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The first round of income-tax returns post-GST is revealing that everyday expenses can cost businesses 15% more than they expect, if they don't have a tax invoice, according to PricewaterhouseCoopers (PwC). "The problem lies in business's inexperience with the interaction between GST and income tax," Ken Fehily, PwC's national GST lead partner, says. "When a company pays for goods or services related to the everyday running of their business, they reclaim the tax in two stages. Firstly, they need to reclaim the 10% paid in GST, then they claim a 34% tax deduction for the remainder of the expense. "If you don't get a tax invoice for the expense, you can't claim the GST tax credit - which most people are getting the hang of. "However, if you try and claim an income-tax deduction on the whole amount, the Tax Office will reject the 10% GST component of the expense. This is actually catching a lot of people unawares at the moment and the net cost ends up being 15% more for the goods or service." For small businesses that do not operate under a company structure, Fehily says the impact can be much greater. "A small-business person on the top personal tax rate of 48.5% (including Medicare) may end up paying an extra 20% if he or she cannot claim back the GST component. This is because the net after-tax cost increases from 51.5 cents to 61.5 cents in every dollar spent," he says. A significant number of GST reviews conducted by PwC have identified the main snag in situations where a business has used someone who is not a regular supplier, or where they have paid for something by credit card over the phone and can't locate a proper invoice. "In these cases, you can expect short shrift from the Tax Office and, unfortunately, this means that businesses will end up wearing the cost themselves," Fehily says. "I think you'll find many small businesses particularly caught unawares in the current round of income tax returns - which is the first time businesses will have filed a return post-GST." Example
Following a storm last May, Joe Bloggs needed urgent roof repairs done on his roadside motel. He looked up his local phone directory and after a phone-around was referred to a repair service that could do the work, provided he paid immediately. A repairman came out next morning and did the repairs. Joe paid $1,100 by credit card over the phone. He was told the account was in the mail. In getting his accounts up–to-date recently, Joe discovered he never did receive a tax invoice for the roof repairs - all he has to show is the expense listed on his credit-card bill. The business name listed on his credit-card statement doesn't show up in a phone directory search and, as Joe has no other record of the transaction, he can't chase up an invoice. Without a tax invoice, Joe can't claim back the $100 he paid in GST. Neither can he claim an income-tax deduction on the whole $1,100 - he can only claim 34% of $1,000. If Joe had a tax invoice, the net cost of the repairs would have been $660. However, because he can't claim back the GST component, he ends up paying $760 - which means it has actually cost him 15% more than it should have. If he did not run his business as a company and was an individual, the additional cost would rise to 20%.