Common GST mistakes to watch out for

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The year 2010 marked a decade since GST first appeared on the tax landscape. It may not be an anniversary that warrants cake and bubbly, but certainly served as an occasion to take a look at what doesn't seem to be working so well with businesses and the GST system.

Small business has by and large been able to adapt to the GST regime – warts and all – and accounting software and computer systems have been developed and widely adopted to automate many tax compliance needs.

But mistakes still do creep in, and the Tax Office has identified the more common GST errors and omissions that businesses make. Over-claiming credits is on the Tax Office's radar, but also issues relating to record keeping, cash businesses and lax BAS habits.

Error watch list

Here are some of the mistakes the Tax Office has noted being made by small businesses. The list is not exhaustive, but may serve to underline areas that others have come to grief on – so you don't make the same blunders.

  • Claiming a credit without a valid tax invoice. Lodging a BAS without such back-up could get you in hot water, so get a duplicate invoice from the supplier. The Tax Office has (from July 1, 2010) given some slack to the regulations, but still…
  • Wrongly claiming GST credits on super or salary payments.
  • Incorrect claims for GST-free purchases such as basic food items, some health services or exports.
  • Claiming the total credits for a car bought for more than the luxury car limit (the maximum GST credit that can be claimed is $5,224 for 2010-11 – any GST paid on top of that is unfortunately not creditable, however the unclaimable GST amount may form part of the cost of the car for tax depreciation purposes).
  • Incorrectly claiming GST credits on bank fees, such as cheque book fees, annual or monthly fees. Bank fees are ‘input taxed' so the bank does not charge GST to its customers. There is however GST on credit card merchant fees, and so a credit can be claimed for these.
  • Mistakenly putting in a claim for credits from government charges such as land tax, council rates, water rates, car registration and ASIC filing fees, where no GST has been included in these.
  • Not reporting the GST on some government grants and incentive schemes that are received inclusive of GST.
  • Incorrectly claiming full credits on entertainment expenses when the business has elected for FBT purposes to use the 50/50 split method (which allows only 50% of input credits to be claimed).
  • Wrongly claiming a credit on the full cost of an insurance policy. There is a stamp duty component in the premium that is not subject to GST (although the actual amount of GST should be spelled out on the renewal form).
  • Sole traders and partnerships not apportioning input tax credits on expenditure that is for partly business and partly private use, such as vehicle expenses. Small businesses (with annual turnover up to $2 million) that lodge for GST quarterly or monthly can apportion private use annually rather than with each BAS.

Not surprisingly, many of the problems highlighted by the Tax Office are attributed to a misinterpretation of the legislation (the surprising thing being that this needed to be pointed out, given the complexity of the GST rules) with the classification of taxable supplies as GST-free or non-taxable high on its list of examples.

And these mistakes can involve some serious money. Using the 2007-08 year as an example, the Tax Office says that of the 1,864 GST-generating taxpayers it contacted, it was able to raise an extra $363 million in GST liabilities. Of the small business market, the Tax Office found that most GST revisions in this exercise came from the retail trade (17% of adjustments), rental, hiring and real estate services (14%) and construction (13%). You can download a copy of the Tax Office report ‘GST and integrity of business system risk' here.

BAS preparation can be tripped up by things such as transposing figures when completing the form, claiming a credit even though a valid tax invoice has been lost or misfiled (and not replaced by the supplier), and incorrectly transferring GST information between associated businesses. Also figuring largely in identified mistakes is the claiming of an entire tax invoice amount when part of the transaction is not subject to GST.

If you make a mistake on your BAS, it can always be fixed. Generally the way to do this is to correct a previous BAS, but in some circumstances you can make up for the error on a future BAS. See here for the Tax Office's guidelines on this.

For a good proportion of the above problem areas, accurate record keeping will go a long way to making sure these sorts of errors cannot slip through. But a weather eye will still need to be kept on one-off or sundry items not in the usual ambit of the business's core transactions, and that may not be accounted for correctly.

Find out more about GST and your business at Taxpayers Australia