What it means
GST is the name used in Australia, New Zealand, Canada, Singapore, India and elsewhere for what Europe calls VAT. The design is the same in every case: tax is collected in slices at each stage of the supply chain, but every business in the chain reclaims what it paid, so nobody in the middle carries the cost.
For most businesses GST is a cash timing issue rather than a genuine expense. You hold money that belongs to the tax office between collecting it from customers and remitting it, which flatters the bank balance and tempts the unwary into spending money that is not theirs.
Registration is normally compulsory above a turnover threshold and optional below it. Voluntary registration can be worthwhile for a business with heavy input costs, because it can reclaim GST on purchases and equipment even while its own sales are still small.
Not everything is taxed at the standard rate. Most systems carve out zero-rated supplies, where you charge no GST but still reclaim your inputs, and exempt supplies, where you charge nothing and cannot reclaim anything, a distinction that is easy to miss and expensive to get wrong.
Consumer prices are usually quoted with GST included, while business-to-business prices are usually quoted excluding it. Mixing up the two is one of the most common causes of margin errors in quotes, price lists and invoices.
In practice
Real-world examples.
Example
A coffee importer pays $8,000 of GST at the border on a container of green beans and charges $14,000 of GST on the roasted coffee it sells that quarter. It remits $6,000, the tax on the value it added, rather than the full $14,000 collected.
Example
A design studio below the registration threshold decides to register voluntarily before fitting out a new office. The $18,000 of GST on the fit-out and equipment becomes reclaimable, which more than offsets the administrative cost of quarterly returns in the first year.
Example
A gym quotes members $88 per month including GST and books the full $88 as revenue in its spreadsheet. When the first return falls due it discovers only $80 was ever its money, and that a $960 quarterly GST bill it had not budgeted for is now payable.
Formula
Calculation
GST on a sale = net (GST-exclusive) price x GST rate
Net GST payable = GST collected on sales (output tax) - GST paid on purchases (input tax)
A landscaping company operating under a 10% GST regime makes $500,000 of GST-exclusive sales in a quarter and buys $280,000 of GST-exclusive materials, subcontract labour and fuel.
Output tax = $500,000 x 10% = $50,000
Input tax = $280,000 x 10% = $28,000
Net GST payable = $50,000 - $28,000 = $22,000
In cash terms the company invoices customers $550,000 in total, pays suppliers $308,000 in total, and sends $22,000 to the tax office. Its own profit is untouched by GST: revenue is still $500,000 and costs are still $280,000.
Working backwards from a tax-inclusive price at 10%, divide by 11. A $110 inclusive invoice contains $110 / 11 = $10 of GST and $100 of net revenue.Case study
Seen in the real world.
Fernvale Joinery is an illustrative fictional business used to show how a healthy company can be caught out by a tax it never actually bears. Trading under a 10% GST regime, it had a strong spring, collecting $50,000 of output tax on $500,000 of sales while paying only $28,000 of input tax on $280,000 of costs.
The bank balance looked excellent all quarter, and the owner used part of it to pay a deposit on a new spindle moulder. When the return fell due, $22,000 had to go to the tax office and the account was short. Nothing had gone wrong commercially: the business had simply spent money it was holding on someone else's behalf.
The fictional fix was mundane and effective. Fernvale opened a second bank account and swept an estimated GST amount into it weekly, so the operating balance only ever showed money the business had actually earned.
Watch out
Common mistakes.
- Treating GST collected as revenue. The tax belongs to the government from the moment it is charged, and counting it as income overstates both turnover and available cash.
- Confusing zero-rated with exempt supplies. Zero-rated sales still allow input tax to be reclaimed while exempt sales do not, so the wrong classification either loses you refunds or creates an underpayment.
- Quoting business customers a GST-inclusive price without saying so. The customer reclaims the tax anyway, so the seller ends up absorbing roughly a tenth of the quoted price for no commercial benefit.
Questions
People also ask.
Does GST affect my profit margin?
Not if you are registered and the goods are standard-rated, because the tax you collect is offset by the tax you reclaim, so it passes through the business rather than sitting in the profit calculation.
What happens if input tax exceeds output tax in a period?
The tax office generally refunds the difference, which is common for exporters, start-ups buying equipment and any business having a quiet quarter after heavy purchasing.
How is GST different from a sales tax?
A sales tax is charged once at the final retail sale, whereas GST is charged at every stage with credits along the chain, which makes GST harder to evade but more paperwork to administer.
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