Explanatory Memorandum(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)
Chapter 6 - Calculating amounts of GST
6.1 This Chapter explains amendments to the GST Act and the GST Transition Act to:
- provide rounding rules for GST liability;
- allow the Commissioner to determine a transitional rounding rule for entities; and
- allow the net amount for a tax period to be worked out from a method provided in a GST return.
6.2 Under the current GST legislation, the GST Act provides that a registered entity's GST liability is 1/11 of the price paid for a taxable supply. It does not have rules for rounding amounts of GST that run into fractions of a cent. As the law currently stands, an entity's GST liability needs to be calculated to an infinite number of decimal places.
6.3 There is an obvious need to provide a rounding rule for GST liability to enable entities to adequately calculate their net amount. To provide entities with both certainty and flexibility, item 1 inserts 2 rounding rules into the GST Act. Entities may round using the 'total invoice rule' or 'taxable supply rule'.
6.4 A supplier and a recipient of a supply need not use the same rounding rules [new subsection 9-90(3)] . It does not matter if the supplier chooses to round using the total invoice rule but the recipient chooses to round using the taxable supply rule (or vice versa).
6.5 Both rounding rules provide entities with a method of rounding where there is:
- only one taxable supply recorded on a particular invoice [new subsection 9-90(1)] ;
- two or more taxable supplies recorded on a particular invoice [new subsection 9-90(2)] ; and
- a taxable supply or supplies broken into a number of items or articles on a particular invoice [new subsection 9-90(5)] .
6.6 One or more taxable supplies may be broken into a number of items or articles on a particular invoice. In these situations the total amount of GST on the taxable supply or supplies is worked out as if each item or article were a separate taxable supply. [New subsection 9-90(5)]
6.7 In situations where an entity does not receive an invoice for a taxable supply or supplies, the entity should treat the document that records the details of the supply or supplies as an invoice for the purposes of this section [new subsection 9-90(6)] . 'Document' is broadly defined in the Acts Interpretation Act 1901 and would include any of the following things:
- a recipient's record of the expense (for small expenses);
- cash register totals; and
- electronic data.
6.8 New subsection 9-90(1) and new paragraph 9-90(2)(a) provides a method for rounding the GST on an invoice using the total invoice rule. In following this rule an entity must round the GST on an invoice relating to one or more taxable supplies to the nearest cent, with 0.5 cents being rounded upwards.
6.9 Where there is only one taxable supply on an invoice, the amount of GST on that supply should be rounded to the nearest cent (rounding 0.5 cents upwards). [New subsection 9-90(1)]
6.10 If there is more than one taxable supply on an invoice, the unrounded amounts of GST for each taxable supply should be totalled and then rounded to the nearest cent (rounding 0.5 cents upwards). [New paragraph 9-90(2)(a)]
6.11 Alternatively, if all the taxable supplies on an invoice include an amount of GST that is exactly 1/11 of the price, an entity may choose to add up the GST-exclusive value of each taxable supply, calculate GST on that amount and then round to the nearest cent (rounding 0.5 cents upwards). [New paragraph 9-90(2)(a)]
6.12 A taxable supply on the invoice may be recorded as a number of items or articles (e.g. an invoice for a supply of nails, glue and paint). In this situation the amount of GST is worked out as if each item were a separate taxable supply. This effectively means that the invoice is treated as having more than one taxable supply on it. Therefore, in these situations the total amount of GST will be worked out using new subsection 9-90(2) .
Amber and Co sells romance novels to consumers. An extract of an invoice to one of its client, is as follows:
Price (includes GST)
Keeping up with Nigel
3 x wrapping paper @ $2.20 each
- ($9.85 + 12.80 + $15.45 + $6 = $44.10),
- calculating the total GST amount for the invoice ($4.41) and then rounding this amount to the nearest cent. The amount of GST for the taxable supply is $4.41.
6.13 New paragraph 9-90(2)(b) provides a method statement for rounding the total amount of GST on 2 or more taxable supplies under the taxable supply rule. Where an invoice has one or more taxable supplies broken down into a number of items, the total amount of GST on the taxable supplies recorded on the invoice will also be calculated using new paragraph 9-90(2)(b) . Using this new paragraph, an entity will work out the amount of GST as follows:
- calculate the amount of GST on each taxable supply [step 1] ;
- where the amount of GST includes more decimal places than the number of decimal places that the entity's accounting system is able to capture and record, the amount should be rounded up or down as appropriate. If the last number is 5 or above, the amount should be rounded up [step 2 and new subsection 9-90(4)] ;
- add the individual amounts of GST for each taxable supply on the invoice as worked out in the above 2 points [step 3] ; and
- where the aggregate amount of GST includes a fraction of a cent, round this amount to the nearest cent (rounding 0.5 upwards) [step 4] .
