You might be wondering what the consequences can be if you charge GST incorrectly on a sale and include excess GST in your BAS.
Incorrectly Charged GST
Excess GST is when you treat something as taxable incorrectly and include GST for it in your business activity statement (BAS). This can happen where you incorrectly:
- treat something which is not a sale as a taxable sale
- treat a GST-free or input taxed sale as a taxable sale
- report a higher amount of GST on a BAS due to miscalculating your GST liability.
If you charged your customer too much GST and included it in the price they paid, and you have not paid that extra amount back to them, the law treats that GST as correctly payable. Because of this, the ATO cannot refund it to you.
To deal with GST matters, you can rely on tax professionals for your business to avoid making mistakes. Many businesses turn to small business accountants Melbourne to ensure they are charging GST correctly.
Passed on GST
The ATO considers that GST has been passed on to the customer when a sale is considered a taxable sale, even if you did not show a 10% GST amount separately in the price. If you issued a tax invoice that shows a GST amount, this means that GST was passed on. Although the ATO expects that excess GST has been passed on to the customer, there may be unusual circumstances where the facts show that it was not passed on. If you didn’t pass the excess GST to your customer and have clear evidence of this, the excess GST you reported is a GST error. You can correct this mistake by making a correction in a later BAS where the mistake happened.
Reimbursing Customers
If you have passed on excess GST to your customer and reimburse them later, you’ll have a decreasing adjustment, allowing you to recover the excess GST that was included in an earlier BAS. You are required to make this adjustment in the BAS for the reporting period in which you reimbursed the customer. GST adjustment is not the same as correcting a GST mistake made in an earlier BAS. If you fail to reimburse the excess GST to the customer, you won’t be able to make an adjustment to recover the excess GST you reported to the ATO. However, you may request that the ATO allow a refund.
If the customer is registered for GST and has claimed a GST credit for the purchase, they will have an increasing adjustment equal to the amount reimbursed. The customer should make this increasing adjustment in their BAS for the reporting time period in which they received the reimbursement. The law does not require you to reimburse excess GST to your customers. Whether you choose to reimburse will depend on the circumstances of the sale and the terms of any agreement between you and your customer.
Charged GST Incorrectly: What Should You Do?
You may choose to charge your customer an administration fee to cover the cost of processing a reimbursement of excess GST. You can offset this fee against the amount you reimburse to the customer. However, you will only be entitled to a full refund of the excess GST from the ATO if both of the following apply:
- The administration fee charged to the customer is based on reasonable administration costs incurred in processing the excess GST reimbursement
- The customer agrees to the administration fee.
If the customer does not agree to the administration fee, or if the fee is not based on reasonable administration costs incurred in processing the reimbursement, you will not be entitled to a full refund of the excess GST. In these cases, you will only be entitled to a refund of the amount of GST that was actually reimbursed to the customer.
Conclusion
Incorrectly charging GST can be costly if not addressed correctly. Whether you can recover excess GST depends on how the sale was treated, whether the GST was passed on, and whether the customer is reimbursed. Reviewing your GST and getting professional advice from Reliable Melbourne Accountants can help you avoid errors and protect your business.