Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)CHAPTER 4 - ACCOUNTING FOR GST AND INPUT TAX CREDITS
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- how to account for your GST and input tax credits;
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- what are your tax periods and to which tax period you attribute GST and input tax credits;
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- how to work out your net amount for a tax period; and
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- how to attribute adjustments.
Chapter Summary
Your net amount for a tax period is the total of your GST, input tax credits and adjustments that are attributable to that tax period. See 4.1
Rather than remitting GST or receiving an input tax credit whenever you make a taxable supply or a creditable acquisition, you attribute GST and input tax credits to tax periods and work out a total.
The accounting rules tell you to which tax period you attribute GST, input tax credits and adjustments.
Net Amount
4.1 Rather than remitting GST or receiving an input tax credit whenever you make a taxable supply or a creditable acquisition, you attribute GST and input tax credits to tax periods and work out a total. This total is the net amount. Section 7-5.
4.2 The net amount is worked out using the formula in subsection 17-5(1) . The net amount is the sum of GST that is attributable to the tax period, less the input tax credits that are attributable to the tax period. The net amount can be increased or decreased by any adjustments that are attributable to the tax period -- section 17-10 . Tax periods are discussed at 4.7 Attributing to tax periods is discussed at 4.22. GST and input tax credits are discussed at 4.29 to 4.32. Adjustments are discussed at 4.33.
4.3 The accounting rules tell you to which tax period you attribute GST, input tax credits and adjustments.
4.4 If the net amount for a tax period is greater than zero, the net amount is the amount you must pay for that tax period to the Commissioner -- subsection 33-5(1) . The net amount will be greater than zero if the GST and increasing adjustments for a tax period exceed the input tax credits and decreasing adjustments for the tax period.
Example
Sharons Scissor Sharpening Service Inc. is registered. Sharons total GST for a tax period is $2,300. She has total input tax credits of $1,900 and $150 worth of increasing adjustments. Her net amount for the tax period is $550. She pays this amount to the Commissioner when she lodges her return for the tax period.
4.5 If the net amount for a tax period is less than zero, the net amount (expressed as a positive amount) is the amount the Commissioner must pay to you for that tax period -- subsection 35-5(1) . The net amount will be less than zero if the input tax credits and decreasing adjustments for the tax period exceed the GST and increasing adjustments for the tax period.
Example
Continuing the example from 4.4 above, in Sharons next tax period she has total GST of $1,500 and total input tax credits of $1,800. She has no adjustments. Her net amount for the tax period is $300. The Commissioner pays this amount to Sharon after she has lodged her return for the period, assuming she has no other tax debts that this amount could be offset against.
4.6 If the net amount for a tax period is zero, you do not have to pay anything to the Commissioner for that tax period and the Commissioner does not have to pay anything to you for that tax period.
Example
Continuing the example from 4.4 above, in Sharons next tax period she has total GST of $1,700 and total input tax credits of $1,650. She has a decreasing adjustment of $50. Her net amount for the tax period is zero. She still needs to lodge a return for the tax period.
Tax Periods
4.7 Tax periods are the periods for which you work out the amount of input tax credits payable to you or the amount of GST payable by you. You offset your GST and your input tax credits for the tax period to give you a net amount for each tax period. Net amount is explained at 4.1 You are required to lodge a return containing your net amount for each tax period that applies to you. Returns are discussed at 7.14.
4.8 With your return for a tax period you are required to remit to the Commissioner any amount by which your GST payable for the tax period exceeds your input tax credits, taking into account any adjustments, for the tax period. The Commissioner is required to pay to you any amount by which your input tax credits for a tax period exceed your GST payable for that period. However, if you have other tax debts, such an amount may be offset against those other tax debts. The Commissioner will not offset refunds where the debt is a matter of legal dispute.
4.10 If the Commissioner is required to pay you an amount for a tax period and the Commissioner does not pay the amount to you within 14 days, interest is payable on the amount -- subsection 35-5(1) . Interest does not start being payable until you have provided the Commissioner with all the information required to determinethat the payment should be made.
What tax period applies to you?
4.11 Generally, your tax periods will be three months long and end on 31 March, 30 June, 30 September and 31 December -- section 27-5 . In certain circumstances your tax periods may be the months in a year.
