Max Newnham -Sep 30, 2013
The GST system has now been operating since July 1, 2000. Where a business sells items the system is relatively easy. If a business is registered for GST it can claim a credit for the GST included in prices; these are called input tax credits. The business must also include 10 per cent GST in the price of what it sells.
Q. I am a builder. If I build a house that costs in materials $250,000 I will have paid $25,000 in GST. If I add the value of my labour of $50,000 this would mean I have to charge $300,000 for building the house. Do I only charge the client $5000 in GST or do I add a further 10 per cent to all the materials?
A. One of the most complicated industries when it comes to the GST system is the building industry. This is because in addition to materials forming a large part of the cost another major component is the cost of labour.
To make things more complicated in some cases a building contractor only provides the labour, in others they provide their labour and materials, in yet another situation they can buy the land and build the house and sell it as a complete package. In this last situation the GST charged can be reduced by what is known as the margin scheme.
One of the common mistakes made by people is to take 10 per cent of the total cost
of the items they buy as being the GST. To arrive at the GST included in a purchase price you must divide the cost by eleven. In your situation with the $250,000 in materials the GST included in them will be $22,727. This means after claiming the GST included these materials they will have cost you $227,270.
If you charged your client $300,000 for the building services this would have GST included in the price of $27,272. This would mean you would be receiving, after allowing for the GST included in the price, $272,720 in total. The amount of money you received, allowing for the after GST cost of materials of $227,270, would be only $40,454 for your labour.
If you wanted to receive $50,000 after GST for your labour you would need to charge your client $305,000. Included in this price would be $27,727 of GST leaving you with a net amount received for labour and materials of $277,270.
If you charged $305,000 you would need to include on your business activity statements the $27,727 of GST received, and also be able to claim an input tax credit for $22,727 for the GST included in the materials. The result would be that you would owe the tax office the $5000 of GST you included in your labour.
The GST you owe the tax office will be further decreased by the GST included in your other expenses including your motor vehicle running costs and any other costs associated with your business.