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Tax Briefing GST Basics

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Title: 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??
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