7 common mistakes business owners make with GST
Goods and services tax (GST) can be complicated. It’s an area where I see business owners tripping themselves up as they don’t realise there are a lot of moving pieces that need to be managed.
I’ve put together seven common mistakes that I see business owners making when they’re registering for GST, and in the first few months after they’ve registered.
1. Registering too late
Businesses are required to register for GST when their annual income reaches $75,000 (or $6,250 per month). They have 21 days to lodge their registration once their monthly turnover reaches that threshold.
If you register later than you should have then it’s possible that the ATO will come and take the GST you were meant to submit. While the likelihood of them doing this is low, it's not worth taking the risk so make sure that you’re checking each month if you’ve reached the GST registration threshold, or are likely to reach it.
2. Choosing the wrong accounting method
There are two methods of accounting for GST; (1) cash, or (2) non-cash (accrual).
If your business has a turnover of less than $10 million, or uses the cash accounting for income tax, you can use either method.
The cash accounting method means you account for GST on the activities where you receive or make payment.
The advantages of this method are that it is better suited to small businesses that handle cash transactions and it’s easier to manage your cash flow.
The non-cash accounting method means you account for GST on the activities where (1) you receive payment OR have issued a tax invoice before receiving a payment, and (2) make payment on a purchase OR receive an invoice from your supplier before making a payment.
With this method your cashflow becomes critical as you may need to submit GST before you have been paid. This method is better suited to businesses who are paid within a short period of issuing an invoice.
If you’re unsure on which method is right for your business book in a time to talk to me before you register.
3. Not updating the format of your invoices
Once your business is registered for GST there are certain requirements you need to comply with when issuing invoices.
In general, for sales that are under $1,000 your invoices need to include the following information:
1. Your business’ full name
2. Your business’ ABN
3. That the invoice is intended to be a tax invoice
4. The date the invoice was issued
5. A brief description of what was sold, including the quantity (if relevant) and the price
6. The GST amount payable (if any). The GST can be shown separately or, if the amount is exactly one-eleventh of the total price, as a statement which says 'Total price includes GST'
7. The extent to which each sale on the invoice is a taxable sale.
For sales of $1,000 or more, invoices also need to include the identity of the purchaser or their ABN.
This information is correct at the time this post is published. It is always worth going to the ATO website for the most up to date information.
4. Not putting enough GST aside
Another common mistake I see businesses making is not putting enough GST aside to meet their tax obligations. I recommend having a separate bank account to transfer GST to (and funds to cover other tax) as payments are received or on a regular basis.
5. Not filing BAS on time
As part of your GST obligations, you are required to report and pay any GST amounts due by lodging a business activity statement (BAS).
The timing for lodging your BAS depends on the size of your business. The timing could be annually, quarterly or monthly.
There are penalties for late lodgement of your BAS so make sure you are clear on your obligations and have internal systems set up to be able to lodge on time.
6. Not claiming GST back on purchases
You are able to claim GST credits on purchases made by your business from other GST registered businesses if you have an invoice from those suppliers. I see businesses forgetting to collect invoices, especially for a one-off service, which means you won’t be able to claim a GST credit. You’re effectively giving money away!
Ensure that you ask for an invoice when payment is made so you don’t need to be requesting invoices months later when you’re lodging your BAS.
It’s important to review purchases from overseas suppliers too, e.g. software companies, to check if they are charging GST in Australia.
7. Making errors in recording in book keeping
The last mistake I see businesses making with their GST is incorrectly recording purchases in their bookkeeping. You need to check each item when you’re coding your purchases so you know if they include GST or not, and ensure that is correctly recorded in your bookkeeping.
Although registering for, and managing, GST can feel complicated it doesn’t need to be. By having a clear understanding of your obligations, and systems in place to meet those obligations, transitioning to being GST registered can be smooth.
If you’re approaching the GST registration threshold and want to ensure that you meet your obligations easily, book in a 20-minute call with me to discuss how I can provide the support you need.