How is GST recorded and why is it neither revenue nor an expense for the business?
Record the goods and services tax on sales and purchases using source documents and report the net GST liability
GST is collected on sales and paid on purchases. The business holds it on behalf of the ATO, so GST collected is a liability and GST paid reduces that liability; the net is remitted, not treated as revenue or expense.
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What this dot point is asking
You need to identify GST on source documents, record the GST component separately in journals, and calculate the net GST payable to the ATO.
GST and source documents
A tax invoice is the source document that triggers GST recording. It shows the price, the GST, and the GST-inclusive total. For a GST-registered business, GST flows through balance sheet accounts, not the income statement.
Extracting GST from a total
If a figure is GST-inclusive, the GST is one eleventh of it, because the total represents 110 percent.
Recording GST in journals
On a credit sale, the debtor is debited with the full inclusive amount; sales is credited with the price; GST collected is credited with the tax. On a credit purchase, the asset or expense is debited with the price, GST paid is debited with the tax, and the creditor is credited with the inclusive total.
Source documents and the audit trail
GST recording is only as reliable as the documents behind it, so SACE expects you to link each entry to its source document. The main documents are:
- Tax invoice. Issued for sales of more than $82.50 (GST inclusive) and required before a buyer can claim an input tax credit. It must show the seller's ABN, the words "Tax invoice", the GST amount or a statement that the total includes GST, and the date and description.
- Receipt. Evidence that cash has been received or paid; it triggers the cash journals.
- Cheque butt or electronic remittance. Evidence of a payment made.
- Credit note (adjustment note). Issued when goods are returned, reversing both the sale and the GST originally recorded.
Each document is the verifiable evidence that supports the journal entry, satisfying the qualitative characteristic of faithful representation: the figures can be checked back to an external record rather than relying on the bookkeeper's word. Keeping documents in date order builds the audit trail an external examiner or auditor follows from the financial statements back to the original transaction.
Reporting the net GST on the BAS
A registered business reports GST to the ATO on a Business Activity Statement (BAS), usually each quarter. The GST collected and GST paid accounts are netted off: when GST collected exceeds GST paid the business remits the difference; when GST paid exceeds GST collected (common when a business makes large capital purchases) the ATO refunds the difference. Settling the BAS clears the GST control accounts back toward zero, ready for the next period. This is why GST never touches the income statement: the whole cycle of collecting, paying and remitting moves only through asset, liability and cash accounts.
Why GST is a balance sheet item
Because the business merely collects GST for the government, it cannot be income, and the GST paid on purchases is recoverable, so it cannot be a cost. The net GST sits as a current liability (GST payable) when collected exceeds paid, or a current asset (GST refundable) when paid exceeds collected.
Exam-style practice questions
Practice questions written in the style of SACE Board exam questions on this dot point, with worked answer explainers. The year tag is the paper they imitate, not the source.
SACE 20225 marksDuring a BAS quarter a retailer made cash sales of 22 000 (GST inclusive), bought inventory on credit of 1 100 (GST inclusive) for electricity. Calculate the GST collected, the GST paid (input tax credits) and the net GST payable to or refundable from the ATO.Show worked answer →
Strip the GST out of each inclusive figure using the one-eleventh rule.
GST collected: cash sales ; credit sales . Total GST collected .
GST paid (input tax credits): inventory ; electricity . Total GST paid .
Net GST: payable to the ATO. Because collected exceeds paid, the net is a liability (GST payable). Markers reward correct extraction of GST from inclusive totals, separating collected from paid, and the correct direction (payable, not refundable).
SACE 20203 marksA business issues a tax invoice for a credit sale with a GST-exclusive price of $1 800. Show the general journal entry to record the sale, and explain why GST collected is classified as a liability rather than revenue.Show worked answer →
GST is 10 per cent of the exclusive price: , so the inclusive total is .
Journal entry: debit Debtors ; credit Sales ; credit GST collected . Debits equal credits.
Classification: the is collected on behalf of the ATO, not earned by the business. The business has a present obligation to remit it, so it meets the definition of a liability. Treating it as revenue would overstate income and the gross profit margin. Markers reward the correct three-line entry with GST separated and the liability reasoning.