GST - Basic Concepts This presentation is designed to highlight the main principles and by its very nature it is simplified and generalised in nature.

GST - Basic Concepts

This presentation is designed to highlight the main principles and by its very nature it is simplified and

generalised in nature. When considering any transaction, in particular, an unusual transaction either

due to its nature, value or complexity seek advice.

GST - Introduction• GST is a transaction based consumption tax whereby the final tax payable is borne by the consumer not by the

producer.

• Each transaction has a GST interpretation and classification aspect.

• It is a tax on the production cycle where at each point of the production process if there is a value added component GST can be raised.

• The main issues for the producer are cashflow planning & getting the classification and recording of transactions correct to ensure GST compliance

• The producer collects & remits the net GST to the ATO – in effect, each enterprise is a tax collector.

• GST covers more than goods & services – it covers real estate, creation of legal rights, entitlements to intangible assets and rights, plus goods & services.

• Goods are defined as: any form of tangible personal property. ( section 195-1 )

• Service not defined in the GST legislation – generally: any supply which is not a tangible good.

A service is the completion of some task, function or work involving direct human intervention. Eg doctor performing an operation or a lawyer drafting a contract.

Question 1

RMIT as you may know does not pay income tax and someone asks you the following question:

My school rents a car space on a monthly basis to a RMIT academic for $200 per month and raises an invoice for that amount.

Do we raise GST on the invoice & if so how much?

Question 2

RMIT sold a terrace house it owned in Cardigan Street Carlton, it was being rented out as a residential property since about July 2001 when RMIT first acquired it.

Initially RMIT was going to redevelop the property and the adjacent sites, which RMIT also owned into student accommodation, but there was a change of plans and the house was no longer needed so it was sold for $550,000.

How much GST due on the sale?

Question 3

RMIT is to establish a medical centre open to staff, students and residents of CBD Melbourne.

The first patient has a tattoo removed and the doctor bills the patient $110.

How much GST is liable on the service?

Question 4

Carol the carpenter repairs a partition and sends an invoice to RMIT for $88.

How much GST can RMIT claim back as input tax credit?

Question 5

A school at RMIT has to buy a piece of equipment but does not have the funds to so and has to arrange a bank loan.

The bank charges a fee of $1100, including GST, as a borrowing fee

What are the GST implications of this transaction?

Question 6

• RMIT has been engaged to undertake consulting work and provide advice on how an overseas company can get Australian government approval so that its aircraft can fly in Australia.

• The consulting and research work is carried out in Australia, the aircraft are located overseas.

• The contract has been drawn up with the provision that the “project cost is inclusive of GST”.

The first invoice is due to be raised for $20000 – how much GST should be raised and why?

First principals - GST Supply

• GST Charged & collected if–

You make a taxable supply which is:

1. a supply for consideration (ie in exchange for something of value )2. made in the course or furtherance of an enterprise

3. supply connected with Australia4. registered or required to be registered

And

Not a taxable supply to the extent it is GST free or input taxed.

Supply widely defined to include goods and services, assignments, grants. rights, obligations and financial supply etc section 9-10(2)

First principles – GST Free1.Main ones:

• Education provided by a registered provider• Medical – ( generally eligible for Medicare rebate )• Child care services• Exports• Basic food – meaning in general ‘raw’ food products available for human consumption eg.

vegetables

2.Others – you may encounter

• Religious services• Water, sewerage and drainage• Crown & farm land• Some activities of charities

3. Others – infrequently encountered

• cars for the disabled• sale of business• inbound duty free shop sales etc

First principles - GST Free Classification

• Why is the classification important:

• If GST free sale/ supply do not raise GST but can claim input credits on the acquisitions to generate the supply.

• So RMIT, which supplies mainly education services, which are GST free, can claim back the GST it pays, for example, on the computers acquired to generate education courses.

First Principles - Input taxed supplies

Recall the basic tests for assessing whether GST on a supply was to be raised excluded GST free and input taxed supplies.

What are Input taxed supplies?

Main ones:

Financial supplies

Supply of residential rental property

Sale of established residential property

Distinction between GST Free & Input Taxed

• If GST free can claim input tax credits on inputs to generate outputs, in contrast if it is an input taxed supply can not claim input credits associated with generating those type of supplies/sales and can not raise on GST on the supply.

