By Hilary O’Dwyer, CEO, Titian Consulting
In my latest 2 Minute Takeaway, I spoke about GST. Which seems pretty basic but it’s surprising how little some people understand about it and how it works. What I speak to assumes that you are already registered for GST.
GST is a sales tax and that means that the ATO add this onto the price of most goods and services. They have pushed the admin onto businesses, meaning they make businesses charge it to their customers; collect it and then pay it over to the ATO. What you owe the ATO is done on a self declaration basis.
GST operates in two directions – what you have to charge your customers and what your suppliers charge you. As this is a tax, it is NOT a P&L item. This means that the full amount of your invoice is not what you have earned. The GST is like the icing on the cupcake. The cupcake is yours but the icing belongs to the ATO!
Let’s break it down and also consider how it is accounted for in your books:
Easy example: you sell a widget for $80. With GST, this will cost your customer $88. This will be $80 revenue for you in your P&L (your cupcake) and then $8 in your balance sheet (the icing), that you owe the ATO. You receive the full cash amount of $88 but you only own $80 of it.
Next up, you pay for your Xero subscription, say $60 for their fee. This is $66 cash that you pay them – their fee plus 10%. The charge in your P&L is $60 and $6 GST goes to your balance sheet to your GST account. The cost to you is just the $60. The $6 is Xero’s icing. You have to pay it but it’s not your expense.
The difference between both of these amounts is what you owe the ATO in your returns. In this example, it’s $2. That’s $8 sales tax less $6 input tax. From a cash perspective, you need to make sure that you have put that $2 to one side so you’re ready to pay your BAS when it’s due. If your accounting system is up to date, you will be able to see quickly and easily the total GST that you owe right now. And it’s always better to be forewarned about this!
