The 10 Most Common GST Coding Mistakes

If you own a small business, you may decide to take all your bookkeeping tasks internally to save some money. We have several clients whose partners take care of the day-to-day administration of the business.

Mixing admin tasks with bookkeeping tasks is a common misconception for many small business owners. It’s undeniable that, thanks to great Accounting apps like Xero or MYOB, some of the basic bookkeeping processes have been simplified. However, although recording transactions may be simpler, the complexity and consistent change in laws and regulations often cause inexperienced users to make serious mistakes in coding business transactions.

In this blog, we have compiled a list of the 10 most common GST coding mistakes we have encountered during our clients’ quarterly audits.

Why do these GST mistakes happen?

Before we get to our top-ten GST mistakes, we will review three key GST coding core topics to help you better understand how to code GST in Xero or MYOB.

1. Understand the difference between GST, GST Free and Non-Reportable GST Transactions;
2. Manage GST in Xero or MYOB Business;
3. Identify the correct documentation required to claim GST on purchases

1. Understand the difference between GST, GST Free and Non-Reportable GST Transactions

There are three GST transaction types:

• GST Transactions > any goods or services subject to GST. The total value of all these transactions must be declared to the ATO by reporting them on the Business Activity Statement;
• GST Free Transactions > any goods or services the Australian Government decided to exempt from GST. The list includes: certain medical services, Education, unprocessed food, export sales and more. A comprehensive list of GST free goods and services is available on the ATO Website.
  GST Free Transactions also include any goods or services from those businesses whose Annual Turnover is less than $75,000 per annum and who have chosen not to register for GST.
  Although these transactions do not include GST, they are still reportable in the Business Activity Statement
• Non-reportable Transactions > These transactions do not include GST as they are not goods or services. The list includes: Stamp Duty, Council Rates, Fines, interest etc. The value of these transactions is not included in the Business Activity Statement.

2. Manage GST in Xero or MYOB Business

Although there may be common ways to manage GST across different Accounting software, each application has its own way and rules to manage how GST is calculated and reported. As our expertise is limited to Xero and MYOB Small Business (AccountRight and Essentials), we will only outline the GST rules for these applications.

Xero

Managing GST
Xero uses Tax Rates to manage GST. The main GST Tax Rates in Xero are:

• GST on Income and GST on Expenses
  If values in a transaction line are entered as Tax Exclusive, these Tax Rates will add 10% GST to the value of the transaction.
  If the values in a transaction line are entered as Tax Inclusive, these Tax Rates will calculate GST by dividing the line value by 11.
• GST Free Income and GST Free Expenses
  When one of these Tax Rates is assigned to a transaction line, GST is not calculated on the line value. However, the line value is reported in the Activity Statement report for the relevant period as either GST Free Sales or Purchases.
• BAS Excluded
  When this Tax Rate is assigned to a transaction line, GST is not calculated on the line value. The line value is not reported in the Activity Statement report.
• GST on Imports
  This Tax Rate is used exclusively when a Clearance Agent charges GST on a consignment of goods imported into Australia from Overseas.

GST Rules
1. Always use Tax Rates to calculate GST. Never post GST by manually calculating 10% of a transaction and post it directly to the GST Account;
2. Only post directly to the GST account when you record the BAS transaction or when you record GST on Imports;

MYOB Business

Managing GST
MYOB uses Tax Codes to manage GST. The main GST Tax Codes in MYOB are:

• GST
  If values in a transaction line are entered as Tax Exclusive, this Tax Code will add 10% GST to the value of the transaction.
  If the values in a transaction line are entered as Tax Inclusive, this Tax Code will calculate GST by dividing the line value by 11.
• FRE
  When this Tax Code is assigned to a transaction line, GST is not calculated on the line value. However, the line value is reported in the Activity Statement report for the relevant period as either GST Free Sales or Purchases.
• N-T
  When this Tax Code is assigned to a transaction line, GST is not calculated on the line value. The line value is not reported in the Activity Statement report.

Although, at first sight, the range of Tax Codes seems simpler in MYOB, the absence of specific Tax Codes for Sales and Purchases transactions makes managing GST more difficult.

Therefore, as well as key rules, we will also include a couple of tips and tricks to get around some of the common GST reporting challenges in MYOB.

GST Rules
1. Always use Tax Codes to calculate GST. Never post GST by manually calculating 10% of a transaction and post it directly to the GST Account;
2. Only post directly to the GST account when you record the BAS transaction;
3. If you record an expense as a Spend Money transaction and receive a refund, never record the expense refund as Receive Money. Record it as a negative spend money transaction.

