GST 101

avoca beach takeaway

The most common question we get asked from people who are starting on out in business is; “Should I register for GST?” This is followed by a slew of related questions such as; “When is the best time to register for GST?” ,  “How does it affect what I do?” You might already be in business and registered for GST, but you might not fully understand what it actually is.

Well here’s a quick overview of what GST is, how it works and when you might need to register for it – plus a few hints and tips along the way.

GST really gets complicated in some areas which we’ll cover in a future blog. If you deal with any of the following then you should speak to an expert to make sure you’re treating your GST correctly:

  • Used item dealerships (eg cars/bikes).
  • Digital services provided from an overseas business.
  • Exporting services from Australia.
  • Health services.
  • Importing goods into Australia.
  • Residential rents versus commercial rents.
  • The business of buying, renovating and selling homes.

For this blog post though, we’re just going to start with the very basics of GST!

So what is GST?

Well, it stands for Goods and Services Tax. And it’s very similar to other taxes charged around the world, such as Value Added Taxes, or VATs. GST was introduced by the Howard Government around the year 2000. And what it does is charge a 10 per cent tax to the end user of a good or a service. That’s the thing that a lot of people actually don’t realise. It increases the price by 10 per cent of everyday products that we in the general public buy and use all the time.

Before GST: you had something that you were selling for $10.

After GST: you’d have to charge $11 because you were forced to add a 10% tax on top of your normal price.

The best way to explain how this might work is to use an example. Let’s imagine a plumber. This plumber buys materials. Those materials are made by another company. Let’s say piping. Without knowing it the plumber is adding value to that piping by combining it in such a way that a customer can use it – in this case so that their sink doesn’t leak. This gets to the heart of what a value added tax or a goods and services tax targets. If you’re buying things, adding resources and labour and increasing value by doing so and on-selling it to someone else then you have to charge GST.

The pipe company usually would’ve sold their piping to the plumber for $100.00 before GST was regulated.

Under the current rules of GST they have to charge an extra $10.00 (if the GST rate is 10%). Meaning they’ll sell their piping to the plumber for $110.

The poor plumber has to pay that extra $10. But if the plumber is registered for GST, is operating a business and is going to use that piping to add value and on-sell to someone else, then they won’t suffer the payment of that tax. They’ll actually be able to get the $10.00 back.

This is where some people do get confused. Not only do you have to pay GST on all goods and services that you sell if you’re registered for GST, if they’re within the scope of the GST laws, but you also get to claim the GST on all goods and services that you purchase. It’s a two-sided coin!

So if you have business to business transactions and you’re both registered for GST, neither of those businesses really pay that tax. The person who pays the tax is the end user. Private residents and everyday people like you and I. In the example of the plumber it would be a residential customer.

GST essentially works in a cycle, passing from business to business, until it gets to an end residential user who essentially is the one paying the tax. Businesses are the ATO’s middle man when it comes to GST, collecting the tax on their behalf and paying it to them regularly. This brings us to…

Business Activity Statements

BAS’s are real drag for many business owners. A lot of people, especially those new to business, forget to budget for their BAS. It’s very easy to not realise that money in your bank account, as a business owner collecting GST, doesn’t actually belong to you. In essence you’re holding it for the ATO temporarily until your next BAS.

This is a big challenge for a growing business that’s potentially struggling with cash flow.

If you’re registered for GST then at the end of every month, quarter or year (depending on what your lodgement cycle is), you lodge a BAS. In that BAS you include all your GST related income and all of your GST related purchases. Then you total what that is and it’s either a refund or a payable and you receive or pay that to the ATO.

When Should You Register for GST?

Some new businesses can hold off registering until their sales grow. Others must register straight away as they are in a designated industry. For some businesses registering for GST is a big positive, for others it should be something that you delay as long as possible.

The ATO’s guidance is that when you expect to reach turnover of $75k during a financial year then you should register for GST. Therefore it is a little bit grey as to when you must register. But certainly you should register as soon as you reasonably think your sales will be over $75k in the financial year.

Here’s an example of a completely acceptable manner in which to register for GST, using our plumber scenario. Let’s imagine the plumber has just started his business. He’s been trading for 6 months. His sales have reached $60k, which includes materials bought and on-sold to customers. This means it’s December and the plumber has got 6 months left in the financial year. At that point you would reasonably expect ‘I’m going to exceed the $75,000 GST turnover limit’. Your next thought should be ‘I need to think about registering for GST pretty soon.’

It’s important to be aware of this as it gives the plumber some time to start telling suppliers and customers that they’re going to be registered for GST.

The Pros and Cons of Registering for GST

Obviously there are some pros and cons of registering for GST and it depends on your unique scenario.

Business to Business: If you’re working business to business, it’s not a huge change because those businesses that you’re serving could actually be able to claim the GST credits back if they’re registered for GST. This means they’re not going to suffer a price increase – that is once they lodge their BAS and get their GST paid back to them.

Residential Customers: If you’re working for residential consumers, it’s a different story. You’re going to have to put your prices up and people might not be happy about that. Sometimes a 10 per cent hike is pretty significant for a small business. And you don’t want to leave the price the same and simply eat into your profits. This is where if you’re not expecting to get $75k of income in a financial year then you really have to weigh up whether or not it’s worth registering.

