Tax Briefing GST Basics

1
Tax Briefing GST Basics

• Achieving VPS Taxation Compliance
• Presented by Greg Berry
• Ernst Young

2
Agenda

• Introduction to GST
• Special Rules
• BAS Completion
• Correcting GST Mistakes and Penalties
• Case Studies

3
What is the GST?

• A tax system which applies
• to supplies
• for consideration
• in the course or furtherance of an enterprise
• connected with Australia
• by a registered person
• NB. But some exclusions

4
Types of Supplies

• Taxable Supply
• Broad base
• GST-Free Supply
• Education, Health, Exports, Some foods etc.
• Input Taxed Supply
• Financial Services etc.
• Outside Scope
• Salaries and wages, non-registered suppliers etc.

5
Supply

• Any form of supply whatsoever
• Includes (but not limited to)
• Supply of goods/services
• Provision of advice or information
• A grant, assignment or surrender of real property
• A creation, grant, transfer, assignment or
  surrender of any right
• A financial supply
• An entry into, or release from, an obligation
• To do anything or
• To refrain from an act or
• To tolerate an act or situation

6
Consideration

• Includes any payment, act or forbearance in
  connection with a supply of anything and
• Any payment, act or forbearance in response to or
  for the inducement of a supply of anything
• Can be monetary or non-monetary

7
What is an enterprise?

• Series of activities
• In the form of a business
• significant commercial activity
• intention to make profit
• size and scale of activity
• not a hobby, recreation or sporting activity
• In the form of an adventure or concern in the
  nature of trade
• Regular and continuous basis
• By the trustee of a fund to which deductible
  gifts can be made
• By a trustee of a complying superannuation fund

8
What is an enterprise?

• By a charitable institution or by a trustee of a
  charitable fund
• By a religious institution or
• By a Commonwealth, a State or a Territory, or by
  a body corporate, or corporation sole,
  established for a public purpose by or under a
  law of the Commonwealth, a State or a Territory
• What is not an enterprise?
• Employee activities
• Private recreational pursuits or hobbies

9
Connected with Australia

• Supply of goods wholly within Australia
• Supply of goods from or to Australia
• Supply of real property that is in Australia
• Supplies of anything else if either
• The thing is done in Australia or
• The suppler makes the supply through an
  enterprise that the supplier carries on in
  Australia (ie. permanent establishment)

10
Registration

• Required to be registered if
• entity carrying on an enterprise and
• annual turnover equals or exceeds 100,000
  (non-profit bodies) or 50,000 (all others)
• May choose to be registered if not required to be
  registered

11
Taxable supplies
ATO
2
4
4
10
6 - 2
10 - 6
Wholesaler
Consumer
Retailer
Manufacturer
22
66
110
Price 20 Plus Tax 2 22
Price 60 Plus Tax 6 66
Price 100 Plus Tax 10 110
12
GST-free supplies
ATO
2
(6)
4
0
6 - 2
0 - 6
Wholesaler
Manufacturer
Consumer (Overseas)
Exporter
22
66
100
Price 20 Plus Tax 2 22
Price 60 Plus Tax 6 66
Price 100
13
GST-free supplies - Examples

• Some Food
• For human consumption
• Place of consumption
• Health services
• Only where supplied to the end user
• Education
• Recognised courses only

14
GST-free Supplies - Examples

• Exported goods
• 60 day time limit
• Exported services
• Rights etc.
• Some services to overseas entities will be
  GST-free
• To be GST-free, services
• Must not be directly connected with goods or real
  property in Australia
• Must not be a supply of work physically performed
  on goods situated in Australia when the thing is
  done
• However, legislation has many other requirements

15
GST-free supplies - Examples

• Non-commercial activities of charitable
  institutions
• Water, sewerage, drainage
• Sale of a Going Concern
• All the things necessary for the continued
  operation of an enterprise must be supplied
• Supplier must carry on enterprise until the day
  of the supply
• Supplier and recipient must be registered for GST
• Supply must be for consideration
• Agreement in writing
• Grants of land by government

16
Input taxed supplies
ATO
2
(0)
4
6
6 - 2
0 - 0
22
Wholesaler
Manufacturer
Consumer
Bank
66
100
Price 20 Plus Tax 2 22
Price 60 Plus Tax 6 66
Price 100
17
Input taxed supplies - Examples

