Goods and Services Tax (GST) - Essay Example

Taxation Introduction Goods and services tax (GST) came into force as an open based indirect tax on 1st of July 2000. This open based indirect tax is set at a rate of 10%. This rate can only be changed if every state and territory in Australia agrees, and both Assembly of each Federal Parliament accepts the amendment. Goods and services tax is a legislation act under the new tax system (Goods and Services Tax) Act of 1999. This law is also common in other countries where it is either called GST or VAT (value added tax). GST is said to be indirect and broad based because, it is charged depending on the supply or activities of good and services instead of being charged directly on income. Also, these charges are applied generally to all taxpayers with a few limitations. Taxation under GST is applied on the goods and services that are used by consumers, meaning that, this system is a consumption taxation system. A step process is used in collection of taxes under GST, to make sure that tax is levied at every stage of production chain, and also to allow suppliers of goods and services who are registered to claim credit on tax paid to their inputs. Although tax is charged at every stage, tax is paid finally by the consumer at the end spot. For a firm to be able to take credit on GST, they must be registered. Thus, if they do not apply to be registered under GST, they are treated as the end consumers and can only enjoy the GST credit they incur. GST is classified into three types of supplies namely; taxable supplies, input tax supplies and GST free supplies. GST liability is created out of supply, but it is not created by the GST registered entity. The rules of GST do not apply if the supplies of either goods or services came to force before 1st July 2000, and in accordance to set special rules, gifts, when supply is made by entities not registered, or which are not required to register and when the transactions involved are not connected to Australia. Body content (A) Registration requirement In order to register Tiles Pty Ltd under GST system, the management needs to ensure that the firm satisfies the following requirements as stipulated under chapter 2, part 2-5 division 23 of the act. The main importance of registration is due to the following: - GST is only payable on any supplies for registered entities only Credits for input tax cannot be claimed unless the entity is registered GST returns are only lodged for registered entities 1. Determine whether it falls under entity structure required to be registered Under the goods and services act, an entity structure may include an individual, a sole corporate, a corporation body, a political body, a partnership, a trust and an unincorporated association or body of persons. Tiles Galore Pty Ltd is a small sized corporation, meaning that, it falls under an entity structure required to be registered. Thus, the firm can apply to be registered by ATO for GST. Registration requirements are in sec 23-5; it states that an entity is registered It is an enterprise Annual turnover meets the threshold for registration turnover The term entity is broad in definition and includes various legal persons as described here below; The trustee is that entity that should register for GST and ABN The partnerships are those entities that should register for GST but not for individual partners It thus entails that under section 23-10, an entity cannot be registered if it does not carry or intend to carry on with an enterprise. It is optional for that entity to register if it carries on an enterprise but does not meet the threshold for registration. 2. Does the entity make taxable supply reflected under the act Supplies fall under various sections namely; taxable supplies, GST free supplies and input taxed supplies. Other kinds are importations and those that fall outside the scope of the GST. Taxable supplies are determinant factors in ruling whether a certain transaction is worth falling under GST. This falls under section 9 – 5, though there has to be the presence of the five components as indicated below; presence of a supply, the making of the supply for consideration, the supply is in the course of enterprise furtherance, the supply has a connection to Australia and lastly the supply is registered or needs to be registered. A GST free or an input taxed supply is not amongst the list of taxable supplies. According to the ATO, a supply may be present even without there being an element of consumption. It also considers that for the good to constitute a supply, it must have some economic value and an entity that is independent from the transaction that is underlying. Section 9-10 puts across that money payment for some worth of supplies is not a supply as it would constitute doubling of the GST. For the firm to be within taxable supply, it must be making supplies that have a consideration element made during, or in extension of the activities that the enterprise transacts on daily basis and that are connected to Australia. Also, the firm must be one which is registered, or is required to register. Tiles Galore Pty Ltd firm as an importer and exporter of tile products transacts in activities that have an element of consideration, are part of the entity daily business activities and that are legally biding in Australia. Thus, the firm taxable supply is as reflected under the act. However, the supply is taxable to the extent that it is not under GST- free exemption or input tax. Under the act, exports fall under the GST – free. This means that, supplies through exportation