MYOB GST Tips & Tricks
If you wish to run a GST Accrual Summary report and reconcile it with your Profit & Loss, you will need to create two additional Tax Codes:

• NTE > to be assigned to all Non-Reportable Expense Accounts (i.e. Stamp Duty or Donations);
• NTI > to be assigned to all Non-Reportable Income Accounts (i.e. Government Grants);
• N-T (Existing) > should only be assigned to Balance Sheet accounts;

3. Identify the correct documentation required to claim GST on purchases

if you wish to claim GST for your business expenses, you must keep Tax Invoices for all purchases over $75 Ex GST (or $82.50 GST inclusive).

Two common objections we often hear from our clients…

”I don’t need to keep Tax Invoices. I make all my business purchases with my credit card. I can use my credit card statement as proof of purchase”.
Wrong! The ATO does not accept credit card statements as valid proof of business purchases, only Tax Invoices.

”I do keep “paperwork” for all my transactions.”
This sentence always alarms us. The only valid paperwork is a Tax Invoice. Credit card payment receipts, delivery dockets, quotes and purchase orders are NOT acceptable proof of purchase to claim GST.

The 10 most common GST Coding Mistakes

Now that we have covered the ground rules, let’s review our 10 most common GST coding mistakes. Whenever applicable, we will also include whether the transaction is income tax deductible or not.

Any goods or services included in our list are categorised as “GST” based on the assumption that the business issuing such goods or services is registered for GST. 

#1 Residential vs Commercial Rent

Inexperienced administrators often confuse income tax deductibility with GST deductibility. Home Office rent may be Income Tax deductible (always check with your Accountant first). However, residential rent does not have GST. Your business may claim a portion of the Home Office rent as an Income Tax deduction, not a GST deduction. As residential rent does not have GST, you do not need a Tax Invoice to claim it.

If your business rents a commercial space, commercial rent does have GST, and you will need a Tax Invoice from your landlord to claim it.

Property investors collect GST from renting commercial properties and can claim GST on all property management expenses. They must issue Tax Invoices to their tenants for GST and Tax purposes.

However, they do not collect GST from renting residential properties and cannot claim GST on property management expenses, but they can claim the full value of these expenses (inclusive of GST) as a tax-deductible cost.

#2 Rates and Stamp Duty

If your business owns a commercial property, building costs and rates, have different GST implications:

• Council Rates > Not reportable GST;
• Body Corporate Fees > GST;
• Water Rates > Not reportable GST;
• Stamp Duty > Not reportable GST;
• Land Tax > Not reportable GST;
• Real Estate Management Fees > GST.

If your business on-charges these rates to a tenant, you should add GST on these rates in your Tax Invoice.

#3 Business Registration Fees

There are various types of Business Registration Fees with different GST implications.

• ASIC Filing Fees > These fees include company registration and business names. These fees are Not reportable GST;
• Professional Association Annual Registrations > If your business is a member of Guilds or other Professional Associations (i.e. Master Builders), then these Annual Registrations have GST.

#4 Bank Fees, Merchant Fees and Credit Card Charges

Although these fees may all be charged by Financial Institutions, they have different GST implications:

• Bank Fees > These are fees your Financial Institution charges to manage your bank account. They may include: Accounting Keeping Fees, Overdraft Fees, International transaction fees etc. These charges are Not reportable GST
• Merchant Fees > These are the fees your Financial Institution charges when your business has merchant facilities (the ability to take Credit Card payments from your customers). These charges have GST
• Credit Card Charges > These are the fees a Financial Institution may charge when you use your credit card to pay your suppliers. The GST implications on these charges vary depending on the GST implication of the products or services purchased. If the credit card charges are applied to purchasing a product or service that includes GST, then the credit card fees also include GST. Alternatively, if these products and services do not have GST (i.e. an international transaction), these charges will also be Not reportable GST.

