Goods and Services Tax (GST) is a value-added tax that is applied to most goods and services in Australia. As a founder, it is important to understand how GST works and how it may impact your business.
The GST system in Australia is a multi-stage tax, meaning that it is applied at every stage of the supply chain. This includes the production, wholesale, and retail levels. Businesses that are registered for GST are known as "taxable entities" and are required to charge GST on the goods and services they provide. They are also required to pay GST on the goods and services they purchase from other businesses.
When a taxable entity charges GST on a good or service, they collect the tax on behalf of the government. This is known as "input tax." The taxable entity then claims back the GST they have paid on their own purchases, known as "input credits," from the government. The difference between the input tax collected and the input credits claimed is the GST that the taxable entity must remit to the government.
For example, let's say a startup founder runs a business that sells handmade soap. They purchase the raw materials to make the soap from a supplier for $100 and charge their customers $120 for the finished product. The GST on the raw materials is $10 and the GST on the finished product is $12. The startup founder would claim back the $10 in GST they paid on the raw materials and remit the difference of $2 to the government.
GST-Free goods
It is important to note that some goods and services are GST-free, such as basic food items and exports. GST-free items do not attract GST, and the business is not entitled to claim input tax credits for GST paid on purchases related to GST-free items.
In Australia, certain goods and services are considered GST-free, which means that they do not attract GST and the business is not entitled to claim input tax credits for GST paid on purchases related to GST-free items. Some examples of GST-free items include:
- Basic food items such as bread, milk, and fruit.
- Medical and healthcare products and services such as prescription medication, hospital treatment, and ambulance services.
- Education and training services such as primary and secondary school education, university tuition, and vocational training.
- Exports of goods and services
- Some financial services such as bank deposits, loans and mortgages, and credit card services.
What about GST for pre-revenue startups?
Pre-revenue startups may not have any income from sales yet, but they may still need to register for GST if they are providing taxable goods or services.
In Australia, a business must register for GST if its annual turnover (gross income) is $75,000 or more. However, some businesses with a turnover below this threshold can choose to register for GST voluntarily. It's important for pre-revenue startups to consider if it would be beneficial for them to register for GST, for example:
- If a pre-revenue startup is providing taxable goods or services and is likely to exceed the $75,000 threshold in the near future, it may be beneficial to register for GST early.
- If a pre-revenue startup is purchasing goods or services that are subject to GST and is able to claim GST credits, registering for GST may help offset some of the costs of these purchases.
If a pre-revenue startup is not yet registered for GST, they are not required to charge GST on goods or services they provide, and they cannot claim GST credits on purchases.
It's important to note that registering for GST is a legal requirement and failure to do so when required may result in penalties and fines. A startup should consult with a tax firm like Fullstack for advice on GST matters.
It's important to note that this list is not exhaustive and specific advice is recommended if you have a complex GST situation (i.e. a marketplace).