Selling Non-GST Items: If you’re someone who is selling non-GST items (eg health Services, exports of goods/services, some foods, etc) you could be getting 10 per cent back on your purchases which have GST in their price. In this instance it could be worth registering for GST even where your sales are less than $75k. This is because the goods or services being sold aren’t GST goods or services and you won’t owe anything to the ATO from the services you’re selling.

Administration Costs: There is an administration cost surrounding being registered for GST. Your standard of bookkeeping must be higher and account for which items you buy and sell have GST included in them. Sometimes it’s not easy to know if an item has GST or not. It will increase your burden of time and admin. The good news is that your accounting software – Xero, QuickBooks, MYOB – will help you keep track of your GST. At the end of the month or quarter, you can run reports that show exactly what you need to lodge on your BAS.

Summary:

Q: You’ve started a business, should you register for GST?

A: If you expect to be making sales of over $75k per annum, or if it could be in your best interest in terms of collecting GST refunds, then yes. Not only are you required but it could be a good idea.

Q: I’m not sure if I’m going to hit $75k this year, should I still register?

A: It depends on your business plans and expectations. If you think your business will rapidly grow and exceed the $75k threshold then it could be smart to register from day one, get used to the system of GST and avoid having to change pricing and systems later down the track.

Q: Can my accountant help me with GST and BAS’s?

A: Yes absolutely they can. Your accountant is there to help and support you. We lodge many of our clients BAS’s and do a lot of client’s bookkeeping. We find that this helps us to keep in touch with them regularly and give them more timely and beneficial advice. We include these at a very attractive price within fixed fee monthly packages.

Is Your Side Hustle A Business?

woy woy takeaway

One of the most common questions we are asked is; “I’ve started doing [insert your brilliant side hustle] and I’ve started to make a little money. What do I do about that?”

Why have a side hustle?

Some people just want an extra bit of cash. The main question is; are you doing this simply because you enjoy the act of doing it? In which case, you’re probably not aiming to make a profit and it’s really just more of a hobby.

Or are you aiming to make cash? In which case your side hustle is probably a business and you need to put a strategy in place.

So you’re making some extra cash.. The next question is; do I need to declare that? Unfortunately it’s not a straightforward answer, it comes down to; how often are you doing your side hustle? How much are you earning?

With those factors in mind; if you said it’s probably less than $5000 a year, I don’t have a website, and it’s something I do on the weekends with friends and family – in this case it’s probably a hobby.

Let’s use an example..

Let’s say you make a wooden table and sell it for $100 on Gumtree. This is a one-off thing. That’s a hobby.

When your side hustle is not a hobby..

You subscribe to Handyman Monthly (great magazine), and you learn how to make a beautiful wooden table. It turns out so good, you decide to make 20 more of them. You then decide to launch a website showcasing your tables and you apply for accounts with suppliers for the materials.

You find antique stores to sell to, various other channels, you create a bank account specifically for this venture and you keep track of your expenses.

You’ve even worked out that a table takes around 20 hours to complete and $500 in materials. So you figure you need to sell your table for around $2500 to make a profit.

You’re running a business.

Now do you need to declare this on your tax return? Again it comes down to how much money you make. If you sell one table for $100 its probably not going to be an issue. But if you make $20,000 – you need to declare that income.

If you’ve made less than $20K in sales and run at a loss, the ATO is not worried whether you include it in your tax return or not.

However, if you made less than $20K in sales and made a profit, thats a business and you should include it in your other income.

The ATO considers some or all of the following factors as a business;

  • You registered a business name
  • You have a dedicated phone number for the venture
  • You have an ABN
  • You are licensed or qualified in the field
  • You create a repeatable product on a regular basis

If you fulfil the most of the above criteria, you are most likely running a business and not a hobby.

So it’s a business.. what do I do now?

Based on a number of things;

  • How much income am I expected to bring in?
  • Are there other people in the business?
  • Am I going to employ people?
  • Whats my long term plan and vision?

Answering these questions will determine whether you are simply going to register as a sole trader or going to form a company. Also whether you are going to need an ABN.

You also need to consider;

  • Do I need insurance?
  • Will I have cash flow or do I need finance to start the business?
  • Do I need to buy some equipment?

In most cases if you are working full time and start a side hustle, you just register for an ABN. You’re not expecting to earn hundreds of thousands of dollars.

The beauty of the side hustle is you can do something you enjoy and that gives you a creative outlet. You can make a bit of money, and potentially it could grow into a business. It could turn into something amazing and you could quit your job (or simply work less).

Ultimately ask yourself; is the side hustle something you want to keep low level and purely as something you enjoy, or do you want to grow it enough to change your lifestyle?

You should really want to be at either end of the spectrum and not hang in the middle.

If you’ve started a side hustle, and based on what you’ve read above, you feel you have some tax obligations, or need some advice in creating the correct business structure, get in touch with us today! We even have an obligation free Discovery Session where we can learn all about you, your business and your goals.

This blog post is a partial transcript from the Two Drunk Accountants Podcast. You can listen to the entire episode here.