#5 Interests, Fines and Penalties

Fines take a different GST implication depending on the institution or business that issues them:

• Fines issued by City Councils > All fines issued by a City Council (Speeding fines, parking tickets, late payments on rates etc.) are both non-tax deductible and Not reportable GST;
• Late Lodgement Penalties issued by the ATO > These penalties are also both non-tax deductible and Not reportable GST;
• ATO General Interest Charges (GIC) > GIC is the interest calculated by the ATO when tax payments are made late. GIC is tax deductible but Not reportable GST;
• ATO Super Nominal Interest Charges (NIC), Admin Fees, and Part 7 Penalties > These are the penalties a business must pay to the ATO as part of a Superannuation Guarantee Charge lodged due to missed or late super payments. These charges are all non-tax deductible and Not reportable GST;
• Interest or late penalties charged by a Supplier > These charges are issued by a supplier (i.e. Telstra) due to late payments. The GST implications on these charges vary depending on the GST implication of the products or services purchased. If the charges are applied to purchasing a product or service that includes GST, the late fees/interest charges will also include GST. Alternatively, if these products and services do not have GST (i.e. an international transaction), these charges will also be Not reportable GST.

#6 Donations

It is important to understand a Donation can only be Tax deductible when the Association receiving such donation is a registered Deductible Gift Recipient (DGR). Before coding any transactions to Donations, you should check whether the charity is a registered DGR via the ASIC ABN Look-up website. If not, the transaction should be coded to a different account (i.e. Promotions and Giveaways).

Regardless of whether the Donation is Tax deductible, any money paid to a charity is Not reportable GST.

#7 Gift and Discount Vouchers

Discount and gift vouchers/cards are Not reportable GST.

If your business sells gift vouchers, the sale of all Gift vouchers should be recorded as a Business Liability, not revenue.

#8 Entertainment

The task of identifying client or staff entertainment versus gifts or refreshments is quite complex. We have covered this topic in more detail in a separate blog on our website.

Generally, if a meal paid to a client or staff is consumed outside the office, this is considered entertainment. Entertainment expenses are non-tax-deductible business expenses.

Although the meal receipt may include GST, a business cannot claim GST on these transactions. Therefore, these transactions should always be recorded as Not reportable GST.

#9 Training Courses

The GST implication on business training courses varies between accredited and non-accredited training courses.

An Accredited Training Course is a course approved by the Australian Government after being assessed by the Australian Skills Quality Authority (ASQA). When a Training Course is accredited, it is deemed as Vocational Education and, therefore, GST Free. An Accredited Training Course can only be delivered by a Registered Training Organisation (RTO).

Non-accredited courses, instead, are considered commercial services and, therefore, subject to GST.

#10 Insurance

There are three types of Insurance transactions, each with different GST implications:

1. Purchase of Insurance
When you purchase an insurance Premium, you may find different fees and charges outlined on the insurance invoices. The GST implication is different for these fees:

• • Premium > GST
  • Stamp Duty > Not reportable GST
  • Levies > GST
  • Admin Charges > GST
  • Broker Fees > GST

Some types of insurance premiums have different GST implications:

• • Life Insurance > Not reportable GST (generally, this is Tax deductible only when taken under a Self Managed Superannuation Fund SMSF)
  • Private Health Insurance > GST Free (this type of insurance cannot be deemed as business insurance. Therefore, it should never be recorded as a business expense)

2. Insurance Recoveries
An insurance recovery is a payment made by an insurance company upon a claim being lodged. For example, an employee was injured on-site, and the employer lodged a Workers’ Compensation claim.

These transactions are called “Recoveries” because the business generally advances the cost covered by the insurance and then recovers it by lodging a claim.

The payment of Insurance Recoveries is made to the business net of GST by the Insurance. Therefore, these transactions should be recorded as Not reportable GST.

3. Excess Payment
An excess payment is the insurer’s upfront cost when an insurance claim is lodged. For example, a business vehicle had an accident on the road. The business is required to pay $1,000 excess as part of the insurance claim. Insurance

If Excess Payments are made to the Insurer, these transactions are Not reportable GST. However, when the Excess Payments are made to a Third-Party company (generally the repairer), these payments include GST and a Tax Invoice is required to claim it.

Bonus #11 Motor Vehicle Purchases, Loans and Leases

The purchase of Motor Vehicles as a Business Asset has the most complex GST implications.

There are three types of Motor Vehicle purchase arrangements:

• Purchase with Full Payment > This is where the vehicle purchased is paid in full;
• Purchase via a Vehicle Loan > This is where the vehicle is purchased via a loan (commonly called a ‘Chattel Mortgage’);
• Lease > This is where the vehicle is purchased via a lease agreement. In this instance, the ownership of the vehicle is retained by the seller until the end of the lease agreement. At the end of the lease agreement, the business is offered the option to either purchase the leased vehicle at a residual value (commonly called ‘Balloon’) or return the vehicle and start a new lease.

