CHAPTER 8 Business activity statements and instalment activity statements

1. CHAPTER 8 Business activity statements and instalment activity statements Learning outcome To understand the preparation of activity statements for GST, PAYG withholding tax, PAYG income tax, fringe benefits tax and other taxes PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis  2011 McGraw-Hill Australia Pty Ltd 8-1

2. KEY TERMS • Australian Business Number (ABN) • Australian Taxation Office (ATO) • Business Activity Statement (BAS) • Fringe benefits tax (FBT) • Fuel tax credits (FCT) • GST-free sales PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis  2011 McGraw-Hill Australia Pty Ltd

3. KEY TERMS cont. • GST input taxed sales • Instalment Activity Statement (IAS) • Luxury car tax (LCT) • Pay-as-you-go income tax • Pay-as-you-go withholding tax • Tax invoice • Wine equalisation tax (WET) PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis  2011 McGraw-Hill Australia Pty Ltd

4. The difference between BAS and IAS • The Business Activity Statement (BAS) is used for: • businesses registered for GST • GST monthly or quarterly • PAYG income tax • PAYG withholding tax • fringe benefits tax • wine equalisation tax • luxury car tax • The Instalment Activity Statement (IAS) is used for all of the above items, except GST PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis  2011 McGraw-Hill Australia Pty Ltd

5. GST checklist for a business • A business with a turnover of $75 000 or more that wishes to engage in the GST provisions must: • register for GST • separate sales into taxable, GST-free or input-taxed items • include the price of GST in its sales • use properly prepared tax invoices • account for GST on a ‘cash’ or a ‘non-cash’ (accrual basis) • report and pay GST using a BAS form PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis  2011 McGraw-Hill Australia Pty Ltd

6. Accounting for GST on a ‘cash’ or a ‘non-cash’ basis • Cash • Cash sales are reported for GST in the same reporting period in which the business receives the actual payment for the sale. GST input tax credits are claimed in the period in which the business pays for them. The conditions are that the business’s annual turnover is less than $2 million and the business income tax is also accounted for on a cash basis. • Non-cash • Usually the full GST is collected and is payable in the period in which the invoice is issued, irrespective of the date of payment of the account. For GST input, this can be claimed in the reporting period in which the supplier issues the invoice. PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis  2011 McGraw-Hill Australia Pty Ltd

7. GST revisited—A summary of GST on business purchases and sales Examples: Examples: Examples: Examples: Inventory purchases Inventory sales Council rates Financial supplies Asset purchases Asset sales Water rates Lending costs Advertising Commission revenue Most foods Buying shares Telephone Rent revenue Education fees Selling shares Insurance Sales of services Medical and health exports Residential rents Motor vehicle expensesReligious and charitiesBank fees PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis  2011 McGraw-Hill Australia Pty Ltd

8. Mixture of GST-free and GST-collected sales • The ATO gives an example where there is a mixture between two groups of sales: • PLANT NURSERY –sells seedlings • GST collected • MARKET GARDENER –sells vegetables • GST-free • WHOLESALER • GST-free • RETAILERRESTAURANT • GST-freeGST-free • CONSUMERRESTAURANT PATRON • GST-free GST collected PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis  2011 McGraw-Hill Australia Pty Ltd

9. Mixture of GST-free and GST-collected sales cont. • There is GST on the nursery plants, but when converted to vegetables by the market gardener the products become a basic food item and therefore GST-free. The goods are sold to the wholesaler, then to the retailer and finally to the end consumer and remain GST-free. • The sale to the restaurant is also GST-free but GST needs to be collected in the price of the meal because the vegetables have been converted into a cooked item. • Source: Adapted from ATO publication ‘GST food guide’ (Australian Government) PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis  2011 McGraw-Hill Australia Pty Ltd

10. Reporting GST to the Australian Taxation Office • If a business turnover is $20 million or more GST must be reported and paid monthly and it must be paid electronically. • If a business turnover is less than $20 million, GST must be reported and paid quarterly, and an annual GST information report must be lodged. • If a business turnover is less than $2 million GST can be reported by activity statements quarterly supported by an annual GST return. Businesses must pay the GST instalment pre-printed by the Taxation Office, which can be varied if the business believes that circumstances have changed during the financial year. PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis  2011 McGraw-Hill Australia Pty Ltd

11. Pay-as-you-go (PAYG) withholding obligations • Businesses need to withhold amounts of tax from payments made to employees on their payroll sheets and to directors • There may also be deductions from amounts paid to contractors and for labour hire depending upon the circumstances • These deductions are called ‘withholding tax’ and these amounts must be passed on the ATO PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis  2011 McGraw-Hill Australia Pty Ltd

12. PAYG withholding tax cont. • The employer must: • register for PAYG withholding • ascertain the tax status of workers • calculate the amounts to be withheld • report and pay the withheld amounts to the ATO • supply payment summaries and lodge an annual return after 30 June each year • In addition, tax must be withheld from other businesses that do not quote their Australian Business Number on their invoices or other documents • The owner’s drawings from the business are not subject to a withholding tax PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis  2011 McGraw-Hill Australia Pty Ltd