The result of step 4 is the total amount of GST on the taxable supplies recorded on the same invoice.
6.14 The taxable supply rule requires entities to record amounts of GST to as many decimal places as their accounting systems can capture. Where an entity's accounting system only allows amounts to be recorded in whole cents, the amount of GST will be rounded to the nearest cent (rounding 0.5 upwards). [Step 2 and subsection 9-90(4)]
In Example 6.1, instead of using the total invoice rule, assume Amber and Co chooses to use the taxable supply rule. Amber and Co's accounting system records amounts to 4 decimal places.Amber and Co's GST liability for the supply is calculated as follows:Steps 1, 2 and subsection 9-90(4):
$0.9855 ($0.98545 rounded up)
Keeping up with Nigel
$1.5455 ($1.54545 rounded up)
3 x wrapping paper
6.15 Items 4 to 6 amend subsections 66-50(3), 75-10(4) and 84-12(2) to insert notes into those subsections. The notes clarify that the new rounding rule will apply regardless of whether or not the amount of GST has been calculated with reference to section 9-70 of the GST Act.
6.16 The GST Regulations about tax invoices (notified in the Commonwealth Gazette on 21 October 1999) currently compel entities to round the total amounts of GST on a tax invoice down to the nearest cent (this rule is to be amended to bring it in line with the new rounding rule for GST liability).
6.17 These Regulations do not affect an entity's GST liability. A tax invoice is merely an evidentiary document to enable a recipient to substantiate its input tax credit claim. To provide some flexibility and assist in the smooth implementation of GST, item 7 allows the Commissioner to make a determination relating to rounding amounts of GST.
6.18 New subsection 24B(5) of the GST Transition Act allows entities to apply to the Commissioner in writing for transitional relief in using the total invoice rule and taxable supply rule discussed in paragraphs 6.8 to 6.14. Where the Commissioner grants transitional relief, it will only be:
- to the entity listed in the determination [new paragraph 24B(2)(a)] ;
- for the time specified in the determination (with this time ending on or before 30 June 2002) [new paragraph 24B(2)(b) and new subsection 24B(4)] ; and
- to allow the entity to use the rounding rule specified by the Commissioner in the determination [new paragraph 24B(3)(a)] .
6.19 New subsection 24B(3) provides that the entity listed in the determination will have the choice of using the rounding rule specified by the Commissioner or the rounding rules in new sections 9-90 and 13-30 of the GST Act.
6.20 However, the Commissioner is restricted in the rounding method he can allow entities to use in the transition. The method an entity can request as acceptable in the transition must round the total amount of GST on an invoice [new subsection 24B(1)] . This means that the Commissioner is unable to make a determination in respect of a rounding method that does not round the total amount of GST on an invoice but instead rounds the GST liability on each of the items on an invoice.
6.21 In situations where the entity does not receive an invoice for a taxable supply or supplies, the entity should treat the document that records the details of the supply or supplies as an invoice for the purposes of this section. [New subsection 24B(6)]
6.22 This rule is only available until 30 June 2002 [new subsection 24B(4)] . After such time all entities must calculate their GST liability in accordance with the new rounding rules in the GST Act. The 2 year period of transitional relief from following the rounding rules in the GST Act is expected to minimise compliance costs by assisting in the smooth implementation of GST.
6.23 Items 8 to 10 amend the TAA 1953 to ensure that the Commissioner's decision under new section 24B of the GST TransitionAct is a reviewable GST transitional decision.
6.24 There are currently no reviewable GST transitional decisions in the TAA 1953. Consequently item 8 inserts new paragraph 62(1)(c) to allow an entity to object against a reviewable GST transitional decision relating to it. Item 9 directs an entity to the relevant subsection that lists what decision in the GST Transition Act is a GST transitional decision.
6.25 New subsection 62(3A) provides that the Commissioner's decision to allow, or refusing to allow, an entity to round amounts of GST in a manner different to that which is specified in the GST Act is a reviewable GST transitional decision under the GST Transition Act.
6.26 A GST registered entity must give to the Commissioner a GST return for each tax period. This return must, among other things, be in the approved form and show the entity's net amount for the tax period.
6.27 When an entity notifies the Commissioner of its net amount in an approved form, item 2 allows the entity to work out their net amount for a tax period in the way specified in the approved form. The net amount that the entity works out using the form will be their net amount for the tax period [new subsection 17-15(1)] . This amount will be the entity's net amount even if they are able to calculate a different net amount using section 17-5 of the GST Act [new subsection 17-15(2)] .
6.28 Item 3 clarifies that the GST return does not need to state an entity's section 17-5 net amount for the tax period. An entity may, instead, show their net amount as calculated under new section 17-15 . The approved form of the GST return may allow an entity to use the form to report their net amount worked out under either section 17-5 or section 17-15 of the GST Act.