• Financial Supplies
• Loans
• Sale and acquisition of shares
• Interest component of hire purchase
• Life insurance
• Residential rent and residential premises
• School tuckshops and canteens
• Fund raising events conducted by charitable
  institutions

18
GST and input tax credits

• Supply GST Payable Input Tax Credit
• Taxable Yes Yes
• GST-free No Yes
• Input Taxed No No

19
Acquisitions

• Creditable acquisitions where an entity
• Acquires anything for a creditable purpose
  (defined)
• The supply of the thing was a taxable supply
• The entity provides, or is liable to provide,
  consideration for the supply
• The entity is registered or required to be
  registered
• Input tax credits can be claimed in relation to
  creditable acquisitions

20
Acquisitions

• Creditable purpose anything acquired in
  carrying on the entitys enterprise that
• Does not relate to supplies that would be input
  taxed or
• Is not private or domestic in nature

21
Importations

• An importation will be a creditable importation
  where
• It is imported solely or partly for a creditable
  purpose and
• The importation is a taxable importation
• The importer is registered or required to be
  registered
• Creditable purpose has similar meaning
• Taxable importation
• Goods must be imported and entered for home
  consumption
• Must not be a non-taxable importation
• GST paid to Customs or deferred

22
Adjustments

• Adjustment events
• Bad debts
• Changes in extent of creditable purpose

23
Adjustment Events

• An adjustment event is an event that
• Cancels the original supply or acquisition
• Changes the consideration for a supply or
• Causes a supply or acquisition to stop being or
  become a taxable supply or creditable acquisition.

An adjustment note for a taxable supply must be
issued by the supplier within 28 days of the
supplier becoming aware of the adjustment.
24
Bad Debts

• Where a debt is treated as bad, an adjustment
  can be made
• If a debt has been overdue for 12 months an
  adjustment can be made
• Where a bad debt subsequently becomes good (ie.
  payment is received), entities will be required
  to pay the GST back to the ATO

25
Change in extent of creditable purpose

• Where an input tax credit is claimed based on
  extent of creditable purpose, and the extent of
  creditable purpose subsequently changes
• Need to make adjustments to take into account the
  change in extent of creditable purpose
• Special rules for timing of adjustments to be
  made

26
Turnover Thresholds

• Registration
• Tax period
• Accounting for GST
• Electronic Lodgement
• Instalment

27
Registration

• Required to be registered if
• entity carrying on an enterprise and
• annual turnover equals or exceeds 100,000
  (non-profit bodies) or 50,000 (all others)
• May choose to be registered if not required to be
  registered

28
Tax Periods

• May be monthly or quarterly
• Monthly if annual turnover equals or exceeds 20m
• Usually quarterly if annual turnover less than
  20m

29
Accounting for GST

• Cash basis if annual turnover less than
  1,000,000
• Accrual basis if annual turnover equals or
  exceeds 1,000,000
• pay GST on earlier of receipt of any
  consideration or issue of invoice
• claim credit on earlier of payment of any
  consideration or receipt of invoice

30
Others

• Electronic lodgement threshold
• 20 million
• Instalment turnover threshold
• 2 million

31
Attribution of GST Payable

• Cash basis
• Attribute GST based on actual amounts of
  consideration received
• Accruals basis
• Total GST liability in relation to a taxable
  supply is attributable to
• The tax period in which any of the consideration
  is received for the supply or
• If earlier, the tax period in which an invoice
  was issued relating to the supply
• Note invoice can be any document notifying an
  obligation to make payment and can be different
  from a tax invoice

32
Attribution of input tax credits

• Cash basis
• Attribute credit based on actual amounts of
  consideration provided
• Must hold a tax invoice
• Accruals basis
• Input tax credit entitlement should be attributed
  to
• The tax period in which you provide any of the
  consideration for the acquisition or
• If, before consideration is provided, the tax
  period in which an invoice is issued
• Must hold a tax invoice

33
Attribution of Adjustments

• An adjustment is attributable to the tax period
  in which you become aware of the adjustment
• Must hold an adjustment note before a decreasing
  adjustment can be made

