Common GST categories
Financial supply
A financial supply is an input-taxed supply such as lending, holding deposits or trading shares, so no GST is charged on it and the supplier generally cannot claim credits on related costs.
A financial supply is a type of supply the GST law treats as input-taxed. The category covers the core activities of banks and similar institutions, such as providing credit, operating deposit accounts, dealing in shares and other securities, foreign exchange, and certain superannuation and insurance arrangements. Interest, for example, is generally a financial supply, and no GST is added to interest charged or earned.
Input-taxed treatment is different from GST-free treatment. With a GST-free supply the seller charges no GST but can still claim credits for related business purchases. With a financial supply the seller also charges no GST, but cannot claim credits on purchases that relate to making those supplies. The cost of GST on rent, software and equipment used for financial supplies therefore becomes a real cost to the business.
Some financial suppliers can claim a reduced input tax credit for certain types of acquisitions, such as specific services connected with their financial supply activities. The details are technical and set out in the GST regulations, so professional advice is usually needed. The concept exists because it would otherwise be harsh to deny credits on all of the costs of running a financial business.
Many ordinary businesses make financial supplies without noticing. A business that lends money to a related company, earns interest from a term deposit or trades shares may be making financial supplies. There is a concession called the financial acquisitions threshold that can let a business that makes only a small amount of financial supplies still claim credits, as long as it stays under the limit set by the legislation. The limit changes, so check the ATO website for the current position.
Common misunderstandings include thinking financial fees are always input-taxed. Some fees for services that are not themselves financial supplies, such as advice or administration, may be taxable. General insurance is generally taxable, while life insurance is generally input-taxed. Another mistake is forgetting that input-taxed sales are generally excluded from GST turnover, which affects whether you must register.
If you make financial supplies, keep separate records so you can apportion costs between taxable and input-taxed activity. This page is general information only, so confirm your situation with the ATO or a registered tax professional.
Worked example
A registered business sells goods and also lends $50,000 to a related company at 6% interest, earning $3,000 of interest. The interest is a financial supply, so no GST is charged on it. If the business pays $330 including GST ($30 GST) for accounting software used 20% to manage the loan, the credit is apportioned: $30 x 80% = $24 is claimable and $6 is not.
Practical tips
- Do not charge GST on interest or loan fees that are financial supplies, and do not claim credits on costs directly tied to them.
- Check whether you may exceed the financial acquisitions threshold before assuming you can claim credits on all your costs.
- Talk to an accountant if your business lends money or holds significant investments, as the credit impact can be larger than expected.