Calculating GST As A Small Business Or Sole Trader
There is a lot to be said about small businesses and sole traders who do it all, from marketing to accounting. With all these balls in the air, it is no surprise that many operators are often misinformed and feel under-resourced in this space. So before you let another year pass you by, let’s review the processes and commonly asked questions when it comes to GST.
The basics
GST, also known as goods and services tax, is a 10% value added to a sale. When it comes time to calculate GST, it is consecutively charged and paid for by small businesses and sole traders who have registered for GST. If you are registered for GST and charging it, this rolling figure must be documented and reported on. This happens at various points in the year, with GST totals reported to the ATO through BAS (business activity statement). How often this BAS is submitted will depend on the size and nature of your business. The level of detail required will also vary, with businesses turning over less than $10 million a year not needing to complete worksheets and detailed supporting documentation.
Is GST required for all small businesses and sole traders?
There are certain financial thresholds in place to determine whether or not a business needs to register for GST. If a business or sole trader has a turnover greater than $75,000, they must register for and pay GST. If this business or sole trader operates as a not-for-profit organisation, the threshold turnover is $150,000 or more. The ATO recommends that new businesses who are likely to earn $75,000 in their first year should register, and if they do not but then believe they will, they have three weeks (21 days) to register for GST.
Calculating GST
If you are building a website and charging your client $3,000 to do, you should add an additional $300 to your invoice if you are registered for GST. This $300 represents 10% of your ‘sale’ and that amount should be paid back to the ATO in due time through your BAS. Being registered for GST also means that you report on the GST that you have paid in that period, whether that be business expenses, training, or anything spent on behalf of the business operation. If you are lodging your quarterly BAS, and your sales turnover was $44,000 (including GST) and your business expenses were $5,500 (including GST), you will be required to pay $3,500 (which is $4,000 minus $500). If you engage a tax agent or use modern accounting software, many of these calculations will not be done by you manually, although it is important to understand.
Exemptions and advantages
There are a number of advantages to registering for GST, including looking professional to your clients who know that your annual turnover is greater than $75,000. It also assists in your first few years of business with all those expenditures that are typical with setting up a new business, as all that GST you paid will then go against what you earn and could reduce what you have to pass on to the ATO. There are certain exemptions for GST, which include some food and beverage items, some education courses and various exports and medical spends. If in doubt, query whether or not this is an acceptable spend of GST before you make the purchase.
There is a lot to consider as a small business owner or sole trader, but GST shouldn’t be something that you feel unsupported in. Keeping meticulous records will go a long way in this space, and will make the reporting process seamless for you or your tax agent.