34
Documentation

• Tax invoices
• Adjustment notes
• Recipient created tax invoices and agreements
• Policies and procedures manuals

35
Tax Invoices

• Need a tax invoice to claim input tax credits
• Suppliers have a legal obligation to issue a tax
  invoice within 28 days of a request (where the
  supply is at least 50)
• All tax invoices should be inspected to ensure
  they satisfy the tax invoice requirements

36
Tax Invoice Format

• Format for supplies of 1,000 or more
• the ABN of the supplier
• the price for the taxable supply
• the words Tax Invoice stated prominently
• the date of issue of the tax invoice
• the name of the supplier

37
Tax Invoice Format

• the name of the recipient
• the address or ABN of the recipient
• a brief description of each thing supplied and
• for each description the quantity of goods or
  extent of services supplied
• A statement that the total includes GST, or the
  GST payable
• Format for supplies of less than 1,000
• only items 1, 2, 3, 4, 5, 8 and 10 highlighted
  above

38
Adjustment Notes

• An adjustment note for a taxable supply gt 1000
  must show
• the ABN of the entity issuing it
• the words Adjustment Note stated prominently
  (or tax Invoice where a credit results)
• the date of issue of the adjustment note
• the name of the supplier or agent of the
  supplier
• the name of the recipient or agent of the
  recipient
• the address or ABN of the recipient or agent of
  the recipient

39
Adjustment Notes

• a brief explanation for the adjustment (eg REF,
  REB)
• the difference between the price of the supply
  before and after the adjustment event and
• the amount of adjustment to the GST payable or a
  statement that the difference in price includes
  GST.
• Adjustment notes for a taxable supply lt 1,000
• No requirement to disclose
• the name of the recipient or agent of the
  recipient
• the address or ABN of the recipient or agent of
  the recipient

40
Recipient created tax invoices

• May be issued in certain circumstances by the
  recipient of the supply.
• May need to apply to the ATO for permission to
  issue recipient created tax invoices
• Need to enter into an agreement
• Format similar to tax invoices
• May reduce administration in some situations

41
RCTI Agreements

• Must specify that
• The recipient can issue tax invoices
• The supplier will not issue tax invoices
• That the supplier and recipient are registered
  for GST, and that each party will inform the
  other if registration ceases
• That the recipient will not issue a document that
  would otherwise be an RCTI if the supplier fails
  to comply with any of the requirements

42
Policies and procedures manuals

• Policies and procedures should be documented
• Assists new staff taking over existing roles
• Assists in showing the ATO that an effort has
  been made to comply with relevant taxation
  requirements PS 2002/8
• DTF Tax Compliance Framework requirement

43
Special Rules
44
Grants and Appropriations

• Appropriations not subject to GST
• Grants may or may not represent consideration for
  a taxable supply made by the grantee
• Grantee may be required to issue a tax invoice to
  the grantor
• Alternatively, recipient created tax invoices may
  be issued

45
Contra Arrangements

• Where Entity A provides goods and services, and
  receives payment in-kind, a contra arrangement
  exists.
• Both parties are liable for output tax on their
  respective supplies and must issue tax invoices.
• Both parties use the tax invoice received to
  offset their output tax liability and claim an
  input tax credit.

46
Contra Arrangements

• The result is tax neutral unless
• one party is not registered and can not issue a
  tax invoice or
• the input tax credits are blocked for income tax
  purposes (eg hospitality).
• Example sponsorship arrangements
• Where sponsor is registered for GST, need to
  swap tax invoices and value sponsorship
  provided
• Can also be a problem with timing

47
Structures - GST Groups

• Membership requirements company, trust,
  partnership etc
• Consequences of GST Group Approval
• GST liability
• Input tax credit entitlements
• Single entity treatment for calculating input tax
  credits and/or adjustments
• Intra-group transactions ignored

48
Structures GST Branches

• To be registered as a GST branch, the branch must
  have
• An independent system of accounting
• Must be able to be separately identified by
  reference to
• Nature of activities carried on through the
  branch or
• The location of the branch
• The branch must carry on or intend to carry on an
  enterprise
• Consequences
• Branch effectively treated as a separate entity
• Main entity treated as a separate entity

