance to help you make an informed decision.
What is GST?
GST was introduced in Australia on 1 July 2000 to simplify the country's tax system. The GST replaced several different taxes, including the Wholesale Sales Tax, the Financial Institutions Duty, and various state taxes. GST is a value-added tax levied on most goods and services in Australia. It is a tax on the final consumption of goods and services, meaning that the end consumer ultimately pays it. GST is currently set at a rate of 10%.
The introduction of GST had several benefits. It increased revenue for the government. By applying a general tax to a broader range of goods and services, the government could generate more revenue to fund essential services such as healthcare, education, and infrastructure. The tax generated by the GST is also more stable and predictable than previous incarnations, making it easier for the government to plan its budgets and spending.
How Does GST Work?
The GST system is designed to be a self-policing tax. Businesses that earn over $75,000 a year are expected to register for GST. Businesses registered for GST must then collect GST on their sales and claim back the GST they have paid on their purchases. This means the tax burden falls on the end consumer rather than the business.
Not all goods and services are subject to GST. Some supplies are exempt from GST, while others are subject to a different rate of GST. It's essential to understand which supplies are subject to GST and at what rate, as this can affect your GST obligations. In the next section, we will discuss who needs to register for GST.
Who Needs to Register for GST?
In Australia, businesses with an annual turnover of $75,000 or more must register for GST. For non-profit organisations, the threshold is $150,000. You must register for GST within 21 days of becoming aware that your GST turnover will exceed the threshold of $75,000 (for-profit) or $150,000 (not-for-profit).
Once your business is registered for GST, you must charge GST on your taxable supplies and claim back any GST you have paid on your purchases. You must also lodge Business Activity Statements (BAS) to report your GST activity to the Australian Taxation Office (ATO).
According to recent statistics from the Australian Bureau of Statistics (ABS), over 1.7 million small businesses are registered for GST in Australia. This represents over 60% of all businesses in Australia, highlighting the importance of GST compliance for small businesses.
Voluntary GST Registration
While businesses with an annual turnover of less than $75,000 are not required to register for GST, you can choose to do so voluntarily. Voluntary registration can provide several benefits, including the ability to claim back GST on purchases and increased credibility with customers and suppliers. Let's look at an example of where it could make sense to register your business for GST.
Let's say you start a small business selling handmade acoustic guitars. It's your first year, so your starting expenses might be higher than the amount of money you make. Your first-year sales are $30,000. Because your turnover is under the $75,000 threshold, so you are not required to register for GST. However, you voluntarily register for GST to claim GST credits on your business expenses, such as the cost of timber, strings, rent, and packaging materials.
Assuming your business expenses for the year were $40,000, and the GST rate is 10%, here's how the calculation would look like:
Your GST input tax credit:
This calculates how much GST was included in the cost of materials you purchased: Total GST paid on expenses =
$40,000 x 10% = $4,000
Your potential GST liability:
This calculates how much GST you received from your sales of $30,000 in year one: GST on sales =
$30,000 x 10% = $3,000
Your net GST position:
Net GST = GST on sales – GST input tax credit =
$3,000 - $4,000 = ($1,000)
In this example, your net GST position would be $1,000. By voluntarily registering for GST, you would receive a refund from the ATO for $1,000. So, if your business has enough GST credits to offset your potential GST liability and the administrative costs of GST registration, it makes sense for you to register for GST voluntarily.
Keep in mind that registering for GST also comes with additional compliance obligations, such as submitting regular BAS to the ATO, so it's crucial to weigh the costs and benefits carefully.
How to Register for GST
Registering for GST is a straightforward process you can complete online through the ATO's website. Here are the steps to register for GST:
- Determine if your business needs to register for GST based on the annual turnover threshold.
- Register for an Australian Business Number (ABN) if you still need to.
- Ensure your business is set up to handle GST, including having accounting software like Thriday.
- Register for GST through the ATO's Business Portal.
- Wait for confirmation from the ATO that your business is registered for GST.
When registering for GST, you must provide some basic information about your business, including your name and ABN. You will also need to select the GST accounting method that you will use, either cash or accruals.
Once registered for GST, you must start charging GST on your taxable supplies and reporting your GST activity to the ATO through regular BAS statements. It's essential to keep accurate records of all GST transactions to ensure that your BAS statements are correct. Failing to register for GST when required can have serious consequences, including penalties and interest charges. In the next section, we will discuss how to calculate GST.
"Once registered for GST, you must start charging GST on your taxable supplies and reporting your GST activity to the ATO through regular BAS statements."
How to Calculate GST
Calculating GST can be confusing, but it's essential to get it right to ensure that you're reporting your GST activity correctly to the ATO. Here are the steps to calculate GST:
- Determine the price that you are charging your customer, which includes GST.
- Divide the GST-inclusive price by 11 to determine the amount of GST included in the price.
