GST Mistakes By Small Business And How To Get It Right!
Are you a small business? Could you be making these simple mistakes on your Business Activity Statements?
1 July 2017 marks 17 years of GST in Australia. However, after nearly two decades of GST treatment on Business Activity Statements, many small businesses are still making some rudimentary mistakes.
Below are some of the most common GST mistakes made by small business and the correct treatment.
Incorrectly claiming GST credits on:
Bank fees (e.g. monthly and annual fees, cheque book fees and loan establishment fees). Bank fees are treated as ‘Input Taxed’ meaning the Bank does not charge GST to the customer. Note that GST is charged on credit card merchants fees and therefore a GST credit can be claimed on these. Government charges like land tax, council rates, water rates, ASIC filing fees and motor vehicle registration where no GST has been charged. Business insurance polices; there is a stamp duty component in the premium which is not subject to GST. The actual amount of GST payable on an insurance premium is usually stated on the renewal form. GST-free purchases such as basic food items, exports and some health services. Entertainment expenses where the business has elected for fringe benefits tax purposes to use the 50/50 split method. In this case only 50% of the input tax credits can be claimed. Luxury car limit ($57,581 GST inclusive for the 2016/17 year). The maximum GST credit that can be claimed is limited to $5,235.
Not using the correct accounting method:
If the business is using the cash accounting method for GST and the turnover of the business is expected to be $2 million or more, the business needs to change to the accruals or invoice basis.
Not paying GST on:
The sale of cars and equipment, including the trade of motor vehicles. The sale of a business asset is subject to GST just like any ordinary business transaction, unless the going concern exemption applies. The annual fringe benefits tax employee contributions and the GST at items G1 and 1A on the relevant BAS. Many employers avoid the need to lodge an annual fringe benefits tax return by having employees make an after tax contribution to reduce the taxable value of fringe benefits (mainly on cars) to NIL.
Sole traders and partnerships:
Many are not apportioning input tax credits and making adjustments to expenditure that is partly private and partly business use (e.g. motor vehicle expenses). To calculate their GST liability small businesses are required to undertake this apportionment each time they prepare their BAS. However, in practice the actual private use may not be accurately determined until the business is required to complete and lodge its annual income tax return. Sole traders and partnerships with an annual turnover of up to $2 million that pay GST either quarterly or monthly can apply private use apportionment for GST purposes on an annual basis instead of each time the BAS is lodged.
The lesson: take the time to consult your accountant or tax agent to avoid costly mistakes. Our tax specialists at KMT Partners can assist you and your business with BAS preparation and any other taxation requirements. Book an appointment by calling our office or sending an email to our office: firstname.lastname@example.org – we’d love to hear from you!