How to handle GST

Paul Drum, head of business and investment policy at the accounting professional body CPA Australia.

By InvestSMART · 14 May 2012

By InvestSMART ·
14 May 2012

Comments

Paul Drum, head of business and investment policy at the accounting professional body CPA Australia.

As a small business owner, should you charge GST?

With less than $75,000 in annual turnover, you don't have to charge GST, giving you a kind of competitive advantage from a price point of view over those that do have to charge GST on the same types of goods and services.

However, many small businesses like to charge GST anyway. One, because they intend to get bigger and don't want to have to raise their prices afterwards. Two, because they want an image in the market that they are larger than they actually are.

If you are not charging GST, the market immediately knows you are very small. It does not send a confident signal that you have the organisational backing to do what the client wants you to do.

Some big businesses will not deal with you unless you are registered for GST because it is too difficult for them to deal with suppliers if some charge GST and others do not.

Large retailers might have tens of thousands of different line items, and it is complicated to have to reclaim input tax credits on some suppliers and not others.

Should you hold collected GST in a separate bank account?

No. Part of the beauty of collecting GST is that you actually have the use of that money and that cash flow until you have to pay it. So if you are quarantining, I would wonder if you are running your business properly because you should be using it to your advantage: get interest on it, or use it where it is needed. Of course, you have to ensure you have the funds when you need to pay the Tax Office.

What is the best payment cycle?

If your turnover is $20 million or more, you have to pay monthly. If your turnover is less than that, you pay quarterly. Very small companies can only pay annually. The longer you have the use of the money, the better. For most small businesses, quarterly or monthly is fine.

However, it is important to remember that GST is not a tax on business but on the consumer. In business, when you buy items and they have GST on them, you get a refund. So whether you lodge monthly, quarterly or annually might depend on how much your refunds are going to be. If you have a lot of input tax credits to come back, you might want to be lodging more regularly.

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Frequently Asked Questions about this Article…

Do I have to charge GST if my small business turnover is under $75,000?

No — if your annual turnover is less than $75,000 you are not required to charge GST, which can give you a price advantage over GST-registered competitors. However, many small businesses still choose to register voluntarily for other reasons, such as future growth plans or market perception.

Why might a small business voluntarily register for GST even when it’s not required?

Small businesses often register because they plan to grow and don’t want to raise prices later, or because charging GST creates an image that they’re a larger, more established supplier. Registering can also make it easier to win work from clients who prefer dealing only with GST-registered suppliers.

Will not charging GST affect how potential clients view my business?

Yes — not charging GST can signal to the market that you’re very small and may reduce perceived organisational capability. Some larger businesses will refuse to deal with suppliers who aren’t registered for GST because it complicates their own accounting and input tax credit processes.

Should I keep collected GST in a separate bank account until I pay it to the Tax Office?

No — the article advises against quarantining GST in a separate account. Collecting GST gives your business use of that cash flow until the payment is due, so you can earn interest or put it to productive use, but you must ensure you have the funds available when it’s time to pay the Tax Office.

What GST payment cycle should my business use — monthly, quarterly or annually?

It depends on turnover: businesses with turnover of $20 million or more must lodge monthly; those under that threshold generally lodge quarterly; very small businesses may be eligible to lodge annually. The longer you keep the funds, the more cash-flow benefit you get, so quarterly or monthly is common for most small businesses.

Is GST a tax on my business or on the consumer?

GST is a tax on the consumer, not on your business. Businesses charge GST to customers but can claim refunds for GST they pay on business purchases (input tax credits), so the net effect is passed to the end consumer.

How do input tax credits affect how often I should lodge GST returns?

If your business expects substantial input tax credits (large GST refunds on purchases), you might prefer to lodge more frequently so you receive those refunds sooner. Lodgement frequency (monthly, quarterly, annually) can therefore be influenced by how much GST you expect to reclaim.

Why do large retailers prefer suppliers who charge GST?

Large retailers often have tens of thousands of different line items and need to reclaim input tax credits consistently. It’s administratively difficult for them to manage suppliers where some charge GST and others don’t, so they tend to prefer dealing with GST-registered suppliers.