Compulsory 1 month tax periods
4.12 One month tax periods are the calendar months in a year. You must use one month tax periods if your annual turnover is $20 million or more -- paragraph 27-15(1)(a) . This is the tax period turnover threshold . See 7.33 for how to determine your annual turnover. You must use one month tax periods if you will only be carrying on your enterprise in Australia for less than three months -- paragraph 27-15(1)(b) . You must use one month tax periods if the Commissioner is satisfied that you have a history of not complying with your tax obligations -- paragraph 27-15(1)(c) . You must use one month tax periods if you have a substituted accounting period for income tax -- paragraph 27-15(1)(d) .
4.13 The tax period turnover threshold can be changed by regulation. If the regulations do change the amount, the change does not apply to you until the start of your next tax period after the regulations come into effect -- section 27-15 .
4.14 If you are using one month tax periods and your annual turnover falls below $20 million you can choose to change to three month tax periods -- subsection 27-25(3) . However, generally you have to use one month tax periods for at least twelve months before you can revert to three month tax periods -- subsection 27-25(2) .
4.15 You can elect that your tax periods will be calendar months -- subsection 27-10(1) . If you want to use one month tax periods you must notify the Commissioner of your election. If you elect to use one month tax periods, you can start using one month tax periods on 1 January, 1 April, 1 July or 1 October.
4.16 If you elected to use one month tax periods, you can generally change back to three month tax periods unless your annual turnover exceeds the tax period turnover threshold. If you change back to three month tax periods, you start using three month tax periods on 1 January, 1 April, 1 July or 1 October. Subsection 27-10(2).
Changing the end of your tax periods
4.17 If the end of one of your commercial accounting periods does not fit well with the end of your tax periods, you can end your tax periods seven days earlier or later than when the relevant tax period would otherwise end. The specified day must be consistent with your commercial accounting periods. This does not change your three month or one month tax periods; it only changes the days on which the tax periods end. Nor does it change your date for lodging returns or making payments -- subsection 27-35(1) . If the day on which your tax period ends is changed, your next tax period starts on the day after the day on which your tax period now ends -- subsection 27-35(2) .
Example
Nitsia runs a suburban supermarket. Her normal accounting practice is to balance her accounts every Friday. Nitsia has three month tax periods. 31 March falls on Tuesday. She ends her tax period on Friday 27 March so that she does not have to make a special balance on the Tuesday. Nitsias next tax period starts on Saturday 28 March rather than on 1 April. Her return for the tax period ending on 27 March is due on 21 April.
4.18 In certain circumstances, the Commissioner can determine that any specified period is a tax period. The Commissioner has to give you written notice of the determination. The written notice must specify the period that is to be treated as a tax period -- subsection 27-30(1) . The period may start before you receive the notice -- subsection 27-30(2) . These determinations exist to assist in the effective operation of the Act when you change your tax periods -- subsection 27-30(1) . For example; you attribute GST and input tax credits to tax periods, so if there is a period of time between tax periods that is not otherwise a tax period, you will not know when to attribute some GST and input tax credits. A determination from the Commissioner specifying that the period is to be treated as a tax period enables all the attribution rules to apply in relation to that period. See 4.22 for accounting rules and attributing to tax periods.
4.19 The period specified in the notice must be less than three months long -- paragraph 27-30(3)(a) . This is because if it is longer than three months a normal tax period can occur in that time and there is no need for a determination to cover a normal tax period.
4.20 The specified period must not overlap with a tax period for which you have already lodged a return -- paragraph 27-30(3)(b) .
Example
Delicut P/L runs a chain of Hairdressers that specialise in sensitive hair. It has three month tax periods. Business has been good recently and has been expanding. In the first week of August, Delicut realises that its annual turnover exceeds the tax period turnover threshold of $20 million. It therefore must change to one month tax periods. The Commissioner determines that it will use one month tax periods starting on 1 September. As Delicuts previous tax period ended on 30 June and the next three month tax periods ends on 30 September, it requests the Commissioner to determine that the period from 1 July to 31 August is a tax period.
