ANSWER ID:9286

Sometimes you may need to record a transaction where the GST is not 10% of the total amount, such as where GST may have been accidentally omitted on a transaction. Another example would be certain arrangements where the full amount of GST is payable as part of the first instalment for services, such as Yellow Pages advertising.

This support note explains how to record GST adjustments or transactions where the GST isn't 10%.

Here's what we'll cover in this support note:

What is grossed-up GST?

When would we need to record a tax adjustment?

When making a GST adjustment, why can't I simply post a transaction directly to the GST control ledger account?

What types of GST adjustments can be made?

GST only - tax inclusive scenario

GST only - tax exclusive scenario

GST adjustment

Tax transfer

Recording a transaction which is all GST

Paying the full amount of GST payable as part of a first instalment

What is grossed-up GST

Grossed-up GST is a term used in this support note which simply means a tax inclusive value calculated from a known GST amount. This is illustrated in the following example:

GST on $110 tax inclusive
= $110 / 11
= $10

Grossed-up GST calculated upon the known GST amount of $10
= $10 x 11
= $110

The key principle is that some GST adjustments are centred around the grossed-up GST value. For example, a GST adjustment of $10 will require a transaction for the tax inclusive amount of $110.

When would we need to record a tax adjustment?

Tax adjustments can be used where an incorrect Tax Code has been used in a transaction that is now locked or can't be changed.

When making a GST adjustment, why can't I simply post a transaction directly to the GST control ledger account?

As the software's GST tax system is centred around the Tax Codes, it's important they are used when making tax adjustments. To demonstrate the role of the Tax Codes, consider the two Spend Money transactions shown below.

Cheque #109: GST has been recorded via a line item.

Note: The Tax amount = $0.00

Cheque #110: GST Tax Code is used to record the GST.

Note: The Tax amount = $10.00

In the Transactions Journal window shown below, it can be seen that the general ledger postings are the same for both cheque transactions.

Because GST reports are based upon the activity of the Tax Codes, only Cheque #110 will be reported in the GST reports; as can be seen in the GST [Detail - Cash] report example below.

What types of GST adjustments can be made?

There are three types of GST adjustments:

1. GST only
   • Tax inclusive - where the GST hasn't been applied to a transaction and the transaction value is for the full tax inclusive amount
   • Tax exclusive - as above but the transaction gross value is only for the tax exclusive amount
2. GST adjustment
   • The GST value of a transaction doesn't equal 10%
3. Tax transfers
   • Transfers a tax amount from one Tax Code to another

Note: Although Bills and Spend Money transactions have been used in the following examples, the same principles apply to Invoices and Receive Money transactions.

GST only - tax inclusive scenario

A Bill for $110 (tax inclusive) was recorded using the N-T Tax Code. It has since been discovered that the GST Tax Code should have been used. To correct this, enter a zero value Bill using the grossed-up GST amount to adjust the GST as shown in the following example:

Referring to the example above, please note:

• The Tax Inclusive option is selected.
• The ledger accounts are those that were used on the original Bill.
• The grossed-up GST is used for both lines. The GST Tax Code is applied to the positive value line entry whereas the N-T Tax Code is applied to the negative line entry.
• Tax is $10.00 and the Total Amount is $0.00.

In the original Bill, the full $110 would have been allocated to the 5-1100 ledger account. This adjustment will post $10 to the GST control account and at the same time reduce the balance of the 5-1100 ledger account by $10.

A corresponding Spend Money transaction is shown below:

GST only - tax exclusive scenario

A Bill for $100 (tax exclusive) was recorded using the N-T Tax Code. It has since been discovered the GST Tax Code should have been used. To correct this, enter a Bill with a gross value of $10 for the GST, as per the example below.

Referring to the example above, please note:

• The Tax Inclusive option is deselected.
• The ledger accounts are those that were used on the original Bill.
• The tax exclusive amount is used for both lines. The GST Tax Code is applied to the positive value line entry whereas the N-T Tax Code is applied to the negative line entry.
• The Tax is $10.00 and the Total Amount is also $10.00.

The gross value of the original Bill was $100 where as it should have been $110 ($100 + $10 GST). This adjustment will post $10 to the GST control account and will increase the trade creditors by $10.

A corresponding Spend Money transaction is shown below:

GST adjustment

This type of transaction is used where the GST doesn't equal 10% of the transaction gross value. An example of this would be consolidating non-taxable and taxable items on a single purchase.

The example shown below results in a Bill with a tax inclusive value of $100, of which only $5.00 (5%) is claimed as an input tax credit.

Referring to the example above, please note:

• Although the Tax Inclusive option is selected and tax inclusive amounts used, this transaction can also be entered as tax exclusive.
• The Bill has been split between two line entries. The GST Tax Code is applied to the first line which represents taxable goods. The FRE Tax Code is used on the second line for the items that are tax free.
• The Tax is $5.00 whereas the Total Amount is $100.00.

A corresponding Spend Money transaction is shown below:

Tax transfer

General journals can be used to transfer amounts between Tax Codes. An example of this would be where the CAP Tax Code had been used in a Spend Money transaction instead of GST Tax Code.

Scenario: A cash payment made through Spend Money for $110 (tax inclusive) was recorded using the CAP Tax Code. It has since been discovered that the GST Tax Code should have been used instead.

Corrective action: For correct BAS reporting, the tax amount needs to be transferred from the CAP Tax Code to the GST Tax Code using a general journal entry as shown below.

Referring to the example above, please note:

• The ledger accounts are the those that were used for the original Spend Money payment. This ledger account is both debited and credited so its balance is not affected.
• The Tax is $0 as this is a transfer between two Tax Codes that are both 10%.

Note: For more information on entering general journal transactions, see our support note General journal entries.

Recording a transaction which is all GST

Let's take a look at the following example: You previously received a bill for $1000.00 but the supplier forgot to charge you an additional $100.00 GST at the time. You now receive a bill for $100.00, all of which is GST. You would enter this bill as shown here:

This could also be recorded as a Spend Money transaction using the same principle. On the first line enter a positive GST inclusive amount with the GST tax code. On the second line enter a negative tax exclusive amount with the N-T Tax code.

Paying the full amount of GST payable as part of a first instalment

An example of this would be a bill for Yellow Pages advertising which is paid in instalments and the full amount of GST is payable on the first instalment.

For instance:

The full amount of the bill is $3300 including GST and you have been asked to pay an initial instalment of $500.00. This is made up of the $300 of GST in full plus $200.

Using a Service layout purchase you would enter a tax-inclusive bill for the full amount of $3300 using the GST tax code. You would then record the payment for $500 through Pay Bills.