One of the questions we are often asked by our micro-business clients is, Should I register for GST? For some businesses there is no option, the answer to this question for them is ‘yes’. For others though, it’s a decision that needs to be made after carefully looking at a number of different points. So let’s have a little look at what your options are.
Do I need to register for GST?
Firstly, let’s see if it’s compulsory for your business to register. Are you a taxi driver or do you own a taxi, car hire business or limousine hire business? If ‘yes’ then you do need to register for GST. Does your business turnover $75,000 annually? This is total income, not profit. This does not take deductions of any sort into consideration. If you answered ‘yes’ to this then yes – you do need to register for GST. If you answered ‘no’, however, to both questions, then you have a choice to make. You may choose to register for GST or you may choose not to register. Both have benefits and both have disadvantages.
What are the requirements for my business if I do opt to register for GST?
There are a number of requirements for those businesses that are registered for GST including:
- Your business becomes a collection agent for the ATO
- Greater potential for profit
- Quarterly or monthly BAS lodgements
- Minimum registration period
- Invoicing ramifications
So let’s explore these in a little more detail:
Your business becomes a collection agent for the ATO
If you are registered for GST then your business is required to charge GST on all relevant items. GST is one-eleventh of the total sale price and is payable by the seller to the Australian Taxation Office (ATO). The ATO recommends having a separate account put aside to put the GST component into on a regular basis so that when it is time to forward this component to them it is readily available, reducing the risk of penalty for late payment. It is important to note that the GST component is not a part of the income of the business for taxation purposes with regard to Company Income Tax at the end of the financial year.
Greater potential for profit
GST is not an expense that the business incurs, but rather a component paid through the business to the ATO by the customer. As such, businesses factor in a 10% increase on what the item would sell for if GST were not being collected. For the business not registered for GST this means that there is a potential to sell their items at a cheaper price than their GST registered competition, or to make a larger profit on the same items than their competitors would if registered for GST. For those businesses who are unlikely to reach the threshold for registration, this is a compelling argument for not registering as it could significantly affect profitability.
If your business is registered for GST then a quarterly Business Activity Statement (BAS) must be prepared and lodged for your business. This is a report that outlines the income and expenditure of your business in a three-month period and highlights the amount of GST you have charged your clients that must be forwarded on to the ATO and the amount of GST that you have paid on purchases that you are entitled to claim back from the ATO. If you have changed (and collected) more GST than you have paid then you must forward the rest of the GST collected to the ATO. If you have paid more than you have collected then you are entitled to a refund. Many businesses find this task to be tedious and sometimes confusing as there are some items that attract GST and some that are GST free, and that is where your bookkeeper can be a vital asset to your business as that is what they specialise in. Your BAS lodgement and payment are due the month after the financial quarter ends, so in January, April, July and October. Having a registered BAS agent do your BAS automatically gets you an additional month to lodge and pay your BAS, making it due in February, May, August and November. Unfortunately, if you lodge and pay on a monthly basis then no time extension can be gained.
Minimum registration period
If you register for GST then you must remain registered for a minimum of 12 months, unless the business is sold or closed during this period. If the business is sold or closed then you have 21 days to cancel your GST registration.
There are certain details that need to be included on your invoices if you are registered for GST, including the amount of GST that is included in the total sales amount and a notation as to what items are taxable or non-taxable. A tax invoice must also contain the seller’s name and ABN, the date the sale was made and a brief description of the items sold. In addition to these requirements, if the total sale is greater than $1000 the buyer’s name and/or ABN is also required to be on the invoice. More information is available from the ATO here: http://www.ato.gov.au/Business/Bus/GST-for-small-business/?page=5
So if I don’t need to register for GST, why would I want to?
There are a number of reasons that people register voluntarily for GST, such as:
- Peace of mind that penalties will not be accidentally incurred
- Being able to claim GST back on expenses
- Good bookkeeping habits are implemented
Again, let’s explore these a little further.
Peace of mind that penalties will not be accidentally incurred
Many business owners start out with a dream to make a large amount of money, but an expectation that this will take a long time to achieve. Some people are either very fortunate or have very good business acumen and find that their business really takes off quickly. For these clients, registering for GST sooner rather than later would be recommended so that there is peace of mind that they will not end up earning over the threshold and ending up with penalties. To avoid accidentally going over the threshold without registering, the ATO recommends checking your turnover on a monthly basis and registering as soon as you think you may go over. If you turn over more than $75,000 you have 21 days from reaching the threshold to register, meaning that if you keep a close eye on your numbers you should be able to get in just before you reach your threshold or in the worst-case scenario, within this 21-day window.
If you do not register within this window, you face penalties from the ATO and may be ordered to pay the GST on all income over the threshold, meaning that your profit margin will be reduced and the amount owed to the ATO may actually be higher than the profit made on those sales. If you do register within the appropriate window, you may still find yourself in a predicament with regards to sales as you would then need to either increase prices by 10% to cover the GST that you are now collecting or if you keep prices the same your profit margin will decrease.
Being able to claim GST back on expenses
If you do not register for GST you are unable to claim GST on purchases. Your business expenses will still be tax-deductible in your annual company tax return, but the GST component will not be claimable. If you do register for GST and have a business that sells GST free products, you are still able to claim the GST on your purchases (for example office supplies, motor vehicle expenses, shop fittings etc) and as you have no GST to collect and forward to the ATO you would end up with refunds for the GST component on these purchases.
For businesses who are just starting out and have low income and high expenses, registering for GST may mean that while there is extra administration involved, there are monetary benefits as many of the start-up costs will have GST attached and as such, more will be able to be claimed back in the initial start-up phase. Many times, BAS lodgement early on can result in refunds rather than a bill because the business has paid more in GST than they have collected in the quarter.
Good bookkeeping habits are implemented
Many businesses find that it is easier to keep track of the health of the business when they are registered for GST as they are required to do quarterly reports and lodge them or face penalties from the ATO. Although many business owners would like to think that they would regularly look at their financials if there was no legal requirement to do so, our experience is that many business owners get too busy with the day-to-day running of the business to take a good look at the state of their financials until either they are forced to look at them due to a crisis or until it becomes time to prepare their annual tax returns.
Regular BAS preparation and lodgement also often mean that paperwork relating to the financial affairs of the business is better organised and in a better state in case of an audit. At Darcy Bookkeeping & Business Services we notice frequently that many tax invoices currently given out by many larger businesses fade quickly and are of little or no use after 6 months as they become impossible to read, meaning that they would be of little to no use to your accountant come tax time, reducing your ability to claim many purchases back against company income tax returns. By having a requirement to lodge a BAS quarterly, these receipts are inputted into your bookkeeping software and the originals filed away, but the majority of the work for your accountant pertaining to your tax return is complete and in one place, reducing the amount of time taken and thus the expense involved in the preparation and lodgement of your annual tax return.
And the verdict is…
As you can see, for some businesses the decision to register or not register for GST will be fairly straightforward, but for others, there may be some deliberation required. As with all decisions relating to the financial well being of your business, we at Darcy Bookkeeping & Business Services recommend speaking with your bookkeeper or accountant for more detailed advice on the requirements of your business.