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What is ITC (input tax credit) in GST?

April 23, 2024

Understanding what an input tax credit is and why it matters is crucial for small businesses. Once your business’s turnover reaches A$75,000 or more, you must register for goods and services tax (GST). However, in addition to making GST payments, it is important to recognise that you may also be entitled to claim credits for any GST included in the price you paid.

What is an input tax credit? Also known as a GST credit, this is a form of credit that a business may claim for the GST included in the price of goods and services that it purchases.

When to Claim Input Tax Credits

To claim input tax credits, certain conditions must be met. The first step for any business wishing to claim input tax credits is to register for GST.

There are several criteria for claiming input tax credits which include the following:

intending to use the purchase entirely or partly for your business
the purchase price includes GST
providing or being liable to provide payment for the item purchased
having a tax invoice from your supplier (for purchases over A$82.50)

Examples of such purchases may include office furniture and fittings, or a print advertisement placed in mainstream newspapers. These criteria emphasise the necessity of understanding the amount of GST paid for a given purchase before reimbursement is sought.

Additionally, you must ensure that your supplier is registered for GST when claiming input tax credits.

When You Cannot Claim Input Tax Credits

There are specific scenarios in which input tax credits may not be claimed. These include:

not being registered for GST or not having a valid tax invoice for purchases over A$82.50 (including GST)
for purchases that are GST-free such as basic food items or sales that are input-taxed (examples include residential accommodation, bank fees or loan interest)
for purchases from a supplier that is not registered or required to be registered for GST

Wages paid to staff are another example of when you cannot claim input tax credits as no GST is applied to wages.

Further examples of situations where input tax credits cannot be claimed include:

a business purchase of an all-in-one printer for private or family use
property purchased under the margin scheme (this scheme offers an alternative way to calculate GST owed by allowing eligible sellers to pay GST on the margin between the purchase price and sale price)
entertainment expenses
for the part of the purchase price of a car that is over the car limit amount for the relevant financial year
where the timeframe for claiming a GST credit for a purchase has expired

Reporting Your GST

Your Business Activity Statement (BAS) helps you report and pay your GST pay-as- you-go (PAYG) instalments. It calculates the GST owed on taxable sales and the input tax credits claimed on taxable purchases. The net GST amount is then reported on your BAS form, and any taxes owed should then be paid to the Australian Taxation Office (ATO).

Each BAS is personalised to the reporting business and based on the GST registration details provided. Your BAS is not just about your GST even if GST is a significant component of it. Typically lodged online, you can complete and lodge your BAS return with the support of a tax or BAS agent, if required.

Accurate reporting of GST involves several preliminary activities including:

registering for GST
determining taxable sales
issuing tax invoices
accounting for GST
setting aside GST amounts for timely payment

Making adjustments to your BAS

If you make a GST error when reporting GST on your BAS, you may be able to correct that error on a later BAS on certain conditions. It is crucial to understand what constitutes an error as it involves misreporting or miscalculating GST amounts.

However, errors relating to fuel tax credits or luxury car tax, for example, do not constitute GST errors. Claiming a GST credit on a later BAS, a GST adjustment and a GST restricted refund are also not regarded as GST errors.

Important time frames

Businesses with a turnover exceeding A$20 million are required to complete their BAS monthly while others may choose between monthly or quarterly reporting.

Quarterly reporting aligns with financial quarters ending in September, December, March and June, with BAS due 28 days after each quarter’s end.

Time limits on Input Tax Credits and refunds

If you are entitled to an input tax credit, you must claim it within four years from the due date of the earliest BAS in which you could have claimed it.

When You Need a Tax Invoice

All claims for an input tax credit must be supported by a tax invoice for purchases that cost over A$82.50 (including GST). Incomplete or missing invoices pose challenges but there may be room for resolving them.

Tax invoice is incomplete

If the tax invoice you have is incomplete, it is not a valid invoice. However, you may be able to regard it as a tax invoice if:

you can obtain missing information from other documents supplied by the supplier or
obtain a complete and correct replacement tax invoice

No receipt of tax invoice

If you do not receive a tax invoice from the supplier, you may request one and they will have 28 days to provide it. If, however, you have not been able to obtain a tax invoice within that time frame and have not been able to locate missing information from other documents provided to you by the supplier, you may request permission from the ATO to treat the document you have as a valid tax invoice. Submission of this request may be made through the ATO’s online services or by writing in.

How to Work Out a GST Credit

While a tax invoice typically specifies the GST amount, there may be occasions when your tax invoice simply states the price inclusive of GST.

If this occurs, you can work out the GST amount yourself by dividing the price by 11. The answer is the amount of GST credit you can claim.

It is important to note that when a purchase is made for an item for both business and personal purposes, only the portion used for business qualifies for an input tax credit. For example, let’s say that you purchased a car that is only used for the business half the time. You would be able to claim a credit of only 50% of the GST paid.

In conclusion, understanding input tax credits is important for every GST-registered business, as it enables the offsetting of GST payments in specific circumstances. Understanding reporting requirements, applicable timeframes and providing relevant supporting documentation as part of the claim will contribute towards a successful application.

Get tax ready with QuickBooks

With a cloud-based accounting tool such as QuickBooks, you can lodge your BAS online and track your GST electronically directly from your QuickBooks account.

With QuickBooks, you can remain GST-compliant and tax-ready at all times.

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