13. PAYG withholding tax cont. • Employees must: • complete a tax file number (TFN) declaration, with the original being sent to the ATO • complete a withholding declaration, to be held by the business, if they: • wish to claim tax offsets • increase the amount withheld by the business • advise changes in the tax-free threshold PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis  2011 McGraw-Hill Australia Pty Ltd

14. How to report PAYG amounts withheld • These are reported to the ATO on an activity statement • The amounts are payable: • for a small business that withholds $25 000 or less per year—quarterly • for a medium-sized business withholding up to $1 million—monthly; or • for a large business withholding amounts over $1 million per year, the amounts owed must be paid electronically PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis  2011 McGraw-Hill Australia Pty Ltd

15. Payment summaries • Within 14 days of the end of the financial year the employer must supply to employees ‘payment summaries’. These contain the total amount earned for the year and the amounts of total tax withheld. These used to be called ‘group certificates’. • The original payment summary for each employee is sent to the ATO and is used when individuals complete their annual tax returns. PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis  2011 McGraw-Hill Australia Pty Ltd

16. PAYG income tax obligations of a business • Australia’s income tax system is based on the principle of self assessment. • The information is provided by the business and the ATO has the power to request the business records to verify the information supplied to it. PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis  2011 McGraw-Hill Australia Pty Ltd

17. PAYG income tax obligations of a business cont. • The ATO will calculate the taxable income for a business using this formula: • Assessable income • less assessable deductions • = Taxable income • The ATO will supply the relevant activity statement to the business with the pre-calculated tax payable, which can be paid in quarterly instalments. This amount may be varied if circumstances change, but reasons must be given. PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis  2011 McGraw-Hill Australia Pty Ltd

18. Other taxable areas • Fringe benefits tax (FBT) • An employer may provide their employees with fringe benefits. • The employer must be registered for FBT. FBT needs to be lodged quarterly for any business for which the FBT liability exceeds $2000 calculated for a year from 1 April to the following 31 March. • If the employer is not required to pay quarterly then the whole amount of FBT must be paid annually using an Annual FBT return. PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis  2011 McGraw-Hill Australia Pty Ltd

19. Other taxable areas cont. • Common fringe benefits include: • low interest loans • private use of a work car • payment of parking fees • health insurance costs • school fees • holiday expenses PPTs to accompany Accounting and Bookkeeping Principles by AAT and David Willis  2011 McGraw-Hill Australia Pty Ltd

20. Wine equalisation tax (WET) • WET is based on a tax of 29% of the wholesale price of wine • Manufacturers, wholesalers and importers collect the tax and forward it to the ATO • The Customs Department collects WET on imported wine but, generally, retailers do not have to pay the wine equalisation tax PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis  2011 McGraw-Hill Australia Pty Ltd

21. Luxury car tax (LCT) • Cars with a GST included value in excess of a threshold of $57 466 (the rate for the years 2009/10) are subject to LCT • The threshold rate changes each year • Retailers, wholesalers or importers may have a liability for LCT • The rate is 33% for the amount above the threshold figure • Businesses need to be registered for FBT, WET and LCT and activity statements are used to report and pay the taxes PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis  2011 McGraw-Hill Australia Pty Ltd

22. Fuel tax credits (FTC) • Credits for fuel tax excise or duty (included in the price of fuel) may be claimed for machinery, plant and equipment and heavy vehicles used by a business. The firm needs to register to be eligible to claim a fuel tax credit. • Aviation fuels and fuel for light vehicles on the road are excluded from claiming LCT. PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis  2011 McGraw-Hill Australia Pty Ltd

23. Tax agents legislation • The Tax Agents Act 2009 provides for registration of tax agents and BAS agents. • The Tax Agents Services Regulations 2009 list the qualifications and the relevant experience requirements for registration. PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis  2011 McGraw-Hill Australia Pty Ltd

24. Registration of a BAS agent • Only individuals, partnerships or a company providing BAS services for a fee need to register as agents. • Persons who provide BAS services for their employer do not need to register. These persons are providing an employment service for a salary or a wage and are not supplying a BAS service. • Registration can be made to the Tax Agents Board and will cover a period of at least three years. A registered person may provide a BAS service. • There are detailed requirements for registration, including those regulating the qualifications and the relevant business experience required. PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis  2011 McGraw-Hill Australia Pty Ltd

25. BAS services • BAS services include: • preparing and lodging approved activity statements about a taxpayer’s obligations and entitlements under a BAS provision • advising a taxpayer about a BAS provision • handling client queries relating to a tax provision with the taxation commissioner on behalf of a taxpayer • BAS provisions • These are the taxes mentioned in this Chapter: • GST, PAYG withholding tax, PAYG income tax, fringe benefits tax, etc. PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis  2011 McGraw-Hill Australia Pty Ltd