49
Structures Joint Ventures

• Membership requirements
• Consequences
• GST payable is payable by the joint venture
  operator and not the participant
• GST input tax credits are claimable by the joint
  venture operator and not the participant
• Transactions between participants excluded

50
Structures Non-profit sub-entities

• Special rule only applicable to charitable
  institutions, a trustee of a charitable fund, a
  gift deductible entity, a government school and
  certain non-profit bodies
• Any branch of the entity can be treated as a
  separate entity for GST purposes provided
• It maintains an independent system of accounting
  and
• It can be separately identified by reference to
  the nature of activities carried on through the
  branch or the location of the branch

51
Special Rules Government entities

• Government entities can register for GST even
  where they are not an entity and not carrying
  on an enterprise
• Special membership requirements for GST grouping
  purposes
• Some grants of land may be GST-free where
  supplied by governments

52
Agents

• Special rules allow agents to issue and receive
  tax invoices on behalf of the principal
• GST liability and input tax credit entitlement
  remains with principal
• Communication between agent and principal
  important to ensure correct input tax credits are
  claimed
• Agent and principal can enter into an agreement
  to treat transactions as principal to principal
  for GST purposes

53
Fees and charges not subject to GST

• List of various fees and charges to be exempt
  from the GST released in Determination format
  (over 300 pages)
• Exempt fees and charges vary in each State and
  Territory

54
Deposits

• Deposits given as security are not treated as
  consideration
• unless deposit is forfeited
• until later supply proceeds, then applied as part
  of consideration
• Therefore, should be no requirement to attribute
  GST where only a security deposit is received

55
Progressive and Periodic Supplies

• Treat each progressive or periodic supply as a
  separate supply, then apply normal attribution
  rules
• If components of supply not identifiable, use
  proportion of consideration against total
  consideration as a proxy
• Overall supply partly connected with Australia
• Components not connected to Australia will be
  treated as separate supplies with no connection
• Includes treatment of leases and hire
  arrangements

56
Anti-avoidance provisions

• Is the dominant purpose or principal effect of a
  scheme to give an entity a GST benefit?
• Stronger than income tax anti-avoidance
  provisions principal effect test
• Commissioner may negate the avoiders GST
  benefit

57
Second Hand Goods

• May have a deemed input tax credit when
  acquired from an un-registered entity
• Exception where the supply to the entity is
  taxable or GST-free
• Deemed input tax credit amount (gt300 in
  consideration)
• 1/11 of consideration provided for acquisition
• If greater than the amount of GST payable on the
  taxable supply of the goods purchased, then
  1/11th of the amount of GST on the taxable supply

58
Second Hand Goods

• Where GST payable on taxable supply lt 1/11 of
  consideration, ITC is 1/11th of consideration
  provided
• Can only attribution input tax credits to period
  during which consideration is received, or
  invoice issued
• Substitute documentation required to claim ITC
  (when acquisition gt50)

59
Vouchers

• Holder entitled to goods or services up to
  monetary value
• Where consideration for supply lt monetary value
• Supply of voucher not taxable supply
• GST payable when voucher redeemed
• Where consideration for supply gt monetary value
• excess over monetary value treated as taxable
  supply when voucher purchased

60
Vouchers

• Holder entitled to specific goods or services
• GST payable when voucher purchased
• No GST payable when voucher redeemed
• Increasing adjustments for unredeemed vouchers

61
Business Activity Statement (BAS)

• Net amount recorded in GST Return, which is
  incorporated into a Business Activity Statement
• Enables GST liabilities to be off-set against
  other tax liabilities such as PAYG, FBT, WET, LCT
• Net amount must be substantiated by a tax invoice
  for every input tax credit
• Cannot record credit in Business Activity
  Statement unless you have the relevant Tax
  Invoice

62
BAS Completion

• The use of the two methods of calculating the GST
  net amount
• Calculation Sheet method of BAS completion
• Derived from Accounts method of BAS completion
• Monthly BAS and Quarterly BAS
• Annual instalments

63
BAS Completion

• Calculation Sheet Method
• All boxes to be completed and must be GST
  inclusive
• Only include items that will be taxable supplies
  or that fall out through G2, G3 or G4
• Adjustments can be included in G1 or separately
  at G7 but not both