The GST implications on these arrangements are:

Vehicle Lease Arrangements vs Loan Repayments
The periodic lease payments are recorded as vehicle expenses with GST. However, if the monthly amount payable is a loan repayment, these amounts are Not reportable GST.

Vehicle purchase either as fully paid or through a Vehicle Loan
The GST implications and Income tax deductibility on these transactions depend on:

1. Whether the vehicle purchased is deemed a commercial vehicle or a non-commercial vehicle used for business purposes.
   • Non-commercial vehicles used for business purposes > Non-commercial vehicles purchased for business purposes are subject to the ATO Annual Limit*.
   • Commercial Vehicles > include certain types of UTEs, Vans and Trucks. The Motor Vehicle Annual Limit* does not apply to commercial vehicles.
2. Whether the Vehicle is New or Second-Hand
   1. New Vehicles > If the Vehicle is New, not all components of the vehicle invoice are subject to GST. Here’s a summary of the most common components of vehicle charges:
      • Vehicle Cost (up to Annual Limit*) > GST;
      • Vehicle Cost (above Annual Limit*) > Not reportable GST (also non-Tax-deductible);
      • Stamp Duty > Not reportable GST;
      • Dealer Delivery > GST;
      • Premium Plates > Not reportable GST;
      • Business Registration > Not reportable GST;
      • CTP Insurance > Not reportable GST (as the dealer charges the value Net of GST directly in the invoice);
      • Luxury Car Tax > Not reportable GST.
   2. 2nd Hand Vehicles > The full value of the purchases of 2nd vehicles is subject to GST.

* What is the Motor Vehicle ATO Annual Limit?
The Motor Vehicle Annual Limit is the maximum amount a business can claim GST and Income Tax (via depreciation) from the vehicle purchase.
The Annual Limit amount is indexed by the ATO each year. The current vehicle’s Annual Limit can be found on the ATO website.

Conclusion

The correct identification of GST, GST Free and Not reportable GST transactions is not as simple as many people may think.

No matter how smart your Accounting system may be, it will never replace the knowledge of an experienced bookkeeper to understand and manage the complexity of Australian laws and regulations.

If you are on a tight budget and still want to save money by taking your day-to-day bookkeeping internally, consider investing towards a quarterly audit of your accounts.

Evolution Cloud Accounting’s services cater for all small business types and budgets. We have packages designed to review your file every quarter and lodge your Activity Statement for a fixed price or help you with complex tasks, including setting up the purchase of a new vehicle or processing tricky employment terminations.

We can also provide MYOB or Xero on-site training, setup, clean-up, and support.

Contact us to learn more about our flexible bookkeeping and training packages and get the support you need!

References

https://central.xero.com/s/article/Default-tax-rates-AU

https://help.myob.com/wiki/pages/viewpage.action?pageId=59869677

https://www.ato.gov.au/business/gst/when-to-charge-gst-(and-when-not-to)/gst-free-sales/#MainGSTfreeproductsandservices

​https://www.ato.gov.au/Business/GST/In-detail/Your-industry/Food/GST-and-food/?page=4

https://www.ato.gov.au/Business/GST/Tax-invoices/

https://www.ato.gov.au/Business/Fringe-benefits-tax/Types-of-fringe-benefits/Entertainment-related-fringe-benefits/how-to-work-out-fbt-on-entertainment/#:~:text=You%20can%20generally%20claim%20an,as%20an%20income%20tax%20deduction.

https://www.ato.gov.au/Business/GST/In-detail/Your-industry/Property/GST-and-residential-property/

https://www.ato.gov.au/Individuals/Investments-and-assets/Residential-rental-properties/Rental-expenses-you-can-t-claim/#:~:text=GST%20credits%20for%20anything%20you,of%20GST%2C%20if%20applicable).

https://www.ato.gov.au/individuals/income-deductions-offsets-and-records/deductions-you-can-claim/gifts-and-donations/

https://www.asqa.gov.au/course-accreditation/overview

https://www.ato.gov.au/Business/GST/In-detail/Your-industry/Financial-services-and-insurance/GST-and-insurance/

https://www.ato.gov.au/Business/Depreciation-and-capital-expenses-and-allowances/Simpler-depreciation-for-small-business/Assets-and-exclusions/?anchor=Carcostlimit#Carcostlimit

Disclaimer

This blog and attached resources are of general nature designed for informational and educational purposes only. They should not be construed as professional financial advice for your individual business. Should you need such advice, consult a licensed financial or tax advisor.