By: Steve Burnham
Generally, the GST component of income or expenditure is ignored for income tax purposes. However, there are exceptions, particularly where there has been a change in planned use.
The effect of GST on assessable income are:
- the GST payable in respect of taxable supplies is excluded from assessable income, and
- a decreasing adjustment is included in assessable income. (This can arise as a result of a change in the extent of creditable purpose [for example, when something is acquired for use in making an input taxed supply but its use changes to be applied to making taxable supplies]).
In respect of decreasing adjustments, an enterprise would have claimed an allowable deduction for an amount that includes the GST on the acquisition that was not claimed as an input tax credit to the extent the acquisition was not a creditable acquisition.
Therefore, by claiming the decreasing adjustment in a BAS, the over-claimed income tax deduction needs to be reduced by declaring the decreasing adjustment as assessable income.
NOTE: As unregistered enterprises do not make taxable supplies they will need to include the full amount of their supplies as assessable income.
The effects of GST on allowable deductions are:
- the input tax credit claimable in respect of creditable acquisitions and creditable importations is excluded from allowable deductions, and
- an increasing adjustment is included as an allowable deduction.
In respect of increasing adjustments, the enterprise would not have claimed an allowable deduction for an amount that was claimed as an input tax credit.
Therefore by declaring the increasing adjustment in a BAS, the under-claimed allowable deduction needs to be taken into account by claiming increasing adjustment as an allowable deduction.
Where the adjustment relates to increased private or domestic use of the item, the increasing adjustment will not be deductible.
NOTE: Registered entities making acquisitions relating to input taxed supplies (that is, residential rents) will not be entitled to claim any input tax credits under the GST operations, however the GST component of the acquisition is included together with the acquisition and claimed as deductible expenditure.
Unregistered entities can claim the GST component of deductible outgoings including the cost of depreciable plant, CGT assets and trading stock.
NOTE: For income tax purposes, depreciable assets are depreciated over a period of time. However, for a registered entity the GST component of a depreciable asset is claimed outright at the time of attribution (subject to adjustments if there is a change in the extent of creditable purpose) and not over a period of time.
Where an input tax credit is not claimed by a registered entity, no income tax deduction is available for the portion of the expense that would otherwise be an input tax credit.
Example
XYZ, a registered entity, receives a non-compliant tax invoice for $110 inclusive of GST. XYZ decides not to pursue the supplier for a compliant tax invoice. XYZ can only claim a tax deduction for $100 as it is entitled to an input tax credit for $10. The onus is on XYZ to request a compliant tax invoice from its supplier.
Source: Tax & Super Australia
