Businesses in Australia are required to deal with the goods and services tax (GST) in various ways — from charging customers 10% and paying the Tax Office the tax collected, to claiming GST on purchases.
While most businesses would typically be entitled to claim GST credits on their purchases, there are some instances where credits cannot be fully claimed – particularly when “financial supplies” are made, such as providing credit for goods sold.
Here we examine certain situations where all GST credits can be claimed when financial supplies are made under a special GST rule.
Rule for claiming GST credits
The general rule under GST law is that you cannot claim a GST credit for expenses if they relate to income that is not subject to GST itself. Under the GST laws, one of the exceptions to this rule applies to “financial supplies”.
Even though your business may not be a financial institution, it is still possible for you to make a financial supply.
If you provide credit to customers so they can make a purchase, and charge some interest on that credit, this is a financial supply.
The Tax Office lists the following examples of financial supplies:
- lending or borrowing money
- providing your customers with goods on credit for a fee
- buying or selling shares or other securities
- creating, transferring, assigning or receiving an interest in, or a right under, a superannuation fund
- providing or receiving credit under a hire purchase agreement entered into before July 1, 2012 if the credit is provided for a separate charge that is disclosed to the purchaser. (For hire purchase agreements entered into after June 30, 2012 the provision of credit is taxable).
These being “input taxed” means that you don’t pay GST on any financial supplies made, and generally can’t claim GST credits for the tax that is included in the cost of anything you buy to make those supplies. However, with regard to the above mentioned financial supplies, there are certain exceptions.
When you can claim GST credits
A business can claim GST credits for the tax paid on relevant purchases if any of the following applies:
- you do not exceed the financial acquisitions threshold of $150,000 (see below)
- your purchase relates to a borrowing you make, which in turn you use for making sales that are not input taxed
- your purchase is a “reduced credit acquisition” that you use to make a financial supply (which generally gives rise to a 75% claim).
- The financial acquisitions threshold is exceeded if you make, or are likely to make, financial acquisitions where the input tax credits related to making those acquisitions would exceed the lesser of either:
- $150,000 (on or after 1 July 2012), or
- 10% of the total amount of input tax credits to which you would be entitled.
Ask us if you require further explanation of any of these exceptions as these rules can be quite complex.
The subsequently available credits will vary depending on the particular business activities of an enterprise — but every little bit helps, as GST credits for financial supplies can build up over a year.
Example 1 – The share trader
By way of example, let’s look at Lisa, who is a share trader. The share trades she makes are “financial supplies” and therefore input taxed. This means Lisa is not required to register for GST. However, she registers voluntarily as she is running an enterprise.
Her turnover from the share trading is $80,000 and she incurs expenses relating to this income that have GST credits attaching to them. Provided these credits do not exceed the financial acquisition threshold of $150,000 (or 10% of the total credits to which her business would be entitled), she is able to claim GST credits on valid expenses that relate to this supply.
The credits attaching to such things as brokerage and relevant research publications on the purchase and sale of the shares would therefore be claimable. The purchase of the shares themselves however would not attract GST.
Example 2 – The Yak Shack
Consider The Yak Shack, which sells a kayak to Jack for $1,000 (plus GST of 10%, so a total of $1,100). The shop sells the kayak to Jack on credit and charges interest. As providing the credit is an input taxed financial supply, the retailer does not include GST on the amount of interest it charges to Jack.
In total, he pays $1,165, made up of the $1,100 purchase price (including $100 GST) plus interest of $65. The Yak Shack can claim a GST credit relating to purchases made to provide that financial supply (the credit provided to Jack) if the business has not exceeded the financial acquisitions threshold.