- Subtract the amount of GST from the GST-inclusive price to determine the GST-exclusive price.
Here's an example to illustrate how to calculate GST:
Let's say you're a small business owner selling a product for $110, including GST. To calculate the GST included in the price: $110 ÷ 11 = $10. The GST included in the price is $10.
To determine the GST-exclusive price:
To calculate the price of the good without GST, take the GST inclusive price of $110 and deduct the GST amount of $10; this equates to: $110 - $10 = $100. The GST-exclusive price is $100.
It's important to note that if you're registered for GST on an accruals basis, you must report the GST on your sales when you issue the tax invoice, regardless of when the client pays. If you're registered for GST on a cash basis, you only need to report the GST when payment is received. The following section will discuss BAS statements and how they relate to GST reporting.
BAS Statements and GST Reporting
A BAS is used to report your business's GST activity to the ATO. BAS statements are usually required to be lodged quarterly, but some businesses with a higher turnover may be required to lodge them more frequently. BAS statements include information on your business's income, expenses, and GST activity for the relevant period.
When reporting GST on your BAS statements, you must include the GST amounts charged for your sales (output tax) and the GST amounts paid on your purchases (input tax). The difference between your output and input taxes is your net GST liability (you owe the ATO) or refund (the ATO reimburses you).
Ensuring that your BAS statements are completed accurately and lodged on time is vital to avoid penalties and interest charges. Automated accounting software like Thriday can make BAS preparation and lodgment easier and less time-consuming. Thriday automates the process of calculating GST on sales and purchases and generating accurate BAS reports. With Thriday, small businesses can track their GST in real time and avoid the stress of manual BAS preparation, allowing them to focus on growing their business.
According to the ATO, around 70% of BAS statements are lodged electronically, while the remaining 30% are submitted manually. Electronic lodgment is the preferred method and offers several benefits, including faster processing times and reduced errors.
Benefits and Challenges of GST Registration for Small Businesses
While registering for GST is not mandatory for all small businesses, there are several benefits and challenges to consider when deciding whether to register. Here are some of the key benefits and challenges of GST registration for small businesses:
- Improved cash flow: Registered businesses can claim back the GST paid on their purchases, improving their cash flow. This can be especially important in the first few years of running your business.
- Increased credibility: GST registration can improve a small business's credibility with customers and suppliers. If you are not registered for GST, you might be perceived as a smaller business, earning less than $75,000.
- Access to input tax credits: Registered businesses can claim back the GST paid on their purchases, which can reduce their overall tax liability.
- Compliance with tax laws: Registering for GST ensures that your business complies with Australian tax laws.
- Increased administrative burden: Registering for GST requires businesses to maintain accurate records and lodge BAS statements regularly, which can be time-consuming and complex.
- Increased costs: Some businesses may need to purchase new accounting software or hire a bookkeeper to handle their GST obligations, which can be costly.
- Cash flow impact: Businesses that are required to charge GST on their sales may experience a cash flow impact as customers may delay payment due to the higher price.
- Reduced competitiveness: Businesses not required to register for GST may have a price advantage over registered businesses.
Use Thriday to automate your GST and BAS
As an AI-based accounting and bookkeeping software, Thriday automates GST tracking by integrating with a business's financial accounts and transactions. Thriday uses machine learning algorithms to categorise transactions and calculate GST amounts automatically. This saves time and reduces errors in GST calculations and reporting. Thriday also generates BAS statements automatically and enables electronic lodgement directly with the ATO. Overall, Thriday simplifies GST tracking for small businesses by streamlining the process and reducing the burden of compliance. You can join Thriday for free now to get started.
What is GST?
GST stands for Goods and Services Tax, a consumption tax levied on the supply of most goods and services in Australia.
Who needs to register for GST?
Businesses with an annual turnover of $75,000 must register for GST. Certain businesses with a turnover of less than $75,000 may also voluntarily register for GST.
How is GST calculated?
GST is calculated as 10% of the price of the goods or services sold. For example, if you sell a product for $100, you would need to add $10 in GST to the total amount charged to the customer.
What are the benefits of registering for GST?
Registering for GST allows you to claim credits for any GST paid on business purchases. It also makes your business look more professional, indicating that you are registered and compliant.
What are some common GST mistakes to avoid?
Common GST mistakes include failing to register for GST when required, charging GST on exempt items, claiming GST credits for personal expenses, and failing to keep accurate records.
Registering for GST is an important decision for small business owners in Australia. While it may not be mandatory for all businesses, GST registration can provide several benefits, such as improved cash flow, increased credibility, and access to input tax credits. In addition, new automated accounting software like Thriday has made GST tracking and BAS reporting easier and more efficient than ever before. At the end of the day, ensuring compliance with Australian tax laws is crucial for the success of any small business. By understanding the basics of GST registration and reporting, small business owners can stay on top of their tax obligations and focus on growing their business.