of tiles by the company will not be covered by GST. The act further defines supply as any form of supply which includes the supply of the following; goods, services, information or advice provision, financial supply among others for there to be GST. This means that, the entity is indeed involved in supplies under the act, since it supplies tiles, which are goods supplied in and outside Australia. It is also good to note that supplies can take various forms and with fewer restrictions. Transactions can include more than one supply. Transactions that are unlawful as also considered to be supplies and are subjected according to the provisions of GST. Supplies are either revenues or assets. According to the regulations of ATO, supplies are considered to be things that normally pass from an entity to the other. If such a transaction includes some right or obligation, it is then not considered as an obligation unless those parties are legally bound in a certain way. According to ATO, there is a consideration that there may be some supplies even without an element of consumption. It considers that for an entry to some obligation to include supplies, the said obligation needs to have some economic value as well as some autonomous entity that lays separately from the transaction that lies therein. 3. Is the entity required to be registered under the act According to the laws of Australia, an entity is required to register for GST if it fulfills a number of requirements as indicated below: If the entity is being carried out as an enterprise and the current turnover or the projected turnover is from AUD$ 75, 000. The amount is $150,000 for a non profit making organization. If the entity supplies taxi or limousine services If the entity represents an entity that is incapacitated and the incapacitated entity is registered or needs to be registered, If the entity is a resident agent that acts for a non resident. For an entity to be required to be registered under the GST law under chapter 2 (section 23-10), it must be one which is already engaged in entrepreneurship activities. Also, it must in its existence, be making a set amount of annual turnover of $ 75,000 and over as provided under chapter 2 (section 23-15). Thus, under this guideline Tiles Pty Ltd fits under the entity structure that is required to be registered under GST system by ATO. This is because the firm is involved in entrepreneurship activities and its annual turnover currently is above $ 75,000. There are various reasons which make registration important for some various reasons as depicted below: - GST is only payable on supplies for registered entities Claims for input tax cannot be claimed unless the entity is registered GST returns need to be lodged if the entity is registered The registration requirements are in section 23-5. It states that an entity is supposed to be registered if one carries on an enterprise or the annual turnover meets the required turnover threshold. A broader definition is found in section 184 and includes various kinds of legal persons as follows The trustee is that entity tat is required to be registered for both the GST and the ABN Partnerships are those entities that require to be registered under the GST but not those that are individuals Under s.23, an entity cannot be registered if it is not an enterprise or not yearning to bean enterprise. If this entity carries on an enterprise but does not satisfy the turnover threshold for registration, registration is then optional. (B) Imports / creditable purpose Under the GST act chapter 2 (section 13-5), importation of goods into Australia attracts a tax referred to as taxable importation, as long as it is not a non-taxable importation. Goods become importation into Australia, if they are meant for home consumption by the owner of the goods. Importation of money in Australia is not considered as importation of goods under the act. As the owner of the goods, you are compelled by the law under this act to pay for any amount of taxable importation you make. The GST amount that is remitted from imports is 10% value of the taxable importation. To get the value of taxable importation, one has to make a summation of custom value, transport cost paid or payable to Australia and the insurance cost paid or payable to transport the goods as well as any other custom duty that is payable when importing the goods. Thus, the total taxable importation from the importation of the goods will be ($5,000 + $2000+$20,000 = $27,000) which are freight insurance cost and custom duty respectively. Thus, the GST amount payable is 10% of $27,000 = $2,700. An importer has a right to enjoy input tax credits from his creditable importation. One enjoys this provision if the importation of the goods is partly or solely of credible purpose, is taxable importation and is registered or under the act is required to be registered. Goods imported are said to be creditable purpose if they imported for the purpose of carrying on the enterprise. If the goods imported are found to have being imported for private or domestic purpose or are supplies that are part of input taxed, they are not considered to be for creditable purpose. Thus, from the importation of the goods by the firm, goods worth $1,000 which managing director intend to use for domestic purpose are excluded from creditable purpose. GST is also payable on importations that are taxable. The liability for the GST falls on the importers and not the suppliers. This kind of an obligation lies on the grounds not considering whether the importers are registered or are required to be