GST free = can claim input tax credits

Input taxed x can’t claim input tax credits

Input Tax credits v Input taxed supply We have looked at input taxed supply – a supply on which no GST is payable and the supplier can not claim input tax credits.

What are input tax credits?

Input Credits: relate to goods & services used to generate income or outputs.

Sales or outputs have GST collected by the enterprise, conversely the enterprises get a credit or offset on the GST they pay for those items acquired to operate.

eg: power, rent, computers, advertising etc

GST calculation summary – BAS Summary

Sales/

Outputs

GST Collected

Expenses/

Inputs

Input tax credits

Education course 50000 0

Consulting 3000 300

Equipment sales 1000 100

Wages 60000 0

Electricity 2500 250

Water 5000 0

Equipment 60000 6000

Motor car expenses 15000 1500

Totals 54000 400 88500 7750

Net GST Result

In this simple example, the business may have generated a loss for the period, but it generated a net GST refund of:

GST collected 400Less Inputs tax credits -7750

Net refund (7350)

This result is typical for RMIT so it is important, given that the main sale/output of RMIT is GST free education, to correctly identify, classify and record the input side of transactions from a GST perspective at the school/portfolio level.

At the central FS level, more emphasis that both the inputs and outputs need to be equally considered since revenue grants from the State/Federal government plus other revenue sources are received by RMIT rather than by the school or portfolio.

GST CodesSimplified Tax Code (GST) decision maker

This is a simplified decision maker. For more detail information about Tax Codes refer to “GST at RMIT” internal web page

1 – Grants • Grants • Donations• Appropriations• Sponsorship• Gifts

In general these will be GST free as there is no payment in return for a service or good.A donation or gift is given for the purposes of benefaction or helping someone without any expectation of receiving something in return.

A gift of books from a book publisher to the library is GST free.

A grant from Big metal Ltd given to the Engineering faculty to study a new metal fabrication process they have developed and to prepare a report with recommendations, analysis and which then becomes the exclusive property of Big Metal Ltd.This is not probably not a gift but a fee for service and so subject to GST.

Question - Grants

Read the attached AACMA document dated 28.08.06 & RMIT invoice:

How would you record the transaction & why?

Now consider the AACMA document dated 31.12.07

AACMA Invoices

Aacma

Grant Decision Tree

Receive fundingMoney in the form of a grant, donation, gift,

sponsorship or scholarship

Obligation on RMITNo taxable supply

No GSTNo

Benefit provided by RMIT

No

Yes

Is benefit material?

YesNo

Taxable supplyGST applicable

Yes

Does the receipt of funding from the external party

create an obligation upon RMIT to complete a specific

activity?

Does RMIT provide a direct or indirect benefit to the external party or their

associates?

Does the benefit provided have nominal or real

monetary value?

The following examples were sourced from “GSRT 2000/11 Goods and Services Tax: Grants of Financial Assistance” and illustrate the above decision tree. 1. Material benefit to the giver: A grant is made to RMIT for the purpose of conducting specific research and providing a report on the results of that research to the grantor, which the grantor intends to use in its business. The report may be expected to provide a material benefit to the grantor. In this situation, the grant does not have the characteristics of a gift. The grant is consideration for the supply of the report and therefore subject to GST.

2. Fringe Benefits Tax - FBT

• As you may recall RMIT does not pay income tax but as an employer is subject to FBT which is a tax paid by RMIT in respect of benefits provided to RMIT employees ( or relatives family members, called associates, of employees )

• Expenses which are not deductible such as outputs subject to FBT are not deductible.

• Entertainment:

• The general rule/test is:

The test for claiming GST input tax credit is whether the expenditure was incurred in furtherance of an enterprise. Non-deductible expenditure do not give rise to input tax creditable acquisitions.

Conclusion:

If an item is subject to FBT it is non-deductible for income tax purposes ( not incurred in furtherance of an enterprise ) and as a result not eligible for claiming GST credits.

Examples of FBT expenses & GST Impact

• Example 1:an RMIT employee taking three clients out to lunch, alcohol served, at a cost of $400 including GST, the following is acceptable in terms of which entries to post based on the current chart of accounts:

- $100 Entertainment & Hospitality (FBT) - GST (account 556352)- $300 Hospitality & Meeting No FBT - No GST (account 553301)

• Example 2:Alternatively if the cost was say $200 ( the $300 minor benefit and the irregular and/or infrequent exemption may apply), could post the total expense to

$200 Hospitality and Meeting No FBT - No GST (account 553301)

This assumes it is difficult or impractical to somehow apportion the costs between the RMIT employee and the clients - & that the expenditure was unexpected and a once –off.

