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TASAccountingSyllabus dot point

How does GST work for a sole trader and how is it recorded?

Explain how GST is collected and paid by a sole trader and record GST in transactions.

How a registered sole trader collects GST on sales, claims input credits on purchases, records the GST clearing account and settles with the ATO.

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What this dot point is asking

The Goods and Services Tax is a broad-based 10 percent tax on most goods and services in Australia. A sole trader whose turnover reaches the registration threshold must register and then acts as an unpaid collector for the Australian Taxation Office. Understanding GST is part of the legal obligations introduced in Unit 1 and applied throughout recording.

Collector, not taxpayer

When a registered business sells, it adds 10 percent GST to the price. This GST collected does not belong to the business; it is owed to the ATO. When the business buys from another registered supplier, it pays GST on the purchase, and this GST paid can be claimed back as an input tax credit. The business only ever hands the ATO the difference between what it collected and what it paid.

Calculating GST

If a price excludes GST, add 10 percent. If a price already includes GST, the GST component is the total divided by 11, because the GST-inclusive price is 110 percent of the base.

GST on a GST-exclusive price=price×0.10 GST\ on\ a\ GST\text{-}exclusive\ price = price \times 0.10

GST inside a GST-inclusive price=total11 GST\ inside\ a\ GST\text{-}inclusive\ price = \frac{total}{11}

Recording GST

On a cash sale, the business debits Cash for the full amount received, credits Sales for the base, and credits GST clearing for the GST. On a purchase, it debits the asset or expense for the base, debits GST clearing for the GST paid, and credits Cash or Creditors for the total.

Worked example

Why this matters

GST flows through almost every transaction you record in Unit 2, so getting the split between base amount and GST right keeps Sales, Purchases and the clearing account accurate. It is also a legal obligation: a registered sole trader must lodge a business activity statement and remit the net GST, and errors can lead to penalties.