It is just over a decade since GST first appeared on the tax landscape. It may not have been an anniversary that warranted cake and bubbly, but did perhaps serve as an occasion to take a look at what doesn’t seem to be working so well with businesses and the GST system.
Small business has by and large been able to adapt to the GST regime and accounting software and computer systems have been developed and widely adopted to automate many tax compliance needs.
But mistakes still do creep in, and the Tax Office has identified the more common GST errors and omissions that businesses make. Over-claiming credits is on the Tax Office’s radar, but also issues relating to record keeping, cash businesses and lax BAS habits.
Many of the problems highlighted by the Tax Office are attributed to a misinterpretation of the legislation due to the complexity of the GST rules with the classification of taxable supplies as ‘GST-free’ or ‘non-taxable’ high on its list of examples.
GST error watch list
Here are some of the common GST mistakes the Tax Office has noted being made by small businesses. The list is not exhaustive, but may serve to underline areas that others have come to grief on.
• Claiming a credit without a valid tax invoice. Lodging a BAS without such back-up could get you in hot water, so get a duplicate invoice from the supplier.
• Wrongly claiming GST credits on super or salary payments.
• Incorrect claims for GST-free purchases such as basic food items, some health services or exports.
• Claiming the total credits for a car bought for more than the luxury car limit (the maximum GST credit that can be claimed is $5,224 – any GST paid on top of that is not creditable.
• Incorrectly claiming GST credits on bank fees, such as cheque book fees, annual or monthly fees. Bank fees are ‘input taxed’ so the bank does not charge GST to its customers. There is however GST on credit card merchant fees, and so a credit can be claimed for these.
• Mistakenly putting in a claim for credits from government charges such as land tax, council rates, water rates, car registration and ASIC filing fees, where no GST has been included.
• Not reporting GST on some government grants and incentive schemes received inclusive of GST.
• Incorrectly claiming full credits on entertainment expenses when the business has elected for FBT purposes to use the 50/50 split method (which allows only 50% of input credits to be claimed).
• Wrongly claiming a credit on the full cost of an insurance policy. There is a stamp duty component in the premium that is not subject to GST (although the actual amount of GST should be spelled out on the renewal form).
• Sole traders and partnerships not apportioning input tax credits on expenditure that is for partly business and partly private use, such as vehicle expenses. Small businesses (with annual turnover up to $2 million) that lodge for GST quarterly or monthly can apportion private use annually rather than with each BAS.
And these mistakes can involve some serious money. Using a recent financial year as an example, the Tax Office says that of the 1,864 GST-generating taxpayers it contacted, it was able to raise an extra $363 million in GST liabilities. Of the small business market, the Tax Office found that most GST revisions in this exercise came from the retail trade (17% of adjustments), rental, hiring and real estate services (14%) and construction (13%).
BAS preparation can be tripped up by things such as transposing figures, claiming a credit even though a valid tax invoice has been lost or misfiled (and not replaced by the supplier), and incorrectly transferring GST information between associated businesses. Also figuring largely in identified mistakes is the claiming of an entire tax invoice amount when part of the transaction is not subject to GST.
If you make a mistake on your BAS, it can always be fixed. Generally the way to do this is to correct a previous BAS, but in some circumstances you can make up for the error on a future BAS. Ask us for guidance if you wish to do this.