GST Impact of FBT Expenses

• Entertainment• Motor vehicle• Travel – eg. academic goes overseas to a run a course for 2 weeks

and adds 2 weeks of holiday: there may be a benefit.• Residual & Property benefits • The main RMIT employee provided benefits are:

Entertainment is the item you will most frequently encounter and in total dollar terms is significant, so this is what we shall examine.

Entertainment

Income Tax Act defines:

“Entertainment by way of food, drink, or recreation, or accommodation or travel to do with providing such entertainment.”

So it is:

Something pleasurable, a diversion not related to completion of a work obligation or task.

Basic questions / tests - will assist in determining whether or not entertainment:

Why was expenditure incurred? When during work hours or after?Who RMIT employees &/ or third parties/RMIT clientsWhere at RMIT or off-campus?

Tax Ruling – TR 97/17

RMIT is a tax exempt entity & the entertainment it provides falls under specific requirements tests:

Minor benefits – ( non-entertainment ) <$300 no FBT

If benefit is irregular, unexpected and or difficult to valueEg; taxi home after working back late one night then minor benefit

Minor benefits – (entertainment ) <$300 no FBT if meet two further alternate tests: ( section 58P(1)

1. RMIT employee’s entertainment is incidental to the entertainment of outsiders & consists of a light meal/refreshments or

2. ‘entertainment’ on RMIT premises to recognise the special achievements of an employee eg promotion or working 30 years+ at RMIT.

Entertainment examples

• Example 1:an RMIT employee taking three clients out to lunch, alcohol served, at a cost of $400 including GST, the following is acceptable in terms of which entries to post based on the current chart of accounts:

- $100 Entertainment & Hospitality (FBT) - GST (account 556352)- $300 Hospitality & Meeting No FBT - No GST (account 553301)

• Example 2:Alternatively if the cost was say $200 ( the $300 minor benefit and the irregular and/or infrequent exemption may apply), could post the total expense to

$200 Hospitality and Meeting No FBT - No GST (account 553301)

This assumes it is difficult or impractical to somehow apportion the costs between the RMIT employee and the clients - & that the expenditure was unexpected and a once –off.

FBT Entertainment

Question - 7

You are asked the following question.

A RMIT staff member is given a corporate card and on their first overseas trip spend $44,000.

Airfares - $11,000Accommodation - $ 22,000Meals - $ 11,000

One meal by itself was $3,300 including wine, beer, spirits and entertainment.

How is the transaction recorded and what is RMIT tax position?

Question - 8

You are asked the following question:

My school purchases wine in bulk this is consumed on site during various functions – farewells, presentations by clients, staff meetings & other seminars.

What are the FBT & GST implications?How should it be treated and recorded?

Question 9

An academic and staff member get an employer provided fringe benefit, they each make an

employee contribution to offset the FBT cost, they pay $1000 each.

What are the GST implications of these payments?

Possible answers to questions

1. Car park is subject to GST – slide 8

2. Input taxed - slide 11

3. GST = $6 removal of tattoo currently not subject to Medicare rebate .

Medical service means:

(a) a service for which medicare benefit is payable under Part II of the Health Insurance Act 1973; or

(b) any other service supplied by or on behalf of a *medical practitioner or *approved pathology practitioner that is generally accepted in the medical profession as being necessary for the appropriate treatment of the *recipient of the supply.

4. Nil – question states an ‘invoice’ not a ‘tax invoice’, therefore the inference is that Carol is not registered for GST.

5. Financial supplies are input taxed see slide 11 – however there are particular rules which can allow input credits to be claimed provided minimum thresholds are met - less than $50,000 or less than 10% of the total input credits for that year.

In general, claim all financial supply input credits, including in this example.

6. Nil – service is provided to an overseas entity and is not connected property located with Australia, therefore the supply not connected with Australia and so not subject to GST.

7. Probably require further info. On current info:

- no GST as all related to overseas therefore not connected to Australia – slide 8

8. Probably subject to FBT and so no GST input tax credits - slide 21.

9. employee contributions are subject to FBT - $1000/11 = $90.91