4.21 In certain circumstances a tax period will be the concluding tax period for an individual or other entity. If an individual dies, becomes bankrupt or has his or her registration cancelled, the last day of his or her concluding tax period is the day of death or bankruptcy, or the day of effect of the cancellation. See 2.23 about cancelling registration. If an entity other than an individual goes into liquidation or receivership, or ceases to exist, or has its registration cancelled, the last day of its concluding tax period is the day it goes into liquidation or receivership, or ceases to exist, or the day of effect of the cancellation. Section 27-40 . See 6.271 for what happens when an entity goes into liquidation or receivership. See the Administration Act for what happens if an individual dies. See 6.259 for what happens when you cease to be registered.
Accounting Rules
-- attributing GST and input tax credits to tax periods
4.22 There are two ways to account for GSTeither the cash basis or the other than cash basis. The general rules apply to most entities. The cash basis applies to certain entities.
4.23 The accounting rules are relevant to determining in which tax period you attribute GST on taxable supplies or input tax credits for creditable acquisitions.
4.24 If your annual turnover is under $500,000 you can use the cash basis of accounting. This is the cash basis accounting threshold . This threshold can be changed by regulation. If you choose to use the cash basis you start to use it from the first day of a tax period. Section 29-40.
4.25 Even if your annual turnover meets the cash basis accounting threshold you may be able to use the cash basis of accounting. To be able to use the cash basis you have to satisfy the Commissioner that it is the appropriate accounting basis for your enterprise. The Commissioner must have regard to the following:
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- the nature of your enterprise;
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- the size of your enterprise;
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- your accounting system; and
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- how you account for income tax.
Example
Debra is a barrister. She has an annual turnover of $600,000. Debras normal accounting system relates to the money she receives, rather than the money she is liable to receive, as a barrister. This is also how she accounts for income tax. It may therefore be appropriate for Debra to account for GST on a cash basis. Debra should apply to the Commissioner to use the cash basis.
However, if Debra also owned and ran a restaurant which accounted on an accruals basis, it would probably be inappropriate for Debra to account for GST on a cash basis.
4.26 If you want to use the cash basis even though your annual turnover meets the cash accounting turnover threshold, you must apply to the Commissioner. Section 29-45.
4.27 The Commissioner must notify you of his or her decision, including the date from which the change in basis starts.
4.28 You must notify the Commissioner within 21 days of ceasing to satisfy the conditions for accounting on a cash basis. The Commissioners approval can be for a single entity or a class of entities. The Commissioner must notify you of a decision to withdraw his or her approval.
Attributing GST on the cash basis
4.29 You attribute GST on a taxable supply to the tax period in which you receive a payment in respect of the taxable supply. The amount of GST that you attribute to that tax period is proportional to the amount of the payment that you received in that tax period. That is, if you received half of the total consideration for the supply in that tax period, you attribute half of the total GST on the supply to that tax period. You include the GST in your return for that tax period. Subsection 29-5(2).
4.30 GST on taxable importations is payable when you make the importation. See 3.43. Paragraph 33-15(b) provides for payments of GST on taxable importations to be made in such further time and in the manner the Commissioner allows. Deferred payments would allow certain entities to offset their input tax credits on imports against their GST. This is because, unlike supplies, the entity entitled to the input tax credit on an importation is also the entity paying the GST.
Attributing input tax credits on the cash basis
4.31 You attribute the input tax credit for a creditable acquisition to the tax period in which you pay for it. The proportion of input tax credit that you attribute to that tax period is the same proportion of the payment that you made in that tax period. That is, if you paid half of the total consideration for the supply in that tax period, you attribute half of the total input tax credit to that tax period. You include the input tax credit in your return for that tax period. However, you cannot attribute an input tax credit unless you have a tax invoice for the creditable acquisition when you lodge your return -- see 7.1 for what tax invoices are. Subsections 29-10(2) and (3).
4.32 You attribute all the input tax credit on a creditable importation to the tax period in which you pay the GST on the importation. Section 29-15.
Attributing adjustment events on the cash basis
4.33 You attribute your increasing or decreasing adjustment to the tax period in which an amount that is payable as a result of the adjustment event is paid. You only attribute the adjustment to the extent that the payment is made. For example, if the adjustment event results in you being entitled to receive an additional payment you would have an increasing adjustment. If you only receive half the payment in a tax period, you only attribute half the adjustment to that period. Paragraph 29-20(2)(b).
