Dennis is puzzled that he has to make a BAS payment, despite his business losing money. Chartered accountant GAIL FREEMAN tells him why. 

Dennis was puzzled about his BAS payment. He said “Gail you advised me that I have to pay $4,876 for my annual Business Activity Statement (BAS) but I am confused as to how I can owe money for GST when I made a loss in the financial statements.”

I said “Dennis, I will explain the BAS system to you in a bit more detail and clarify it for you. You had to lodge a BAS each quarter and you had the choice of paying an installment nominated by the Australian Taxation Office (ATO) or using your actual figures each quarter for the calculation of GST.”

“You may remember that we discussed whether you should take the installment option and we agreed that as you had been having a turbulent time financially it provided you with some certainty so you took this option. You were then certain as to your GST liability in each BAS and how at the end of the year, you would either have a shortfall to pay or you would have overpaid and would, in fact, get a refund when the annual BAS was lodged.”

“I have now finalised your financial statements and note that you have made a loss. Whilst preparing the accounts, I also prepared the annual BAS to calculate your shortfall of GST paid. I can understand you thinking that because you have made a loss that there should not be a GST shortfall.”

“As you know GST is calculated on both purchases and sales at the rate of 10% on most items. So if there is GST on every sale and every purchase, then a loss for income tax purposes would likely result in you having paid enough GST in your BAS’s. However, there are some large items in the accounts which do not have GST for example salaries and superannuation and some other items which have an input tax credit of less than 10%.”

“I always do a quick mental check to see if the final GST figure is within the ball park. For example as your sales are $500,000 then GST on sales is $50,000 and as your total expenses are $650,000, you need to subtract salaries and super of $300,000 which gives you $350,000 of sales with input tax credits of $35,000. So a rough estimate of your GST is $15,000 payable.”

“I note that you have paid $10,000 in installments, so I would expect you to have to pay about $5000 for GST in your annual BAS. The actual figure is $4876 which seems to be about right. So even though you have made a loss, you still have some GST to pay at the end of the year.”

Dennis said “that is a lot to digest. However, I now feel that I have a better understanding of the BAS and instalment system.”

If you feel that you need a better understanding of BAS’s and or GST, please contact the friendly team at Gail Freeman & Co Pty Ltd on 02 6295 2844 for an appointment

Disclaimer
This column contains general advice, please do not rely on it. If you require specific advice on this topic please contact Gail Freeman or your professional adviser. Authorised Representative of Lifespan Financial Planning Pty Ltd AFS Lic No. 229892.

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