GST Topic 5 Part 1 Notes

GST Topic 5 - Chapter 13: Calculation Following CGT and FBT (Part 1)

Introduction

  • GST is a distinct tax from CGT and FBT.
  • Chapter 13 has been updated with diagrams and flowcharts for better understanding.
  • This presentation is divided into two parts:
    • Part 1: Up to slide 27.
    • Part 2: Slides 28-54.
  • The chapter starts on page 494 of the textbook.

Learning Objectives

  • Explain how GST works (general concepts).
  • Understand the concept of a taxable supply.
  • Understand taxable importations.
  • Identify GST-free supplies with examples.
  • Explain input tax supplies.
  • Identify supplies that are out of scope of GST.
  • Understand creditable acquisitions (Part 2).
  • Understand creditable importations (Part 2).
  • Describe administrative issues associated with GST.
  • Briefly mention the general anti-avoidance rule and ethical issues (not directly examinable).
  • Briefly touch on special rules (not directly examinable).

General Operation of GST

  • GST has been in effect for 24 years.
  • It is a broad-based consumption tax at 10% since its introduction.
  • Changing the rate requires agreement from all states.
  • The average GST rate in OECD countries is about 17%, compared to Australia's 10%.
  • GST covers importations into Australia.
  • The tax is charged and collected by registered entities at every stage of the production chain.
  • GST is borne by the consumer, not the business (businesses act as collection agents).
  • Businesses charge GST, claim back GST paid and remit the net amount to the ATO.

Basic Rules

  • Registration threshold:
    • 75,000 for commercial enterprises.
    • 150,000 for not-for-profit organizations.
  • Suppliers can claim input tax credits for GST paid.
  • The net amount (GST charged minus GST claimed back) is remitted to the ATO quarterly via a Business Activity Statement (BAS), along with FBT and PAYG.

How GST Works: Taxable Supplies

  • Flowchart on page 495 illustrates charging and claiming back GST.
  • The supply chain involves manufacturers, wholesalers, retailers, and consumers.
  • Example:
    • Manufacturer makes an item, paying 50 GST to the ATO.
    • Wholesaler charges 70; can claim back the 50 GST paid, so the difference is 20 to the ATO.
    • Retailer charges 100 and claims back 70; the 30 difference goes to the ATO.
    • Consumers pay 1100 for the item, including 100 GST (1/11th of the GST-inclusive price).
    • The 100 GST collected is the sum of GST collected at each stage (50 + 20 + 30 = 100).
  • Different types of supplies: taxable, taxable importations, and non-taxable supplies (GST-free, input tax supplies, and out-of-scope supplies).

Taxable Supplies

  • Overview on page 498.
  • Six elements are required to constitute a taxable supply:
    1. There must be a supply.
    2. There needs to be consideration (something for something).
    3. The entity must be registered or required to be registered for GST.
    4. The entity must be running an enterprise or a business venture.
    5. The supply must be connected with Australia.
    6. It cannot be a GST-free or input tax supply (mutually exclusive).

Example 13.2 (Page 497) - Jewellery Shop

  • A jewellery shop sells a diamond ring. Is it a taxable supply? Apply the six elements:
    • Supply made? Yes.
    • Consideration? Yes.
    • Entity registered? Yes (assumed).
    • Running a business? Yes.
    • Connected with Australia? Yes.
    • Not GST-free or input taxed? Yes.
  • Conclusion: It is a taxable supply.

Taxable Importations

  • Similar to taxable supplies but the supply is made from overseas.
  • Consumption occurs in Australia.
  • Example (Page 499):
    • Everything Electronic Pty Ltd imports goods costing 400,000 from Hong Kong.
    • Freight, insurance, and customs duties add to the cost.
    • GST is payable on the GST-inclusive value, which includes the cost of the goods plus customs, insurance, and freight.
    • If freight, insurance and customs duties are 65,000, then the GST inclusive value is 465,000. The GST payable is 10\% of 465,000. i.e. 46,500.

Low Value Imported Goods

  • Before 01/07/2018, goods under 1,000 were tax-free.
  • Now, all goods imported into Australia are subject to GST unless GST-free.
  • This ensures fair competition for local businesses.
  • Overseas businesses may be required to register for Australian GST, collect the GST, and remit it to the ATO.

Exceptions: GST-Free Supplies (Division 38)

  • Taxable supplies are covered under Division 9 (specifically 9-5).
  • GST-free supplies: No GST is charged, and input tax credits cannot be claimed.
  • GST-free is 'do not charge' and 'do not claim the credit'.
  • Examples:
    • Medical equipment (Page 500).
    • Basic food (Division 38, Schedules 1 and 2).

