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  • Stock purchases method

    The stock purchases method is designed for businesses that are resellers, not converters.

    You can only use the stock purchases method if you meet all of the following conditions:

    • GST registration: Required
    • Required transactions: Sell both taxable and GST-free food
    • Turnover threshold: SAM turnover of $2 million or less
    • Point-of-sale equipment: Inadequate
    • Nature of business: Reseller only.

    If you are a converter (you buy GST-free ingredients and convert them into taxable items), you cannot use this method.

    You may be eligible to use this method if you operate a business such as a:

    • grocery store or supermarket
    • convenience store or milk bar
    • video hire outlet
    • health food shop
    • continental delicatessen
    • butchery
    • service station
    • newsagency
    • greengrocer's store.

    How it works

    Using the stock purchases method, the percentage of your GST-free sales is taken to be the same as the percentage of your GST-free purchases.

    There are three ways you can use the stock purchases method:

    1. Every tax period – you work out your percentage of GST-free purchases accurately then use this percentage to estimate your sales.
    2. Two four-week sample periods – you reduce your administrative workload further by estimating both your GST-free sales and purchases.
    3. 5% GST-free stock estimation basis – you track only the GST-free goods that you purchase and resell (such as bottled water, pure fruit juice, milk or fresh fruit). This reduces your administrative workload even further as you only track your GST-free purchases and estimate your GST-free sales.

    You must complete a daily worksheet detailing your transactions. If you choose to use every tax period or two four-week sample periods, this worksheet should contain a breakdown of your total purchases for the period. It should distinguish between your taxable and GST-free purchases.

    If you choose to use the 5% GST-free stock estimation basis, your worksheet should show only the GST-free purchases that you resell GST-free for each tax period.

    Every tax period

    Using this option, you calculate the GST credits on your purchases but only estimate the GST you are liable to pay on your sales. You do this in four steps:

    • Step 1 – record your total stock purchases.
    • Step 2 – record your total GST-free stock purchases.
    • Step 3 – divide your GST-free stock purchases by your total stock purchases to calculate your percentage of GST-free purchases.
    • Step 4 – apply this percentage to your total stock sales to estimate your total GST-free sales for the period.

    You must complete these four steps for every tax period.

    Example: Every tax period

    Connie runs a grocery store and decides to use the stock purchases method to account for GST. She only resells goods and doesn't convert any items.

    During a quarterly tax period, Connie purchases trading stock totalling $203,000, which includes GST-free stock totalling $99,470. Connie also sells stock totalling $219,500 during the same period.

    Connie works out her total GST-free sales by using the four steps:

    Step 1  Total stock purchases

    =

    $203,000

    Step 2 Total GST-free stock purchases

    =

    $99,470

    Step 3 Percentage of GST-free stock purchases ($99,470 ÷  $203,000 × 100)

    =

    49%

    Step 4 Total GST-free sales ($219,500 × 49%)

    =

    $107,555

    Connie has to do this calculation every tax period.

    End of example

    See also:

    Two four-week sample periods

    Using this option, you estimate your GST-free purchases as well as your sales. To do this, you calculate the percentage of your total purchases that are GST-free over two four-week periods during the financial year. You then apply that percentage for every tax period until the next sample period to both your total purchases and sales to calculate your GST-free purchases and sales.

    You do this in five steps for each sample period:

    • Step 1 – record your total stock purchases for the four-week sample period.
    • Step 2 – record your total GST-free stock purchases for the four-week sample period.
    • Step 3 – divide your GST-free stock purchases by your total stock purchases to calculate your percentage of GST-free purchases for the four-week sample period.
    • Step 4 – apply this percentage to your total stock purchases for the tax period to estimate your GST-free stock purchases for the tax period.
    • Step 5 – apply the same percentage to your total stock sales for the tax period to estimate your GST-free sales for the tax period.

    Continue to apply this percentage to every tax period until the next sample period.

    Each sample period must be of four continuous weeks. They should take place between both:

    • 1 June and 31 July (to cover the period from July to December)
    • 1 December and 31 January (to cover the period from January to June).

