Even though the Goods & Services Tax (GST) has been around for the last couple of decades, it’s something that can be confusing at the best of times. This is especially so for most time-poor small business owners as their time evaporates whilst performing many different roles – technical work, research & development, sales, finance, marketing, HR, reception, bookkeeping and so on. Every Australian small business owner will need to consider sooner or later whether they should register their business for GST or not. Ideally, a plan should be in place on day 1. Getting this decision wrong can really hurt the business. This article will look at some good reasons for both registering and not registering for GST, as well as some of the issues to look out for along the way.
Some good reasons to register for GST
Although businesses with a turnover of less than $75K p.a. aren’t required to register for GST, there are some circumstances where it can be beneficial to do so. Here are some good reasons for any business to register for GST:
- Your business turnover exceeds $75K p.a. It probably goes without saying, but complying with the law is a good reason to register for GST. If your business turnover is greater than $75K p.a., or you expect it to exceed $75K p.a., then you’re required to register for GST.
- You want your business to look more professional. Depending on the type of business you operate and your business strategy, your customers/clients might prefer to work with a GST-registered business. A lack of GST registration indicates that your sales are quite low. Due to this, your customers/clients (both existing and potential) might perceive your business to be too amateur, inexperienced or small to do what they need. Registering for GST might alleviate their potential fears.
- Your business mainly sells to other businesses. One of the downsides to being registered for GST is needing to charge an extra 10% to your customers/clients (we’ll discuss this more below). That extra 10% is the GST component and should be payable on top of whatever you’re already charging. It can make you more expensive than your rivals for no real gain. If your business sells primarily to other businesses, however, than most of your customers/clients will likely be registered for GST. This means that they shouldn’t be worried about paying an extra 10% GST, since they will get a direct credit for it when they lodge their Business Activity Statement (BAS) with the ATO. Additionally, you’ll be able to claim GST on any of your materials/expenses that it applies to, effectively reducing your costs.
- You think you’ll end up registering for GST and need to invest in some GST-inclusive equipment/stock. If your business was initially not registered for GST but you expect its turnover to grow to more than $75K p.a. in the future, then you know it’ll need to register for GST at some point. If you have a significant upcoming business outlay (e.g. a car purchase or investment in stock), it may be a good idea to register for GST earlier, so that you’re able to claim the GST credit on the purchase. E.g. if a trades business needs to buy a $55K ute, it effectively pays an extra $5K (i.e. the GST component) if it’s not registered for GST. If the business is registered for GST, it would pay $55K but receive a GST credit (which can be refunded) of $5K.
- Your business’ sales are GST-free. Sales within the vast majority of industries are GST-inclusive, however not all businesses are required to charge GST on their sales. For example, GST isn’t required to be charged on a lot of medical or childcare services (amongst others). If your business operates within one of these industries, registering for GST will allow you to claim GST credits on your relevant expenses without needing to pay GST on your sales.
Some good reasons not to register for GST
Businesses which turnover less than $75K p.a. aren’t required to register for GST purposes. They can, however, register for GST voluntarily. Here are some good reasons not to voluntarily register for GST:
- It can make you more expensive if you sell mainly to consumers. If your business registers for GST, then it must charge GST to all customers/clients from the registration date onward. This will make you more expensive than your unregistered competitors. For example, let’s say a small new bike retailer charges $300 for a bike sale. If it registers for GST, it’ll need to charge 10% GST on top of what it previously was charging, taking the total price to $330. But almost all of its customers are individuals who aren’t registered for GST, so they won’t be able to claim the $30 GST. This means that registering for GST effectively makes the bike shop 10% more expensive. This will likely make it harder to generate sales.
- It will create more administration. For businesses required to be registered for GST (i.e. turnover > $75K p.a.), registering for GST will mean they’ll need to submit BAS to the ATO on a quarterly or monthly basis. This means that either the business owner will need to prepare this paperwork, or they’ll need an accountant to do this for them. Either way, it’ll create an extra cost for the business. Not registering for GST in the first place will certainly be simpler.
- Your business doesn’t generate many GST credits. Businesses in different industries have different types of expenditure. If your business’ costs mainly don’t include GST (e.g. wages), then the GST you collect on your sales will be significantly more than what pay to your suppliers. This will result in a GST bill with the ATO each quarter/month.
Common GST registration issues to deal with
Once you decide that you’d like (or need) to register your business for GST purposes, there’s some practical implications that need to be thought through:
- If my business turnover goes over $75K p.a., will the ATO charge GST on all my old sales? This is a common question we see from people thinking about GST registration. In a nutshell, the answer is no. If your business turnover exceeds $75K p.a., that should trigger you to register for GST. From the date you register for GST purposes, you’ll need to start charging GST from that point onward. There will be no historical GST obligation. If you don’t register for GST when you should, the ATO will likely pick this up when you lodge the relevant tax return.
- Make sure you understand your pricing! After registering for GST, a lot of people charge their customers/clients the same dollar figure but change their invoicing to indicate that the sales are now GST-inclusive. This is a huge mistake, as effectively those business have now given all their customers/clients a 9.09% discount. Although they’ll receive the same amount in cash, 1/11th of this (i.e. 9.09%) will be required to be paid to the ATO when the business lodges the relevant BAS. Depending on the business, this sort of discount has the ability to destroy its profitability. GST should always be charged on top of whatever the business was previously charging.
- Once registered, you’ll need to make immediate changes to your invoicing system. As previously mentioned, from the date of GST registration the business is required to charge GST on all its sales. Immediate changes need to be made to your invoicing system to ensure that this is accurately being reflected. For some businesses, this will involve ticking a “GST Registered?” box in their sales app or software package. For other businesses, it may require modification of invoice templates. To avoid headaches, make sure this happens at the relevant time.
- GST on imports and exports. It’s worth pointing out that GST is an Australian tax which applies to Australian customers/clients. If you operate an Australian business but sell internationally, you shouldn’t charge GST on your export sales. On the flipside, if you buy supplies overseas, the purchases of the goods themselves won’t attract GST. When the goods are processed through customs, however, GST will be charged on them and you’ll receive a separate invoice. These invoices are complex and need to be accounted for carefully.
- How to register for GST. You can do this using either ATO’s online services or by calling the ATO directly. However, it’s probably easier to ask an accountant to do this for you. It would certainly be worth running your plans by an accountant to make sure you’re making the right decision.
The verdict
Knowing whether or not to register for GST can be a confusing topic. What’s right for one business won’t necessarily be right for a different business. It’s important to understand the pros and cons of GST registration in order to make the right decision. Getting it wrong can be both inconvenient and costly. Make sure you have a chat to a professional (i.e. accountant) to help you make the right decision.
