Indirect taxes
Indirect tax
An indirect tax is a tax charged on transactions or goods, such as GST, excise or customs duty, collected by businesses and passed to the government rather than paid directly on a person's income.
An indirect tax is a tax on spending or on goods and services, rather than on income or profits. The person or business that is legally responsible for paying it to the government often passes the cost on to someone else through higher prices. GST is the most familiar indirect tax in Australia, and others include excise duty, customs duty, luxury car tax and wine equalisation tax.
The distinction from a direct tax is about who bears the tax and how it is imposed. With a direct tax, such as income tax, the person who earns the income pays the tax directly. With an indirect tax, the business collects the tax from its customers when it sells, and passes it on. The customer ultimately bears the cost, although the legal liability is with the business.
For a business, indirect taxes show up in two ways. When you sell, you charge GST on taxable sales and report it on the BAS. When you buy, you pay GST in your purchase price and, if you are registered and the purchase is for a creditable purpose, claim a credit. This credit mechanism means that businesses generally do not bear GST as a cost, since it is passed along the supply chain until it reaches the final consumer.
Other indirect taxes work differently. Excise and customs duty are generally built into the price of goods and are not recoverable as credits. Luxury car tax and wine equalisation tax are charged at specific points in the supply chain. Each has its own rules for who pays, how it is calculated and how it is reported. Understanding which taxes are included in your costs helps with pricing and cash flow.
State and territory taxes such as payroll tax and stamp duty are sometimes confused with indirect taxes. Payroll tax is a tax on wages, and stamp duty is a tax on certain transactions, and both are administered by state and territory revenue offices and vary by jurisdiction. They are not covered by the ATO's GST rules, though stamp duty is a tax on transactions, so it is often described as a transaction tax.
A common misunderstanding is that business owners pay GST out of their own pocket. In most cases they act as collectors, with the net amount reported on the BAS. This is general information only, so confirm your situation with the ATO or a registered tax professional.
Worked example
A registered business sells goods for $1,100 including GST, collecting $100 GST from the customer. It bought stock for $550 including GST, paying $50 GST. On the BAS it reports $100 GST collected and claims $50 credit, so net GST payable is $100 - $50 = $50. The business acts as a collector, and the $50 is effectively borne by the final customer.
Practical tips
- Remember that a registered business collects GST for the government and generally does not bear it as a cost.
- Know which of your costs include excise or customs duty, because those are not recoverable as credits.
- Keep indirect taxes separate from income tax in your records, since they are reported and paid differently.