Are you able to boost your GST credit claims?

The goods and services tax (GST) costs businesses money in two ways. The most obvious is the tax levied on a business’s goods and services, but there is a second, more subtle, cost — the professional fees, time and other administrative costs associated with GST.

Most businesses focus on reducing the costs of complying with this tax, however many may be overlooking opportunities to not just reduce the GST levied but, for certain businesses, to be in a GST refund position year-on-year.

From time to time, politicians may hint via mainstream media that a change to the GST credits that a business can claim may be on the cards — and one of these changes could be the ability to claim credits against expenses relating to income for “financial supplies”.

The general rule in this area of tax law is that you cannot claim a GST credit for expenses if they relate to income that is not subject to GST itself. One of the exceptions to this rule is for “financial supplies”.

Even though your business may not be a financial institution, it is still possible for you to make a financial supply. For example, 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 ATO lists examples of financial supplies as the following:

  • lending or borrowing money
  • providing your customers with goods on credit for a fee
  • creating, maintaining and closing your customer’s bank account
  • life insurance
  • dealing in
    • debt
    • equity
    • unit trusts
    • partnership interests, and
    • futures contracts.

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 four exceptions.

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 (see below)
  • you use the purchase to make a financial supply through a business or a part of a business that you carry on outside Australia
  • your purchase relates to a borrowing you make, which in turn you use for making sales that are not input taxed (this does not include a borrowing through a deposit account you make on or after July 1, 2012, if you are an Australian authorised deposit taking institution, such as a bank, building society or credit union)
  • your purchase is a “reduced credit acquisition” that you use to make a financial supply (which generally gives rise to a 75% claim).

Ask this office if you require further explanation of any of these exceptions.

The financial acquisitions threshold (beyond which GST credits cannot be claimed) is a double-barrelled affair, in that it can be exceeded by either of two tests. For the relevant 12-month period, if the GST credits you could claim for financial supplies are more than 10% of the total amount of GST credits for all purchases (including financial acquisitions), you will have exceeded the threshold. You will also go over the threshold if GST credits from financial supplies are more than $150,000 for the year.

This last threshold has been pegged at $150,000 only since the start of the 2012-13 financial year (it was previously $50,000, and was set when GST was introduced in 2000) — which means that a business’s capacity to make such claims (under this part of the double-barrell threshold) has increased threefold.

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.

How it works

By way of example, let’s look at Steve, who earns income from two businesses, one of which is share trading. The share trades he makes are “financial supplies” and therefore input taxed. This means Steve is not required to register for GST for this business income. However, he is registered due to his other enterprise.

The annual monthly GST credits relating to expenses from share trading activities (for say, brokerage and relevant research publications) is $8,000 and the remainder of GST credits he can claim from his retail clothing store is $90,000. This represents 8% ($8,000 ÷ $98,000). This means Steve passes both tests for the financial acquisitions threshold and can therefore claim the GST credits relating to the share activities.

Remember that the test for the financial acquisition threshold are that the GST credits are:

  • equal to or less than $150,000 of GST credits from financial supplies claimed throughout the year (so a monthly limit of $12,500)
  • equal to or less than 10% of the total GST credits  you could claim for all purchases.