GST core
Input tax credit
An input tax credit is the amount of GST included in the price of business purchases that a GST-registered business can claim back on its Business Activity Statement.
Input tax credits are what stop GST from becoming a cost to business. When a registered business buys something for its enterprise, the price includes GST. The business can then claim that GST as a credit, reducing the net amount it must pay to the ATO. In effect the tax is borne by the final consumer, not by the businesses along the chain.
The calculation is simple. If a purchase price includes GST, the credit is one-eleventh of that GST-inclusive price. For a $220 purchase the credit is $20. If the supplier shows the price GST-exclusive, the credit is 10% of that price. You report all credits at label 1B on the BAS, and the total is subtracted from the GST you have collected, which is reported at label 1A.
To claim, you must meet several conditions. You must be registered for GST, the purchase must be a creditable acquisition, meaning it is for your business and not private, and you must hold a valid tax invoice if the price is more than $82.50 including GST. For $1,000 or more, the invoice must identify you as the buyer. These requirements are strictly applied, and a missing invoice can mean a disallowed claim.
Credits are not available for everything. You cannot claim on purchases used to make input-taxed supplies, such as financial services or residential rent. You cannot claim on private or domestic purchases. And you cannot claim GST that was never charged, for example where the supplier is unregistered or the item is GST-free. Where a purchase is used partly for business, you claim only that proportion.
Timing is important. Credits are generally claimed in the BAS for the period in which the invoice relates, and you can claim up to four years after the due date for that BAS. Claiming too early, before you hold a proper invoice, or claiming the same invoice twice, can lead to penalties and the general interest charge.
When credits exceed GST collected, the result is a GST refund. This commonly happens to new businesses buying lots of equipment, and to businesses that make mostly GST-free sales. The ATO may review a refund before paying it, so keep documents ready. Some businesses also need to make a later adjustment if a purchase's use changes, for instance when an asset first used for business is later used privately.
This is general information only. For difficult cases such as mixed-use assets, vehicles, or property, confirm your position with the ATO or a registered tax professional.
Worked example
A registered florist collects $4,400 GST-inclusive in sales during the quarter, so GST collected is $4,400 divided by 11, which is $400. She buys $2,200 of flowers and vases, GST-inclusive, with valid invoices. Her credit is $2,200 divided by 11, which is $200. The net GST payable is $400 minus $200, which is $200, reported on her BAS as 1A of $400 and 1B of $200.
Practical tips
- Never claim a credit without a valid tax invoice if the purchase is over $82.50 including GST.
- Claim only the business portion of mixed-use purchases and keep notes explaining how you worked it out.
- Do not claim credits on purchases that relate to input-taxed income such as residential rent.