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Business Tax Activity 5

THE GOODS AND SERVICES TAX (GST)

Years 7-10

Fact sheet

Discover how to calculate the goods and

services tax (GST) for various items and discuss what constitutes a fair tax.

PRICES TO INCLUDE GSTThe amount of GST (10%) must be included in any advertised or displayed price of goods and services that are sold and that are subject to GST. If a business fails to include GST in any price it charges, that GST amount will need to come from its own resources.

GST is collected and refunded/credited at each stage of the production process. In the end, it is the final consumer of the item who pays the full amount of the GST. The following examples show the different ways that GST is treated, depending on the nature of the transaction.

Example A: Selling an itemSophie operates the shop Only Jeans. She needs to sell each pair of jeans for $100 to cover her costs and desired profit. Sophie also needs to add $10 (10%) to that price, as this is the amount of GST to be forwarded to the ATO after the sale. The total price charged to the customer is therefore $110.

If Sophie had left her price at $100, she would be able to keep only $91 for the jeans, because 1/11th of the sale price must be paid to the ATO ($9 in this case).

The displayed price of an article includes GST of 1/11th of the sale price, so it is possible to work out the GST portion by dividing the sale price by 11.

Example B: Buying an item for a businessSophie buys a cash register for use in her shop. Its price is $1,100. If Sophie divides $1,100 by 11, she will find that the GST portion of the amount paid is $100. As Sophie’s business is GST-registered, Sophie can claim this $100 as a GST credit. Sophie has to have a valid tax invoice for all purchases costing more than $82.50 (including GST) before she can claim the GST credits.

Example C: Who pays the GST?Because a GST-registered business can claim back the GST paid on goods and services used in the business, the net effect is that the final private consumer is paying the GST, as shown in the following flow chart.

In the end, it is the final consumer of an

item who pays the full amount of GST. The

GST rate is 10%.

Activity 5: Fact sheetPage 39

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GST FLOW CHART – GROWER TO CONSUMER

Supply Chain

Wood

Timber

Table

GST Amount

Amount paid to ATOGrower

Kelly Pine Plantation grows pine trees and sells the unprocessed

wood to a producer for $44 including $4 GST

Producer Tall Timber Pine Mills produces

timber and sells it to a manufacturer for $66 including

$6 GST

Manufacturer Fine Pine Products makes pine furniture and sells a pine table to a retailer for $154 including

$14 GST

Retailer Fancy Furniture sells the pine table to a consumer for $330

including $30 GST

Net result Anne is the consumer who buys the pine table for $330 including $30 GST, which is collected by

the retailer

Net result The ATO has collected $30

GST from Anne, the final

consumer

GST

GST

GST

GST

less GST paid

previously

less GST paid

previously

less GST paid

previously

less GST paid

previously

GST to pay now

GST to pay now

GST to pay now

GST to pay now

Grower pays $4 GST

to the ATO

Producer pays $2 GST

to the ATO

Manufacturer pays

$8 GST to the ATO

Retailer pays $16 GST

to the ATO

$4

$6

$14

$30

$0

$4

$6

$14

$4

$2

$8

$16

Activity 5: Fact sheetPage 40

Tax, Super+You. Take Control.

TASK 1CALCULATING GSTBusiness Tax Activity 5: The Goods and Services Tax (GST)

Worksheet

Years 7-10

YOU WILL: � calculate GST to be added to an item at the final selling

point � calculate GST on the final selling price � calculate GST paid by the retailer and by the retail customer

YOU WILL NEED: � Fact sheet: The goods and services tax (GST) � Answer Sheet: Task 1 – Calculating GST

APPLY YOUR KNOWLEDGE1. Complete Table 1 and calculate the GST amount to be added to the value of each item.

Table 1

ItemValue $

excl GSTGST to be added $

Selling price $

Jeans 130

Jumper 120

Mobile phone 550

2. Complete Table 2 and calculate the GST portion of the prices and the price without GST. Prices with GST are given.

3. Complete Table 3 to show the breakup of the selling price for a mobile phone. Then answer questions 4 to 8.

Table 3

ItemAmount paid by phone retailer

GST paid by phone retailer

(275 ÷ 11)

Amount paid by buyer

See table 1

Amount of GST (in selling price)

See table 1

Amount kept by the retailer from

sale of phone

Mobile phone 275

4. Who collected the final GST payment? __________________________________________________________________________________________

5. What is the net amount of GST that the phone retailer must send to the ATO?

6. What is the full amount of GST finally received by the ATO?

7. Where does the difference between the amount paid by the retailer and the buyer come from?

8. Who actually pays the GST amount? (That is, who pays the full GST amount and is not entitled to any GST credit?)

9. Explain why the value of the GST itself is not equivalent to 10% of the GST inclusive price.

Table 2

ItemValue $

excl GSTGST to be added $

Selling price $

Sneakers 220

Meal in restaurant 121

Chair 165

Activity 5: Task 1Page 41

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TASK 2IS GST A FAIR TAX?Business Tax Activity 5: The Goods and Services Tax (GST)

Worksheet

Years 7-10

YOU WILL: � work collaboratively to consider different viewpoints about

what constitutes a fair tax � list the characteristics of GST � decide on whether you think the GST is a fair tax � debate your findings with other students, identifying points

of agreement and disagreement

YOU WILL NEED: � Fact sheet: The goods and services tax (GST) � Answer Sheet: Task 2 – Is GST a fair tax?

CONSIDER DIFFERENT PERSPECTIVESThere are different views on whether the GST is a ‘fair tax’.

1. Read the quotes below.

"The GST is a much 'fairer' tax because it is harder to evade. Everybody who spends money will end up paying GST. That includes people operating in the black economy, tourists and even those who pay no income tax".

“When the GST is examined as a proportion of income, the GST is found to be a regressive tax, even though the GST is applied at a constant rate of 10 per cent. This is because people with higher incomes tend to spend less (and save more) of their income than people with lower incomes, which results in less GST being paid as a percentage of the income of higher income earners”.Varela, P. (2016 February 24) Brief: Progressive and Regressive Taxes. Retrieved from URL http://www.austaxpolicy.com/brief-progressive-and-regressive-taxes/

2. Work with a partner to analyse these statements. Although views will depend on your personal beliefs and values, the following prompts may get you started.

a. Identify what you believe are the main characteristics of a 'fair' tax. b. List the main characteristics of consumption taxes such as GST. c. Conclude: Do the characteristics you listed for GST match those you would expect of a 'fair' tax?

3. Debate your findings with those of another pair of students. How much agreement was there in your views? On what aspects did you disagree?

Points of agreement Areas of diverging views

Activity 5: Task 2Page 42