    Sampling is done at these times to allow for seasonal fluctuations. However, if you have recently started your business, your first sample period should be in the first two months of trading.

    Example: Two four-week sample periods

    Andrew runs a supermarket in which he resells all his goods. He doesn't convert any GST-free goods into taxable products.

    Andrew's tax invoices for a four-week sample period in June show that he has total stock purchases of $60,000 and total GST-free purchases of $29,400.

    For the full tax period (quarter of the year), Andrew has total stock purchases of $203,000 and total trading sales of $219,500.

    He works out his total GST-free sales for the tax period using the five steps:

    Step 1 Total stock purchases for the sample period

    =

    $60,000

    Step 2 Total GST-free purchases for the sample period

    =

    $29,400

    Step 3 Percentage of GST-free purchases ($29,400 ÷  $60,000 × 100)

    =

    49%

    Step 4 Total GST-free purchases for the tax period ($203,000 × 49%)

    =

    $99,470

    Step 5 Total GST-free sales for the tax period ($219,500 × 49%)

    =

    $107,555

    Andrew applies the 49% rate to his total stock purchases and sales for subsequent tax periods until his next four-weekly sample period in December.

    End of example

    See also:

    5% GST-free stock estimation basis

    To make the stock purchases method even easier for retailers of mainly taxable goods, we have simplified the stock purchases method further with the 5% GST-free stock estimation basis. In this method, you use the figures for your GST-free stock purchases to estimate your GST-free sales.

    You can use this estimation basis for goods that you purchase GST-free and will resell GST-free (such as bottled water, pure fruit juice, milk or fresh fruit). You may use this basis if your past or projected trading patterns (or your supplier's tax invoices for the tax period) show your GST-free stock purchases that you will resell GST-free represent no more than 5% of your total stock purchases.

    The following food retailers are likely to be able to use the 5% GST-free stock estimation basis:

    • kiosks that don't prepare takeaways
    • service stations
    • video hire outlets
    • newsagents.

    Example: 5% GST-free stock estimation basis

    Valda's Video Hire has suppliers' tax invoices for the tax period that show total stock purchases of GST-free items of $750, as follows:

    Bottled water

    =

    $300

    Pure fruit juice

    =

    $450

    Total

    =

    $750

    Valda's total stock purchases are $24,000, so her GST-free stock purchases are only 3.1% of this total.

    As GST-free stock purchases are less than 5% of her total stock purchases, Valda can use this estimation basis.

    End of example

    Using this option, you work out your purchases for each product line and add these up to work out your total GST-free purchases. You estimate your total GST-free sales for each product line by applying your mark-up to the totals, then adding your estimated GST-free sales for each product line to calculate your total GST-free sales.

    You do this in four steps:

    • Step 1 – record and add your purchases for each GST-free product line.
    • Step 2 – add each GST-free product line total to calculate your total GST-free stock purchases.
    • Step 3 – apply your mark-ups to the totals (from step 1) to estimate total GST-free sales for each product line.
    • Step 4 – add your estimated GST-free sales for each product line to calculate your total GST-free sales.

    If your mark-up is the same for each product line, you don't have to separately record the totals for each product line. Only record the total amount of GST-free stock purchases. Apply your mark-up to this amount to calculate your GST-free sales.

    Example: Calculating GST-free purchases and sales

    Using the previous example, Valda has GST-free stock purchases totalling $750 for the tax period ($300 for bottled water and $450 for pure fruit juice). Valda's mark-up is 40% for bottled water and 30% for pure fruit juice. She estimates her total sales are $420 ($300 + 40% mark-up) for bottled water and $585 ($450 + 30% mark-up) for fruit juice.

    Valda adds these amounts to calculate her total GST-free sales of $1,005 for the tax period.

    End of example

    If you choose to use this option, your worksheet should only show the GST-free purchases that you resell GST-free for each tax period.

    See also:

      Last modified: 30 May 2017QC 16262