4.34 If you have a decreasing adjustment you cannot attribute the adjustment until you have an adjustment note. That is, you cannot attribute the adjustment until the tax period for which you lodge a return when you have an adjustment note.
Example 1
Hildergard has an enterprise that supplies equipment for dog shows. She is registered. She uses the cash basis of accounting. Rob has an enterprise that runs commercial dog shows all around Australia. He is registered. He uses the cash basis of accounting. Rob obtains his dog show equipment from Hildergard. They have the same tax periods. Rob acquires a new loudhailer from Hildergard for use in his dog shows. The supply of the loudhailer is a taxable supply by Hildergard. The acquisition of the loudhailer by Rob is a creditable acquisition. Hildergard supplies the loudhailer in the second tax period for the year. Hildergard also issues the tax invoice for the supply in the second tax period for the year. Rob pays for the loudhailer in the third tax period for the year. The diagram outlines when the supply and payment occur.
Rob attributes the input tax credit to tax period 3 because he paid for the taxable supply in that tax period and he had a tax invoice. Hildergard attributes the GST on the taxable supply to tax period 3 because she received Robs payment for the taxable supply in that tax period.
Example 2
Amelia operates a small business. She is registered. She accounts on a cash basis. She buys stationery supplies for her business from Barrie. This is a creditable acquisition by Amelia. Barrie is also registered and accounts on a cash basis. The supply of the stationary is a taxable supply by Barrie. Amelia makes a deposit for the stationery before she receives it. She then makes the rest of the payment for the stationery after she received it. The diagram shows when the stationery was supplied and when the payments were made.
Amelia made a payment, the deposit, for the taxable supply in tax period 1. She would be able to attribute an input tax credit to tax period 1 for the GST included in the deposit if she had a tax invoice for the supply. However, she did not have a tax invoice until tax period 2. She therefore attributes her input tax credit on the deposit to tax period 2. The amount of the input tax credit is the tax fraction of the amount of the deposit 1/11 of the deposit (tax fraction is explained at 3.16). She makes the rest of the payment in tax period 3. As she has a tax invoice, she attributes her input tax credit on the rest of the payment to tax period 3. Barrie attributes the GST on the deposit to tax period 1. He attributes the GST on the rest of the payment to tax period 3.
Attributing GST on other than the cash basis
4.35 You attribute all the GST on a taxable supply to the tax period in which the earliest of the following occurs:
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- you receive any consideration in connection with the supply; or
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- an invoice is issued in relation to the supply.
You include the GST in your return for that tax period. Subsection 29-5(1) and section 33-5.
4.36 GST on taxable importations is payable when you make the importation. See 3.43. Paragraph 33-15(b) provides for payments of GST on taxable importations to be made in such further time and in the manner specified in the regulations. Deferred payments would allow certain entities to offset their input tax credits on imports against their GST. This is because, unlike supplies, the entity entitled to the input tax credit on an importation is also the entity paying the GST.
Attributing input tax credits on other than the cash basis
4.37 You attribute all the input tax credit on a creditable acquisition to the tax period in which the earliest of:
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- you providing any consideration; or
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- you becoming liable to provide any consideration for the acquisition or importation.
You include the input tax credit in your return for that tax period. However, you cannot attribute an input tax credit to a tax period unless you have a tax invoice when you lodge your return for that tax period -- see 7.1 for what tax invoices are. Subsections 29-10(1) and (3).
4.38 You attribute all the input tax credit on a creditable importation to the tax period in which you pay the GST on the importation. Section 29-15.
Attributing adjustment events on other than the cash basis
4.39 You attribute all of your increasing or decreasing adjustment for an adjustment event to the tax period in which you know about the adjustment event -- subsection 29-20(1) . Adjustment events are discussed at 3.7
3.
4.40 You attribute all of your increasing or decreasing adjustments for an adjustment event to the tax period in which you know about that adjustment event -- subsection 29-20(1) . However, you cannot attribute the adjustment unless you have an adjustment note when you lodge your return for the tax period. Adjustment events are discussed at 3.73.
Example
XYZ P/L makes clothing fasteners such as zippers and buttons for the rag trade. XYZ P/L is registered and uses the general rules for attributing GST and input tax credits. Handmade Clothing Co. makes mass produced clothes for several large retailers. Handmade Clothing Co. is registered and does not account on a cash basis. Handmade Clothing Co. regularly acquires clothing fasteners from XYZ P/L. The diagram outlines the supply and payment for one such supply.
