ANSWER ID:9266

When a business purchase is made and a proportion of the purchase will be used for private consumption or a non-deductible business expense, the amount of GST credit claimed needs to be adjusted. Only that amount of the expenditure used for creditable business purposes is reported for the purpose of claiming an input tax credit. This support note provides a method to correctly record and report these transactions. Our support note Recording a business expense where a proportion is for non-business use may also help.

An example of this scenario would be if your vehicle is used for 80% business purposes and 20% private, the GST credit allowed is only 80% of the total GST paid. You will need to determine what amount is creditable in accordance with the ATO guidelines.

Note: If a transaction is of a purely private nature (or directors' drawings), the N-T (no-tax) code needs to be used, as this expenditure is not reported on your Business Activity Statement (BAS). For non-tax deductible expenses such as speeding fines you need to create and use a new tax code called NTD (Non-Tax Deductible). In this way, you are then able to report these amounts in the G15 field on the BAS, which is where non-tax deductible expenses need to be reported.

How can I record purchases that include both a creditable and non-creditable component?

1. Create a tax code for private use.
   You may need to create several of these because your private use percentage is different depending on the type of private use being dealt with. This tax code will be used to create a consolidated tax code for use on transactions that involve a portion of private use. Enter the Tax Code and Description and make sure the Tax Type is Sales Tax. Set the Rate according to the type of private use. For example, if our private use for vehicle expenses is set at 20%, then the rate in the tax code will be 2%. Select an account for the Linked Account for Tax Collected. You may want to set this as an account named 'Misallocated', because this tax code should never be used on a Sale or Deposit.
   
2. Create a GST tax code specifically for use with the private use tax code created above.
   Again, you may need to create several of these because your private use percentage is different depending on the type of private use being dealt with. This tax code will be consolidated with the code created in step 1 above. This time, make the Tax Type as Goods & Services Tax, and set the Rate according to the type of private use. For example, if our private use tax code created in 1 above is set to 2%, we would set the GST tax code as 8%. This way both tax codes add up to the current GST prescribed rate of 10%. The linked accounts for tax collected and tax paid should be the same accounts you normally use to record these taxes, for example GST Collected and GST Paid.
   
3. Create a consolidated tax code to use when entering your expenses.
   Thus, this time the Tax Type should be Consolidated. Enter the sub - taxes that comprise the consolidated tax code as the two tax codes created in steps 1 & 2 above. Make sure that the total tax rate for the consolidated code is 10%.
   
4. Create a tax inclusive cheque or purchase and enter the Date and Amount.
   Tab to the Memo field and briefly describe the purpose of this transaction. Make the tax code the consolidated tax code created in step 3 above. Go to the Edit menu and select Recap Transaction. Note that only the business use proportion is allocated to the expense account, and the GST paid account is only debited for the amount of tax attributable to business use.
   
5. At the end of the GST reporting period and preparing your BAS through BASlink.
   Select both of the tax codes set up in steps 1 & 2 above at G11, and then the sales tax type code set up in step 1 above at G15. The Goods and Services tax code will show the full exclusive amount of the expense plus business proportion of the GST at G11, and the private use sales tax type code will show the private portion of the GST paid, but not the expense portion. At G15, this last figure (GST applicable to private use) will be multiplied by 11 (this is purely a mathematical correction for BASlink) and then this figure will be deducted from creditable acquisitions at G17, leaving only the business proportion of the expense and GST at G19.

Note: At the end of the accounting period you or your accountant will need to enter an adjusting journal to reduce business expense accounts by the amount of the private use and transfer them to an account such as drawings.

Example

Bill Bloggs the accountant has estimated that he uses his company vehicle for private travel for 20% of total travel undertaken. He is paying his monthly petrol bill for fuel used in this vehicle.

Step 1 - Create a Sales Tax type tax code for vehicle private use

Step 2 - Create a Goods & Services type tax code for vehicle business use

Step 3 - Create a consolidated tax code to use when recording vehicle expenses

Step 4 - Write a cheque to pay for fuel expenses

Step 5 - Prepare BAS through BASlink