Sales Tax Bulletin - No. 18

STB 18

Small Business Exemption

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Date of Issue: 1 December 1996

Valid from 1 December 1996

About this bulletin

This bulletin explains about the small businesses exemption and how you can determine whether or not you qualify for it. It is a public ruling for the purposes of section 77 of the Sales Tax Assessment Act 1992 and may be relied upon by any person to whom it applies. It replaces any previous private or public rulings, if they are inconsistent with the bulletin, and is current as at 1 December 1996.

If after reading this bulletin you need more information, call the Tax Office on 13 28 66 for the cost of a local call.

What is the small business exemption?

The small business exemption is designed to provide an exemption from sales tax for people who have only a small annual sales tax liability. The intention is that people who qualify for the exemption should not pay sales tax on their outputs, but they should pay sales tax on their inputs. This means that if you choose to use the small business exemption, you must pay sales tax to your supplier when buying your business input goods, raw materials or trading stock. You then do not have to charge sales tax to your customers when you sell goods.

Are there any transactions to which the small business exemption doesn't apply?

The small business exemption does not apply to:

• • the local entry of imported goods; or

• • goods purchased through inwards duty free stores; or

• • swimming pool shells constructed by pool builders or pool owner-builders.

Do I qualify for the small business exemption?

In order to qualify for the small business exemption on a taxable transaction (a taxable transaction includes sales and applications to your own use) you must be able to satisfy the following tests:

• • the $10,000 test; and

• • the inputs test.

You must meet both of these each time you make a taxable transaction to qualify for the small business exemption on that transaction.

The $10,000 test

To be eligible for the small business exemption, your sales tax liability for the previous 12 months must have been $10,000 or less and you must expect that your sales tax liability for the following 12 months will also be $10,000 or less. Calculate this as follows:

• • add the current transaction to those made over the 12 months immediately before it; and

• • add the current transaction to what you estimate your transactions will be for the following 12 months. You will need to estimate your transactions for the following 12 months on reasonable grounds, such as past sales, estimates of future turnover and whether or not you intend to introduce new lines of business.

Make sure that you:

• • include the current transaction in both calculations;

• • don't deduct any credits for sales tax paid on inputs;

• • don't include sales to people who quote sales tax registration numbers or exemption declarations.

The inputs test

Are you a manufacturer?

You will satisfy this test if you have paid sales tax on all inputs used in connection with this current transaction. These inputs are:

• • raw materials that form part of the finished goods;

• • machinery and equipment used in manufacturing the goods;

• • other business input goods used in connection with manufacturing, such as shelving for raw materials or lighting for the factory premises.

This test does not apply to machinery, equipment or goods used in connection with manufacturing that you bought or applied to your own use before 1 January 1993; or that you have used for 2 years or more.

Are you a wholesaler or retailer?

You will satisfy this test if you have paid sales tax on the purchase or importation of goods for sale.

What if I don't satisfy the tests?

You must satisfy both tests to qualify for the small business exemption on your current transaction. If you don't satisfy the tests, or if you only satisfy one of the tests, you do not qualify for the exemption and you must pay sales tax on the current transaction.

What if I have been claiming the small business exemption and I go over the $10,000 limit?

If you exceed the $10,000 limit of sales tax, you will have to calculate and collect sales tax on the current transaction. This requirement to calculate and collect sales tax continues for as long as you are over the $10,000 limit.

If you go under the $10,000 limit when making future taxable transactions, you can qualify for the small business exemption as long as you meet the inputs test.

What if I was exempt from sales tax before 1 January 1993?

Before 1 January 1993, if you were a manufacturer whose average annual sales of all goods was $50,000 or less , you did not have to pay sales tax on taxable transactions.

If you are a manufacturer and your average annual sales are still $50,000 or below, your exemption will continue as long as you satisfy the inputs test.

If your average annual sales exceed $50,000, you can still qualify for exemption on your transactions if you meet both the small business exemption tests (the $10,000 test and the inputs test ).

What if I hold tax free stocks?

If you are a manufacturer and you have stocks of taxable raw materials which you bought free of sales tax, you cannot claim the small business exemption on goods you manufacture from those raw materials. Sales tax will be payable on the goods you manufacture until the stocks of tax free raw materials have been used.

If you are a wholesaler or retailer, you cannot claim the small business exemption on transactions using tax free trading stock. Once you've used up all the tax free trading stock, you can claim the small business exemption if you meet the $10,000 test.

Can I get a refund if I sell to people who claim exemption?

If you are using the small business exemption, it means that you will have paid sales tax when you bought your goods. You can claim a refund of the sales tax you've paid when you sell those goods to people who quote. The amount of the refund is the tax that you paid when you bought the goods, to the extent that it has been excluded from the sale price.

Manufacturers are also entitled to a refund of sales tax paid on raw materials used to manufacture goods that are subsequently sold to people who quote. The amount of the refund is the tax you have paid on the raw materials, provided that amount of tax has not been passed on to the customer.

How do I claim the refund?

You can claim the refund from the Tax Office, either as a direct refund, or as credit on your sales tax return. You must keep copies of all records used to determine the amount of the claim, including:

• • the quotations of sales tax number, or exemption declarations, given to you by the purchaser to support their claim for exemption; and

• • purchase invoices showing the amount of sales tax you have paid when buying the goods.

You don't need to send these records to the Tax Office when making your claim. They should be kept for 5 years as we may want to check them later.

How do I apply for the small business exemption?

If you are registered for sales tax, please contact your local Tax Office, in writing, to tell us that you intend to use the small business exemption.

If you are not registered for sales tax, but qualify for the small business exemption, you do not have to contact the Tax Office.

Do you need more information?

If you have any questions or need more information about whether the small business exemption applies to you, please contact your local Tax Office:

• • by phone on our national sales tax enquiry number 13 28 66. You can ring this number from anywhere in Australia for the cost of a local call; or

• • in person by visiting the enquiry counter at your nearest Tax Office. Tax Office addresses are listed in TaxPack, as well as in your White Pages telephone directory.

ATO references:
NO NAT 2043.12.96