Business Tax Made Easy: What Are GST Credits and When Can You Claim Them?

When you generate a gross annual income of $75,000 or more in your business, you will be required to register and collect the Goods and Services Tax (GST). You’ll then have to complete a monthly, quarterly, or yearly Business Activity Statement (BAS) and lodge it with the Australian Taxation Office (ATO).

At that stage, you’ll have a number of other rights and obligations to wrap your head around. In this article, we’ll take you through all the details you need to understand about GST credits.

Once you’ve registered for GST, a crucial part of your obligation will involve charging an additional 10% when you invoice your customers for the goods and services you sell. This 10% represents the GST you collect on behalf of the ATO. 

Pro Tax Tip: If you’re not sure whether you should register for GST, head over to our Complete Guide to the Goods & Services Tax for Beginners. You’ll find all the information you need there. If you still have any questions, a friendly ITP accounting professional is only ever a phone call away.

What are GST credits? 

This term refers to the GST you incur as a business expense to create your goods or services. You may also hear them called Input Tax Credits. The ATO allows you to claim back the GST credits you incur as part of the expenses involved in providing your goods or services.

Pro Tax Tip: When you collect your GST credits, it’s a good idea to keep them in a separate bank account. That way, when the time comes, you have the funds ready to send to the ATO.

How do you calculate GST Input Tax Credits? 

To calculate your input tax credits, you’ll need to add up the GST you have paid or are liable to pay on your business expenses. You’ll then offset this figure against the GST you have collected. 

For example, you may have invoiced your customer $110, which includes $100 of your invoice plus the additional 10% GST. You’ll need to set aside $10 in a nominated bank account.

In order to provide those goods or services, you may have incurred expenses which equates to $3 of GST. You are able to claim back the $3 of GST paid as Input Tax Credits, so you will only need to send $7 to the ATO as a part of your GST obligations.

2 business woman discussing GST

What GST credits can I claim?

The ATO applies a specific set of rules to GST credits. You must be able to demonstrate that you are in a business by:

  • Striving to make a profit 
  • Keeping records of your invoicing and expenses 
  • Providing commercial goods or services 
  • Marketing and advertising 
  • Developing a business plan 

If you’re indulging in a hobby, then you cannot claim GST credits on expenses relating to that hobby. The ATO defines hobbies as:

  • Not aspiring to make a profit
  • Not carried out in a business-type manner
  • Irregular in its activity
  • Done for enjoyment and satisfaction

If you think you have a hobby rather than a business, you may have to cancel your ABN and GST registrations. However, you may also need to amend prior BAS forms where you have claimed GST credits for your hobby. We recommend contacting an ITP accountant to help with this as it can get complicated, and you want to be 100% sure you’re doing the right thing. If this sounds like something you need to do, use our office locator to speak with a tax agent at your most convenient ITP branch.

Are there any restrictions on claiming GST Input Tax Credits?

Strict rules govern your eligibility to claim GST credits. Let’s take a look at them in detail.

Your expenses must be business-related. You must also have incurred them in order to provide your goods or services. If your expenses have a personal portion, you’ll need to work that out and claim only the business-related portion.

Your purchase price must include the GST (if over $82.50). Any time you find an invoice that doesn’t list a GST component, check whether your supplier is registered for GST. If they are registered and the invoice is not a standard tax invoice, you are allowed to request a proper tax invoice showing the GST allocation. If you’re unsure whether your supplier is obligated to collect GST, you can check their GST status by searching the ABN Lookup Website.

To claim your GST credit, you must have already paid the GST on the item you purchased. For this reason, it’s crucial to retain your tax invoice in either hard copy or digital format as proof of purchase. 

You can’t claim any GST credits on certain items, including:

  • Wages
  • GST-free goods
  • Loan and interest fees
  • Items bought for private use
  • Residential accommodation
  • Entertainment expenses
  • Land purchases.

Note that special rules apply when claiming GST credits for some motor vehicles.

Pro Tax Tip: If you’re unsure about what you can or can’t claim, it’s best to seek advice. Your tax agent will know exactly what you can claim and the correct portion you’ll need to calculate. 

Are there time limits on claiming GST credits and refunds? 

To get the GST input tax credits you’re legally entitled to, you need to submit your claim within four years. To be clear, your entitlement to claim ends four years from the due date of your earliest BAS. You are entitled to claim on any BAS lodged in this period, which is called the Period of Review.

Pro Tax Tip: If you have discovered an error, you are entitled to revise the BAS, request an amendment in writing, and correct the error at a later date. Once again, we recommend consulting with your accountant if you need to make amendments like this as it’s crucial to get these things 100% correct.

Bookkeeping and GST credits

It is a good idea to have a dedicated bookkeeper for your business. Not only will they free up your time to work on important tasks other than your books, but they will also have the skills and knowledge to claim all of your eligible GST Tax Input Credits. Minimising the GST you are obligated to pay is just one of many ways a good bookkeeper can save you money.

An added benefit of being up-to-date with your accounts is that you’ll know the exact cash position of your business on any given day. Armed with this knowledge, you can work to keep your business profitable. 

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ITP’s accounting professionals are more than just tax agents. We spend our days helping Australian businesses across the country with expert bookkeeping, complex accounting, and financial advice. Whether you need help one day or five days a week, speak with a friendly ITP professional to discuss your exact needs today.