Handmade Clothing Co. received the invoice (not a tax invoice) for the taxable supply in tax period 2. It became liable to provide consideration for the taxable supply when it received the invoice. Handmade Clothing Co. would attribute the input tax credit on the acquisition to tax period 2 if it had a tax invoice. As it does not have a tax invoice it cannot attribute the input tax credit to tax period 2, but will have to wait until it has the tax invoice.
XYZ P/L issued the invoice in tax period 2. It became entitled to receive consideration for the supply once it issued the invoice. It attributes all of the GST on the taxable supply to tax period 2.
Later, XYZ P/L changes its business practices and requests that payment be made before the goods are delivered. This diagram outlines when a payment and supply occurred.
Although Handmade Clothing Co. paid for the fasteners in tax period 1, it did not have a tax invoice for the creditable acquisition until tax period 2. It attributes the input tax credit for the creditable acquisition to tax period 2.
XYZ P/L received payment for the taxable supply in tax period 1. It attributes all of the GST on that taxable supply to tax period 1.
XYZ P/Ls customers are not happy about making the whole payment before they receive the fasteners, so XYZ P/L decides to accept deposits before delivery and the rest of the payment after delivery. Handmade Clothing Co. decides to make deposits as this will improve its cash flow. This diagram outlines when a deposit, supply and payment occurred.
Despite making a deposit in tax period 1, Handmade Clothing Co. attributes the input tax credit on the creditable acquisition to tax period 3 as it did not have a tax invoice until that tax period.
XYZ P/L attributes all of the GST on the taxable supply to tax period 1 as the deposit was received in that tax period.
4.41 The above discussion of the general rules and the cash basis of accounting could suggest that you have to account for GST and input tax credits on a transaction by transaction basis. You can calculate your net amount from your total sales and total purchases for a tax period, rather than on a transaction by transaction basis. This will give the same result as accounting on a transaction by transaction basis.
Example
Ahlana is a toy wholesaler. She is registered. This table shows the creditable acquisitions and taxable supplies she attributes to one tax period.
| Creditable acquisitions | Taxable supplies | |||
|---|---|---|---|---|
| Item | Consideration | Item | Consideration | |
| 400 Big Ted | $30,000.00 | 550 Jemima | $20,000.00 | |
| 500 Little Ted | $20,000.00 | 200 Little Red Engine | $4,000.00 | |
| 200 Jemima | $4,000.00 | 400 Noddy | $12,000.00 | |
| New computer | $3,000.00 | 200 Little Ted | $18,000.00 | |
| Accounting software update | $450.00 | 200 Jemima | $10,000.00 | |
| 600 Little Red Engine | $5,350.00 | 100 Fire Truck | $600.00 | |
| Accountants services | $500.00 | 200 Big Ear | $4,000.00 | |
| 150 Fire Truck | $300.00 | 350 Big Ted | $50,000.00 | |
| Total creditable acquisitions | $63,600.00 | Total taxable supplies | $118,600.00 | |
Assuming there are no adjustments for that tax period, Ahlanas net amount is 1/11 of the difference between the total creditable acquisitions and the total taxable supplies for the tax period (see 4.1 for net amount). Ahlanas net amount for this tax period is $5,000. As Ahlanas total GST exceeds her total input tax credits, this net amount is the amount that Ahlana pays to the Commissioner when she lodges her return for that tax period.
Attribution rules determined by the Commissioner
4.42 The Commissioner can determine special attribution rules for certain transactions. Section 29-25 .
Example
If you make supplies through a coin operated vending machine you do not know when each payment is made. You only know what supplies you have made and how much you have been paid when you empty the machine. In this case you may attribute your supplies to the tax period in which you empty the machine. The other attribution rules could require attribution in the tax period when payment is made.
4.43 Such topics have not been covered in special rules in the Bill because they have no broader application. Section 29-25 allows the Commissioner to determine the tax periods to which specified taxable supplies, creditable acquisitions and creditable importations are attributable in the circumstances described in subsection 29-25(2) . The Commissioner cannot make a determination unless the general rules and the special rules that are in the Bill would apply inappropriately.