What is GST? A plain-English guide

GST in one paragraph

The Goods and Services Tax (GST) is a broad-based tax of 10% on most goods, services and other items sold or consumed in Australia. It started on 1 July 2000 under A New Tax System (Goods and Services Tax) Act 1999. Businesses that are registered for GST add it to their prices, collect it from customers, and pass it on to the Australian Taxation Office (ATO). The ultimate cost falls on the final consumer, which is why GST is described as a tax on consumption rather than a tax on business income.

GST revenue is collected by the ATO but is passed to the states and territories. That is why GST is also a significant topic in federal and state budgeting debates, even though most small businesses only ever deal with it through their Business Activity Statement (BAS).

How the GST chain works

GST is charged at each step of the supply chain, but each business only keeps the tax on the value it adds. A business that is registered for GST charges GST on its sales and can claim back, as an input tax credit, the GST included in the price of things it buys for its business. At the end of each reporting period the business subtracts its credits from the GST it collected and pays the difference to the ATO, or receives a refund if its credits are higher.

For example, a furniture maker buys timber for $1,100 including $100 of GST, builds a table and sells it to a shop for $2,200 including $200 of GST. The maker has collected $200 and paid $100, so the net amount owed to the ATO for this table is $100. The shop then sells the table to a customer for $3,300 including $300 of GST, claims a credit of $200 and pays the ATO $100. Counting the $100 the timber supplier remitted on its own sale, the ATO has received $100 from the supplier, $100 from the maker and $100 from the shop, which adds up to the $300 of GST the final customer paid.

Who is affected

Consumers pay GST whenever they buy a taxable item. Businesses with an annual GST turnover at or above the registration threshold must register for GST, and many smaller businesses choose to register voluntarily so they can claim credits. Charities, government bodies and non-profit organisations also have GST obligations, with some special rules and higher thresholds. Overseas businesses that sell into Australia can have GST obligations too, particularly for digital services and low-value imported goods.

If you are an employee with no side business, GST usually only shows up as part of the prices you pay. If you run a business, GST affects how you price, how you invoice, how you keep records and how you report to the ATO.

The three types of supply

Almost every sale falls into one of three buckets. A taxable supply has GST added at 10%. A GST-free supply, such as most basic food and many health and education supplies, has no GST added but the seller can still claim credits on related business purchases. An input-taxed supply, such as residential rent and most financial services, has no GST added and the seller cannot claim credits for the GST in related purchases. Knowing which bucket you are in is the single most important GST skill, and it is covered in detail in our guide to GST rates and categories.

What GST does not cover

GST is separate from income tax, PAYG withholding, superannuation, fringe benefits tax and capital gains tax. It is also separate from state and territory taxes such as payroll tax, stamp duty and land tax. A business can owe GST even in a year when it makes a tax loss, because GST is calculated on sales and purchases, not on profit.

Where to go next

If you are working out the amount of GST on a price, use the calculator on our home page. If you are wondering whether you need to register, read the registration guide next. For definitions of specific words you will meet along the way, use the glossary.