GST For Small Businesses: Here’s What You Need To Know

By Team Zeller

16.08.2021 Business tips Finances

GST For Small Businesses: Here’s What You Need To Know

Wondering if you should charge GST? Here’s how to know.

Most small business owners will be familiar with GST, or the goods and services tax. This is because when you first launch your business, you have to determine whether or not to register for it. Once registered, Australian businesses then need to account for the extra tax owed to the Australian Tax Office (ATO) every quarter.

If you’re unsure whether or not you should register your small business for GST, the following will help you determine whether you meet the requirements.

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What is GST?

Put simply, GST is a goods and services tax of 10% applied to most goods and services sold or utilised in Australia. Whether it’s a coffee or a haircut, if it was provided or sold in Australia, a 10% tax will have been factored into the price.

GST has been around since 1 July 2000 as part of the Howard government tax reform. The aim of this new tax was to overhaul the existing sales tax system across all states and territories, replacing it with a broad tax of 10%.

This means that if a business then registered for the tax, they’d be required to collect extra money from sales and pay it — minus the GST the business itself has paid for goods and services — to the ATO.

Applied to a real-world example, this means if you price a cake at $100 and are registered for GST, you’d charge your customer $110. This additional $10 would then be paid to the ATO. However, when you buy icing mixture, decorations and cake tins, you’ll also be charged GST for all three goods, which you can then claim back as credit — but more on that later.

Since GST arose more than two decades ago, it has well and truly become a fixture in the Australian small business landscape (whether it’s considered effective or not). Regardless of public sentiment, business owners must remain informed of their GST obligations.

How does GST work for small business?

One of the biggest determinants for whether or not you should register for GST is your business’s turnover (gross income). Once it reaches $75,000 or more a year, you must register for GST. In the case of not-for-profit organisations, that income threshold is $150,000. 

Now, while that may seem simple enough, it’s unfortunately not as straightforward as that. Here is where that rule does not apply.

GST for taxi services and ride-sharing businesses

Businesses that provide taxi travel and ride-sharing drivers (such as Uber drivers) must register for the tax regardless of whether their income surpasses the threshold or not.

New businesses with substantial forecasted turnover

For new businesses that expect to reach or surpass the $75,000 threshold in the first year, the ATO recommends registering for the GST. If your business exceeds that income threshold without being registered for GST, your must register for it within 21 days.

Part-time businesses and hobbies

If you are engaging in a part-time activity, you may wonder if it is deemed a business or a hobby. In short, if you are making a profit from that activity (i.e. selling the goods or services for more than cost price), it’s a business. For further clarification, you can also refer to these guidelines.

Businesses below the threshold 

For businesses that expect to remain below the income threshold, registration is optional. However, a business that decides to register and continues to remain below the threshold amount will still be required to report and pay GST.

Advantages of GST

Even if you don’t have fall under the criteria for GST registration, there are a few benefits associated with doing so regardless.

Impression of legitimacy

One reason businesses choose to register for GST from day one is to create a strong first impression for their clients and customers. By charging GST, it implies that your turnover is more than $75,000.

Input tax credits

Another advantage is that you can claim back the goods and services you have paid as input tax credits. So, if your expenses are substantial, it can make sense to register for that tax so that you can claim back the GST you have paid.

Items exempt from GST

While GST is a broad tax, some items are in fact exempt, which means as a business selling GST-free items like basic food, exports or some forms of education, then you don’t have to pay the tax to the ATO. That being said, you can still claim GST credits if goods or services purchased to create what you sell or deliver had GST applied. 

For example, if you sell tomato sauce, it is deemed by the ATO as an essential food, which means it is GST-free. However, to make that tomato sauce you have to buy the plastic container, which you pay GST for. This means you can claim GST credits for the GST paid on the packaging.

Another main GST exemption is an input taxed sale. This includes things like residential properties that are resold or leased multiple times.

Claiming back GST for business purchases

While you are required to pay GST, you can claim it back if the goods or services purchased are business expenses. Say your quarterly sales are $110,000 (including GST) and your business expenses are $55,000 (including GST), you will need to pay $5,000 in GST for that quarter.

GST spent is essentially input tax credits, as it’s GST you paid on inputs into your business. Confused? Here are some real-life examples.

Meet Hettie

Hettie runs her own retail business, where she sells face masks. She purchases fabric for $22 (including GST), then turns the fabric into three face masks — which she sell for $55 (including GST).

Because Hettie has already paid $2 in GST, when purchasing the fabric, she only owes the ATO $3.

gst-for-small-business

Meet Max
Max runs a tutoring business. He's just bought a new laptop, to help him teach. The laptop cost Max $1,100, including GST.

Max is registered for GST, because his business's turnover is more than $75,000. This means he is able to claim GST credits for the GST included in the cost price of his laptop ($100). If, at the end of the year, his GST credits are higher than the amount of GST he has to pay the ATO, he will be refunded the difference.

Registering for GST

Ultimately, when it comes to GST registration, it all depends on what category your business fits into, your annual turnover, and the products or services you offer. If you’re at all uncertain, make sure you talk to a qualified accountant to ensure you’re doing the best thing for your business.

If you do qualify, or choose to register for GST regardless, you can do so online, by phone or through your registered tax or BAS agent when you first register your business. The best place to start, however, is the ATO website. When it comes time to register, you’ll need your ABN on hand as it will serve as your GST registration code. Once registered, you’ll never have to do it again, even if you create multiple businesses in the future.

Now that you’re up to date on GST and how you can make it work for you, it’s time to make the rest of your business work harder for a better bottom line. Sign up to our Business Blog to cash in on valuable insights sent straight to your inbox.

Please note this article is for educational purposes only and does not constitute advice.

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