registered. Taxable importations arise on two grounds; when there is importation of goods and when they are entered for consumption at the home level. In the case that these goods are GST free or if the goods are input taxed, there is no liability for GST. For the taxable importations, GST is usually 10% of the value of that importation which is a sum of the customs value of those goods, cost of transportation and the cost of insurance. (C) Loan and Credit facility Loans and credit facilities fall under financial supplies which are also under the input taxed supplies. Financial supplies include facilities such as banks, insurance brokers, and financial institutions. Supplies that are made to accountants are not deemed as financial supplies. The financial supplies are in the concept of supply of various financial facilities. Such supplies may include direct lending or indirect lending to a given customer or a broker for mortgages. The financial supplies become input taxed as it is hard to determine their value and thus calculate the payable GST. Loans fall under this category and are listed amongst ten other things which include mortgages, money dealings, superannuation funds, allocated pension, annuity and life insurance, guarantees, hire purchase credits under some particular terms, securities, derivatives and currency. Under regulation 40-5.12, there is some exclusion to things that might fall within the clause of taxable supplies. It is also worth noting that financial supplies are not only made by financial institutions as also other businesses make the supplies in their day to day carrying out of their businesses. Money that is received by means of borrowing is a financial supply which is input taxed under chapter 3 (section 40-5). Thus, the loan the firm received from ABC Finance is under input tax supply, under the act. (D) Exports Under the act, the supply of goods meant for export is classified under GST – free as it provided under chapter 3 (section 38-185). This is only possible if the supply of the goods meant for exportation takes place within 60 days after the supplier receives any kind of payment, or after the supplier issues an invoice. Invoicing of the goods, in this case, was done on 1st of October 2011 and payment was done on 31st of October the same year. However, the actual exportation of the goods was done on 20th November the same year. This means that, the exportation of the goods took place within 60 days, as it took 50 days after the invoicing. This means that the exportation of the goods got the opportunity to fall under the GST – free classification. The goods that have since being imported back to Australia by the supplier do not fall under GST – free zone. The general GST principle is that it is only intended for Australian tax consumption. It thus holds that exporting other goods, services or other things is free as it happens outside Australia. In this case, it is only export supply that is considered to be GST free. The goods considered in this section are detailed in a tabular manner in section 38-185. The legislation for GST does not have a formal definition for exports. There are other provisions that exist that relate to the export of those goods that are hired or the goods that are leased. For supplies to be declared GST free, the supplier needs to export them within 60days after he has received any consideration from these goods. If the same goods were invoiced before making of any payments, they need to be exported within the 60 day period. (E) Accounting and Administration A company can choose to use cash basis method of accounting, if its annual turnover is not above the cash accounting limit under section 29-40. One may choose to account on cash basis, by starting with the first day of the tax period one chooses. The threshold put for cash accounting turnover is $500,000 or any other higher amount that may be specified by the regulations. Tiles Galore Pty Ltd predicts that its turnover will be $30,000 per month in the coming year. This means that its annual cash turnover is expected to amount to ($30,000* 12 = $360,000) from next year. This means that the turnover is short of the set limit of cash turnover amount under the act. Thus, the firm has no problem if it decides to continue accounting for its tax income on accrual basis as it is within the limit. However, the company is required to apply to the commissioner of Australia tax office for permission to account tax income on accrual basis. The act provides that, the commissioner will consider the size and nature of the firm, ones current accounting system and the method under which one accounts for the tax income. Once satisfied, the commissioner is supposed to notify the concerned individual of his or her decision. A tax invoice is meant for taxable supply which is issued by the supplier. An ABN of the firm that issues the tax invoice and the price of the supply must be reflected in the tax invoice. Also, it must contain all relevant information which are required by the regulator and are approved. A tax invoice must be supplied within 28 days after by the supplier and once the recipient of the supply demands for it, unless it has being created by the recipient. (F) BAS BAS under small to medium sized enterprises is supposed to contain the following information to the ATO; firm exploitation on export tax exemption, how it exploits WET producers rebate advantage, recent development in property investment, possible or recent acquisitions or mergers, input tax claims and internal accounting controls. In the case where the returns for GST are