I’ve had this conversation with quite a few people who are just starting to have to deal with GST, or are working with any kind of tax, commission or percentage. The conversation usually revolves around how they add GST onto their products, and the problem is, most of the time the calculation is done wrong and eats into profit margins. In this post, I will go through what happens, why it happens and how to apply percentages correctly. This method will also work for any percentage, not just GST. But first, what the heck do you mean by GST?
What is GST?
GST is a tax levied by the Australian Taxation Office (ATO) on nearly all goods and services; hence it being called the Goods and Services Tax. Other countries around the world have similar systems where they might be called GST, VAT (Value Added Tax) or a simple Sales Tax.
In Australia, GST is 10%, and businesses must be registered for GST when your turnover (revenue) for the year is greater than $75,000. Read more here: https://www.ato.gov.au/Business/GST/Registering-for-GST/
How to calculate GST
Nearly all retail environments state prices with GST already calculated and showing. So, if you walk into a clothing store and see a shirt priced at $100, there is already GST included in that. GST is 10%, so that makes the GST component of the shirt $10. The remaining $90 are what’s known as the ‘ex GST’ amount, which the business keeps.
Simple enough hey?
The problem most people have is when they need to add GST to a product. Say your $100 shirt was the ex GST amount. You know you need to add GST, and you know GST is 10%. So, you take your $100, work out 10% (ten bucks, right?) and add that on. BAM $110 thank you ma’am!
How to get caught out by GST
The problem with the above scenario is the ATO takes 10% of what you sell the shirt for. So, they see the $110 price tag and take 10% of that. What’s 10% of $110? If maths is not your strong suit, that’s ok! Grab a calculator and type in “110 x 0.1” (the 0.1 is one-tenth of the number 1, or 10%) which will equal $11. This is the amount the ATO will take. Does that $11 equal the $10 you added on?
Key Message: Adding 10% to your ex GST amount will lose you money
Want to read more? Head on over to Part 2!
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