GST still giving you grief? Learn how it works and fix those headaches for good.
GST still not clear? Let’s fix that
Hard as it may be to believe, GST is still causing headaches for business owners, mainly because they don’t seem to “get it” conceptually; they only feel the pain at the hip pocket.
When I was casting around for a topic for this week’s blog, I asked my dearly beloved, also a Chartered Accountant, what was bugging her business clients. She answered right back: GST. After all this time – it was introduced on July 1, 2000 – I would have thought everyone would have had it down, but apparently not. So if you are one of those people who can’t find the GST in your income statement, or just don’t really get how it works or affects your pricing, read on.
Naturally you must seek specific GST advice from your accountant or equivalent that is relevant to your circumstances.
First, we’ll look at the GST you collect (on sales).
Generally speaking, when you sell a product or service you are required to add 10% to your selling price – this is the GST that you collect on behalf of the tax office. The GST that you have collected from your customers is never your income. You owe it to the tax office, so you must show it immediately as a liability.
Here is the financial impact of a cash sale for $330, which includes $30 GST.
The $330 cash you received from your customer, which includes the $30 GST that you collected for the tax office, is now sitting in your bank account. Of course, ensure that you don’t spend the GST collected – it belongs to the tax office.
Now, we’ll look at the GST you pay (on purchases). It’s essentially the reverse situation to the collection system.
Generally speaking, when you buy a product or service, the supplier is required to add 10% to their selling price – this is the GST you pay. The GST that you have paid to your suppliers is not an expense to you, nor is it included in the purchase price of an asset. The tax office gives you a credit for the GST you have paid. Later on, you can deduct that credit from the GST you have collected, so the GST you have paid is shown immediately as an asset. Note that for convenience, most accounting systems will show the GST Paid account as a “negative liability”, so that it is grouped with GST Collected and thereby easier to reconcile.
Here we show the financial impact of a cleaning expense of $110 that you have paid which includes $10 GST.
The $110 cash you paid to your cleaning supplier, which includes $10 GST, has left your bank account. The $100 has been “used up” as a cleaning expense and $10 is still “in use” as a GST credit.
At the end of the GST period (month or quarter), you compare the GST Collected to the GST Paid. If you have collected more than you have paid, a typical situation, then you will remit the difference to the tax office. If you have paid more GST than you have collected, you will receive a refund from the tax office.
Cash vs accrual GST system
The main difference is that under the cash system, you become liable to the tax office for the GST collected when you actually receive the cash from a sale. Under the accrual system, you become liable when you issue the invoice (or receipt) for a sale.
For GST paid, the same principles apply. Under the cash system you become eligible for GST credit when you actually pay the supplier whereas under the accrual system it is when you receive the supplier’s invoice.
Remember the above diagrams when you are looking for transactions in your general ledger or financial statements that include GST. Only the net amount will be shown in the specific income, expense or asset account – the GST component is transferred directly to the GST Collected or GST Paid account.
- The preferred GST system for your business, if indeed you do have a choice, is best discussed with your accountant. Whichever system you use, apply your strategic mind to it – how can you automate and streamline it and thereby minimise the operation costs?
- Why not put the GST Collected “to work” until you have to hand it over to the tax office. Even if you just use a separate savings investment type account, you can earn some extra interest and help offset the costs of being a tax collector. Build it into your cash budgeting system.
- When using the accrual GST system, pay particular attention to large sales invoices issued close to the end of the GST period and particularly where the client may take some time to pay you. A cash crunch may be looming.
- When you are pricing your products or services internally, get in the habit of excluding the GST so you are always dealing with your real profit margins.
Mark Robilliard and business partners Peter Frampton and Carmen Mettler started a journey to find a new way for anyone to ‘get accounting’ and use it in their job and life to create value. Accounting Comes Alive was born and now provides workshops all over the world using their unique and friendly Colour Accounting™ learning system that really does work, for everyone.
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