discussed in a separate legislation, the said return is then incorporated in the BAS of an entity. BAS, which stands for business activity statement, is a document that is used to report tax obligations of various natures like PAYG payments (Pay As You Go). There exist some restrictions on the kind of people who have the authority to charge or prepare BAS on behalf of taxpayers and also advising on it. This also happens for cases of dealing with ATO for the basis of the obligations of BAS. Before March, 2010, these were tax agents and bookkeepers under the agents. Currently, there is a national legislation that governs the people in the business of providing BAS services for a certain fee. The BAS agents need to meet some experience tests as well as minimum educational requirements. Services provided by BAS are preparation of returns about the liabilities of the taxpayer, obligations, and entitlements under the provisions of BAS. They are also responsible for giving the taxpayers some advice about the provisions that they can expect to reasonably rely on for satisfaction of their tax obligations. BAS is also responsible for dealing with the commissioner in place of the taxpayers in matters that relate to the provision of BAS. (G). Purchase of motor vehicle Under the act, acquisition of a specified commodity that brings in financial supply element, gives rise to right of reduced input tax credit as provided in section 129-5. The amount that can be gained from input tax credit is a product of GST, payable during the supply of purchases by percentage specified by the regulation, and in respect to the commodity being purchased. A purchase of a kind through reduced credit is permissible to be of creditable purpose, if it is made through financial supply. Thus, the firm will make a tax credit claim and lodge it for in the next BAS by applying for tax credit and financing the purchase of the vehicle by borrowing from a financial institution. The amount that they will claim will be ($75,000 * percentage specified by the regulation). (H). Cash flow Registering for GST will allow the firm to be able to reflect cash flow with ease as they will have a tax report at all time that will show movement of various transactions. The firm will at all time be expected to record their transactions under the tax invoice which will be a good source of information regarding how the entity transact on daily basis. Thus, the firm will be able to benefit by holding the taxes they receive from customers before they pay to ATO. (I). Purchase of competitors business Tiles Galore PTY ltd can avoid paying GST if it purchases the rival company as a going concern entity which will make it as a GST – free under section 38-325 of chapter 3. A going concern supply is GST – free if it has consideration characteristic, buyer of the commodity is registered or is required to be registered and the both seller and buyer have agreed by mean of a written document that the sale is on going concern basis. Thus, the firm should only accept to purchase the business if the rival company owners agree to under a written document to sell the business a going concern entity. According to the above stated data, Basic provisions contained in taxable supplies may be made by Tiles Galore Pty Ltd due to the following considerations: - The supply is for consideration; and The supply is connected with Australia; and The Company is registered, However, the supply is not a taxable supply to the extent that it is GST free or input taxed.\ Basing the topic on this analysis, the supplies are thus caught by the act. Meaning of creditable purpose This concept is stated in the same terms in both importations and acquisitions in the GST act and requires some conditions as follows: - One acquires or imports a thing/good for a “creditable purpose” to the extent that they do so in carrying their enterprise One does not acquire or import goods for “creditable purposes” to the extent that that acquisition relates to making some supplies that would be taxed for input or if the importation is private. Conclusion A GST system is of much importance to the firm, as it will improve its financial management in the future. The system will improve the record keeping of the transaction that the companies engage in, a factor which will ease management. Good record keeping helps firms in indentifying areas where they can be able to exploit by making some opportunistic financial spending. Also, by registering to the GST system the company will be able to avoid heavy penalties that may be realized as a result of tax evasion without the knowledge of the management. Thus, the management should adopt the system in order to keep track of their business and avoid risks. References Australian Government Business Register (2012) required to register for GST What to select, < http://help.abr.gov.au/AG/Index/Register/Required_to_register_for_GST/ > Australia, 2011. Australian GST legislation with overview. Melbourne. CCH Australia limited. Christensen, S and Duncan, W 2009. Sale of business in Australia. Perth. Federation press. Lang, M and Melz, P 2009. Value added Tax and Direct Taxation: similarities and difference. Melbourne. IBFD publishers. McCouat, P 2011. Australia masters GST guide. Melbourne. CCH Australia limited. Nethercott, L, Devos, K and Richardson, G 2010. Australian taxation study manual. Sydney. Oxford press. Rendahl, P 2009. Cross border consumption taxation of digital supplies. Sydney. IBFD publishers. Warhurst, J and Simms, M 2002. 2001:the centenary election. Queensland. University of Queensland press. Read More