Even though the Goods and Services Tax (GST) has been in operation for more than 20 years, despite its best efforts to educate the general public, the Australian Taxation Office (ATO) is still receiving business activity statements (BAS) containing many errors. Most of these errors relate to the over-claiming of GST input tax credits (ITCs) but in general, can be attributed to a misinterpretation (or lack of knowledge) of GST legislation.
Below is a list of some of the most common errors business owners make when preparing the BAS.
Incorrectly claiming ITCs on the following:
- Setting up your accounting software with incorrect tax codes: If you do not set up your chart of accounts with the correct tax codes from the start, this will result in sales, purchases and payroll being processed incorrectly. This will also mean that the resulting figures you use to prepare your BAS will be erroneous. We advise that you get your BAS/tax agent to set up your tax codes BEFORE you start using the software.
- Claiming ITCs on the BAS without possessing an actual tax invoice (self-explanatory).
- Using incorrect accounting method: You are either registered for GST under the cash basis or the accrual basis. Using the wrong accounting basis when preparing the BAS will result in incorrect figures being reported. If you don’t know which accounting basis to use, check with your BAS agent, tax agent or accountant (hint: the accounting type can also be found on your BAS).
- Failing to report GST received on some government payments: Some government grants and incentive schemes are inclusive of GST. Be careful to check if this is the case before reporting the income on the BAS.
- Failing to report/charge GST on the sale of business assets: If you are registered for GST and you sell a company vehicle or equipment, you must include GST as part of the sale price. There are some exceptions – go to this ATO web page for more information.
- Sole traders and partnerships not apportioning ITCs on expenses which are used both privately and for business: These entities should be determining the business usage percentage of items like motor vehicle, telephone, internet, rent, power, gas etc. Small businesses with an annual turnover up to 2 million also have the option to work out their business usage at the end of the financial year rather than on each BAS.
- Incorrectly calculating instalment income for PAYG: If you do not understand how to calculate the PAYG income tax instalment amount, you must seek professional advice. There is a special calculation used to arrive at this figure so check with your accounting professional if you are unsure.
- Reporting purchase of capital items on the wrong BAS label: If you purchase business assets costing more than $1000, you must report these purchases at G10 on the BAS, not G11 (check with your accounting professional about this topic as there are some variations to the rule).
- Bank Fees: There are two main types of bank fees – general bank charges like monthly/annual fees and merchant banking fees. General bank fees are input-taxed, so no GST to claim there but merchant bank fees do attract GST. Note, PayPal merchant fees are GST free, however eWay merchant fees are subject to GST – be careful!
- Interest Income: Interest income does not attract GST because it is an input taxed sale.
- A tax invoice that includes a mixture of GST free and GST-inclusive items.
- Motor Vehicle Registration: In Victoria, the vehicle registration is broken up into 3 parts: Registration Fee, TAC Charge and Duty Insurance. Only the TAC Charge includes GST; the other 2 components are GST Free. Similar scenarios exist in other states (check with your local roads and motor vehicle authority for more information).
- A car bought for more than the luxury car limit: Each year the ATO provides the luxury car limit and the maximum amount of GST which can be claimed. You cannot claim the entire amount of GST on the purchase a luxury vehicle. Go to this ATO web page for the current figures for this financial year. The unclaimable GST amount will form part of the cost of the car for tax depreciation purposes (request advice from your accountant about this issue).
- Government charges: GST is not included in land tax, council rates, water rates, ASIC filing fees or insurance stamp duty.
- Purchases that are GST free: Items such as basic foods, overseas exports and some health services are GST free.
- The full cost of an insurance policy: Most insurance policies include a stamp duty component. This is exempt from GST but the rest of the policy includes GST. Check your renewal notices as some also include extra fees and charges which may or may not include GST. It is important to note that GST credits can be claimed on the full amount of an invoice relating to workers compensation insurance.
- Recharges: Recharge purchases for items such as MYKI, CityLink tolls, mobile telephones etc. are GST free. The GST is not accounted for until the recharge purchase is redeemed.
- Gift cards: These are GST free and like recharges, the GST is not accounted for until the cards are used to purchase goods.
- Yellow Pages (Sensis) advertising: If you pay for your advertising via instalments, the full amount of GST is charged up front in the first invoice. If you account for GST on an accrual basis, you can claim the full amount of GST in your next BAS. However, if you account for GST on a cash basis, you must only claim 1/11 of each instalment on the BAS for the period in which you made the payment/s.
- The full amount of some telephone bills: Always check your telephone bill before assuming that GST is attributed to the total amount – some companies can include GST free items in their bills.
- Wages & Superannuation: Neither of these items attract GST. Wages should be reported at W1 and tax withheld at W2 on the BAS. Superannuation is not included on the BAS at all.
- Donations: Donations are GST Free.
- Wrongly claiming GST credits on expenses relating to residential properties.
- Entertainment expenses: Seek the advice of your accountant before attempting to claim ITCs on entertainment costs such as meals, Christmas parties, gifts for clients etc. There are special rules for each business type in relation to entertainment and it is possible that fringe benefits tax may become involved.
- The sale/purchase of vouchers: The supply of a voucher does not attract GST. GST only applies once the voucher is redeemed. This is to prevent double taxation of supplies.
- Hire purchases and chattel mortgages: If you account for GST on a cash basis and you purchase goods under a chattel mortgage arrangement, you may claim the entire ITC at the time the borrowed funds make full payment for the chattel. If, however, you have entered into a hire purchase agreement prior to 1 July 2012, you can only claim GST credits of the principal component of each hire purchase instalment payment in the period you pay for it. That is, you can only claim back credits progressively over the term of the hire purchase agreement. For hire purchases entered into after 1 July 2012, you may claim ITCs up front instead of waiting for each instalment period. It is also important to note that after 1 July 2012, all components of a hire purchase supply including interest and associated fees will be subject to GST. If you account for GST on an accrual basis, you may claim the full amount of GST on the purchase made under either a chattel mortgage or hire purchase agreement.
- Security deposits: GST credits on security deposits can only be claimed when either one of these things occurs: the deposit is forfeited or it applied towards the total cost of a purchase. Otherwise, the deposit is not subject to GST.
- The purchase of secondhand goods from a charitable organisation: These items are GST free.
- The purchase of secondhand goods from other sources: If you purchase a secondhand item from a GST registered business, you may claim full ITCs on your next BAS. However, if you purchase these items from a private seller or non-registered business, there are special rules that apply:
- If the cost of the item is less than $300, then you may claim credits as per normal
- If the cost of the items is more than $300, you can only claim credits when you sell the item (there is a bit more to this, so if you need to know more, consult your accounting professional)
Developing good record-keeping habits will go a long way towards avoiding many of the above mistakes. However, the best way to ensure that your BAS is prepared correctly is to engage the services of a BAS or Tax Agent. These professionals have a much better understanding of the accounting behind the above business expense scenarios than most business owners. It only makes good sense to engage a professional to do it for you!
Remember, e-BAS Accounts is a registered BAS Agent and we can process and lodge your BAS for you. Contact us anytime for a free consultation and appraisal of your bookkeeping needs.