Medical Equipment - GST Free Supplies

  • GST free supplies of medical equipment.
  • Medical equipment supplied, sold the parts from the manufacturer 1,000. No input Tax Credit to ATO receives the 1,000 directly.
  • However, medical equipment manufacturer buys the parts and then sells it on to the hospital, they will charge 1,500 but be able to claim back 1,000.
  • So therefore 500 is taken in by the ATO.
  • The hospital supplies then the equipment and 1,500 GST but they can claim the whole credit of 1,500 that they actually paid.
  • So no GST is charged at the end of the day!
  • 1,500 of GST is received and you're claiming back 1,500 of GST, so the net amount is zero!
  • Medical items paid for at hospitals are GST-free under Division 38.

Basic Food

  • Basic food is covered under Division 38 Schedules 1 and 2.
  • Fresh fruit and vegetables, food fit for human consumption are GST-free.
  • Processed foods, restaurant foods, and takeaway foods are generally taxable.
  • Alcoholic beverages are generally subject to GST.

Example 13.4 (Page 502) - Hotel Services

  • Andrew Johnson operates a hotel and provides various services to guests.
  • A guest orders sandwiches and a bottle of wine and uses a free bus pickup service.
  • Goods and services consumed by tourists in Australia are generally subject to GST.
  • The sandwiches (processed food) and wine are subject to GST.
  • Food for consumption on the premises is subject to GST.

Health and Medical Services (Subdivision 38B Schedule 3)

  • Most health and medical services are GST-free.
  • Examples: services by pathologists, hospital treatment, medical aids, prescribed drugs, medicines, health foods.

Food and Health (Figure 13.6, page 504)

  • Schedule 1: Food that is not GST-free (prepared food, snacks, confectionery).
  • Schedule 2: GST-free beverages (milk products, soy milk, rice milk, fruit and vegetable juice, water).
  • Medical aids: pain relief, footwear for people, cardiovascular heart monitors, pacemakers (generally GST-free).

Education

  • Most educational courses are GST-free: preschool, primary school, secondary school, tertiary education (bachelor, master, doctoral).
  • Related supplies like textbooks and uniforms may be subject to GST.
  • Private tuition may be subject to GST.
  • Retraining and industry courses may be subject to GST if they don't fall under specific school education.

Childcare (Subdivision 38D)

  • Generally GST-free by approved childcare providers: daycare centers, family daycare centers, outside school hours care, occasional care services.

Exports (Page 505)

  • Goods going outside the country are GST-free.
  • Overseas travel is GST-free.

Input Tax Supplies (Division 40)

  • GST Free we charge, but we claim back!
  • Input Tax Supplies are we don't charge/claim back.
  • Supplies that don't fall into taxable or GST-free categories.
  • Commonly financial supplies and residential rents.
  • Too complicated to get involved with GST, so 'don't charge' and 'don't claim back'.
  • If GST is collected on supply of equipment and the parts, the GST is charged on the sale.
  • When the financial institution uses equipment to make input tax supplies no input tax credit can be claimed by the financial institution.

Flowchart (Page 505)

  • Computer equipment: supplier selling parts to a manufacturer.
  • GST is charged at 600, but no GST is claimed back.

Types of Input Tax Supplies (Page 506)

  • Financial supplies, residential rents, residential premises, precious metals, and school tuck shops.

Financial Supplies

  • Most services provided by banks and financial institutions: loans, investment advice.
  • Bank charges, interest charges, credit cards, loans, etc.
  • Banks can also supply taxable supplies such as accounting and legal services.

Residential Rents (Page 507, Subdivision 40C)

  • Renting of a private house by a landlord to a tenant.
  • The landlord cannot charge GST to the tenant.
  • The landlord cannot claim input tax credits on GST paid for expenses (insurance, repairs, agency commissions).
  • Commercial rent is different and claimable.

Sale of Residential Premises

  • Input taxed to the extent the property is used predominantly for residential accommodation.
  • No GST payable, and no GST input tax credits can be claimed for buying and selling residential property.
  • Sale of new residential premises is not input taxed. Builders and developers charge GST.
  • Sale of commercial premises is subject to GST.

Supplies Outside the Scope of GST

  • Supplies that don't fall into the taxable, GST-free, or input-taxed categories.
  • e.g., salary and wages (income), superannuation, annual leave, donations, and depreciation.

Summary (Page 509)

  • Four types of supplies:
    • Taxable supplies: Charge GST and claim it back (two positives).
    • GST-free: Do not charge GST, but you do claim back (negative/positive).
    • Input tax supplies (Division 40): Don't charge and don't claim back (two negatives).
    • Out-of-scope supplies: GST is not applicable.