64
BAS Completion

• Derived From Accounts Method
• Must have adequate accounting systems to
  calculate GST net amount and provide audit trails
• Specifically, accounting system must have at
  least
• GST payable control account
• Input Tax Credit control account
• A GST adjustments control account is optional
• If meet these requirements, less detailed
  information may be provided on the BAS

65
BAS Completion

• Monthly or quarterly
• Subject to turnover thresholds If annual
  turnover is greater than 20 million, must submit
  monthly returns
• If less than 20 million, can choose monthly or
  quarterly
• Compliance costs
• Ability to obtain refunds from ATO in a timely
  manner
• Ability to delay GST liability
• Annual instalments
• Must be under threshold
• Must be in a net refund position
• Must have complied with all GST return
  obligations
• Must have a current GST lodgement record of at
  least 4 months

66
Correcting GST Mistakes

• Applies to mistakes made when completing prior
  BASs
• Does not apply to adjustments, only to errors and
  omissions
• Input tax credits that could have been claimed on
  an earlier BAS
• eg. not aware that tax invoice was held
• Claim on any BAS, as long as tax invoice is held.
  No time limit

67
Correcting GST Mistakes

• Time Limits

68
Correcting GST Mistakes

• Correction Limits

69
Correcting GST Mistakes

• If the limits are not satisfied, an amended BAS
  must be lodged for the relevant tax period/s.
• Must only correct genuine and reasonable mistakes
• Unable to use arrangements in fact sheet to
  correct errors if the ATO have advised of an
  intention to conduct a verification check
• Must keep records to explain corrections

70
Penalties for non-compliance

• Penalties may be incurred where
• Returns (BAS) are not lodged on time
• Incorrect amounts of GST are claimed/remitted to
  the ATO (ie. where there is a shortfall amount)
• Documentation is not retained
• Tax invoices are not issued
• General Interest Charge
• Remission policy PS 2002/8

71
Case studies

• Company A carries on an enterprise and has an
  annual turnover of 25 million.
• Does Company A need to register for GST?
• Can Company A submit monthly or quarterly BAS?
• Company A receives a grant for 1.1 million from
  a State Department
• Does Company A have a GST liability or input tax
  credit entitlement in relation to this grant?
• What is the amount of GST liability/input tax
  credit entitlement?

72
Case Studies

• Company A must register for GST
• Company A must submit monthly returns annual
  turnover is greater than 20 million
• Where the grant represented consideration for a
  taxable supply made by Company A, it will have a
  GST liability of 100,000
• i.e. 1/11th of 1.1 million

73
Case Studies

• XYZ Pty Ltd acquires goods from Arco
  Manufacturers for 220,000 in June 2002.
  However, the paperwork is delayed and XYZ Pty Ltd
  only receives a tax invoice in August 2002.
• Is XYZ Pty Ltd able to claim an input tax credit
  in its BAS for June 2002?
• If not, when is XYZ able to claim an input tax
  credit?

74
Case Studies

• XYZ has incorrectly claimed the 20,000 input tax
  credit in its June BAS
• Will XYZ be liable for any penalties?
• Can these penalties all be remitted?
• How can the mistake be corrected by XYZ on a
  subsequent BAS when the tax invoice is actually
  received (ie. August 2002 BAS), or does the June
  2002 BAS need to be re-submitted?
• Hint XYZs annual turnover is 50 million

75
Case Studies

• Answer
• XYZ could be liable for shortfall penalties
  because it claimed too much input tax credits
• General Interest Charge may also be imposed
• Shortfall penalty may be remitted, but General
  Interest Charge is likely to still apply
• XYZ will have to re-submit its June BAS - 20,000
  is greater than the correction limit of 10,000
• Note Correcting GST Mistakes Fact Sheet could
  be used, General Interest Charge would not apply

76
Conclusion

• Relatively straightforward basic concepts but
  special rules complicate GST compliance
• Need to be aware of all taxable supplies made so
  correct amounts of GST are remitted to ATO
  beware contra supplies!
• Use Correcting GST Mistakes Fact Sheet to avoid
  penalties and General Interest Charge

77
Questions??