Guest post by H&R Block’s Director of Tax Communications, Mark Chapman.
The growth in online retailing in the last decade has been explosive. Indeed, with the growth of online marketplaces like eBay and Amazon, a whole new generation of retailers has been born that trades only online. So, the question is, what are the tax implications that those selling online need to be aware of?
Am I an online retailer?
Thousands of people regularly sell goods and services online. Many of those sellers wouldn’t even consider that they are in business and that there might be tax implications to what they do. Clearly, there is a difference between someone selling a few unwanted second hand goods through eBay to clear the house of clutter (which wouldn’t be taxable) and someone running an online store (which would be taxable). But where is the dividing line? Basically, if you are running a business, you will need to account for taxes. To determine if you are in business, consider these questions:
- Do you have an online shop? If your online space looks like a shop and has a brand name, it’s probably a business.
- Is your main intention to make a profit? If you buy goods with a view to selling them at a higher price, you are probably in business.
- Do you make repeated or regular sales? If you’re a regular seller online, this is an indication that you are in business.
- Do you manage your activities as if it were a business? If you have a business plan, advertise your goods or services, keep a separate bank account for your online activity and keep records of your purchases and sales, all these are indications of being in business.
So, if you are running an online business, what are the tax issues you need to consider?
Income Tax
Sales online are included in as business income. Such sales are included in your total assessable income and are subject to income tax. This applies regardless of whether the sale is made to a domestic or overseas customer.
Goods and Services Tax
You might also need to consider Goods and Services Tax (GST). You must register for GST once your annual turnover is $75,000 or more.
Once you are registered for GST you will need to:
- include GST in the price you charge for your goods or services, provided the sales are taxable
- issue tax invoices for your taxable sales and obtain tax invoices for your purchases
- claim credits for the GST included in the price of your business purchases, such as stock
- account for GST through a Business Activity Statement (BAS) and put aside the GST you have collected so you can pay it to the ATO when due
TIP: You only register once for GST, even if you operate more than one business. So, if you run a pastry shop and a plumbing business, you only need the one registration unless one of the businesses is operated through a different entity, such as a company.
If you fail to register when you should have done, you may be forced to account for GST on all sales backdated to the point at which you became required to register, plus penalties and interest. If you didn’t charge GST to your customers, that will be a hit to your profits.
How does the GST work?
The current rate of GST is 10%. This means that if you charge $100 for your merchandise, your customer will be charged $110. The additional $10 is the GST which needs to be paid to the ATO.
When you buy supplies for your business, you’ll be charged 10% in GST which you can claim back as a credit. At the end of each GST period – usually quarterly but occasionally monthly – you need to account for the GST you’ve collected on your sales minus any that you’ve paid (the credits) on your purchases. The difference is the amount payable (or refundable if credits on purchases exceed debits on sales). You do this by completing a business activity statement (BAS) and paying the net GST to the ATO
Businesses with a turnover of less than $75,000 are given the choice of registering for GST because if a business is spending extensively on supplies, the business might want to claim the GST credits back. This is particularly the case if GST credits on purchases exceed the GST charged to customers.
What about overseas sales?
Where GST can get complex is in relation to sales to overseas customers. Given that the internet enables you to target customers all across the globe, the growth prospects for in international markets are huge for those with the right products to sell at the right prices.
GST is not generally chargeable when selling to an overseas customer. However, such sales are included when calculating your annual turnover for GST registration purposes. Remember, where your turnover exceeds $75,000, you are required to register for GST. So, even though the sales themselves potentially do not attract GST, they are still included in that $75,000 figure. What that could mean is if you are not currently registered for GST because your Australian domestic sales do not reach $75,000, you may be obliged to register because your overseas sales may tip you over the $75,000 threshold. Once registered, you will then need to account for GST on your Australian sales (but probably not your overseas sales).
