§-Syllabus dot point

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.

Generated by Claude Opus 4.87 min answerUpdated 2026-06-02

Reviewed by: AI editorial process; not yet individually human-reviewed

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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\text{-}exclusive\ price = price \times 0.10

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

Net GST for a quarter

A registered sole trader wants to find out how much GST is owed to the ATO for the quarter and record the settlement.

Step 1: Calculate GST collected on sales

Because the sales figure of $50\,000$ is GST-exclusive, we multiply by 10 percent to find the GST the trader collected from customers on behalf of the ATO. This amount is credited to the GST clearing account because it is a liability owed to the ATO:

\text{GST collected} = 50{,}000 \times 0.10 = \$5{,}000

Step 2: Calculate GST paid on purchases and expenses

The purchases and expenses figure of $30\,000$ is also GST-exclusive, so the same 10 percent rule applies. This GST paid is an input tax credit and is debited to the GST clearing account, reducing what is owed to the ATO:

\text{GST paid (input credits)} = 30{,}000 \times 0.10 = \$3{,}000

Step 3: Find the net GST clearing balance

The GST clearing account accumulates GST collected on the credit side and GST paid on the debit side. Subtracting the debit from the credit gives the net liability still owed to the ATO:

\text{Net balance} = 5{,}000 - 3{,}000 = \$2{,}000 \text{ (credit)}

A credit balance means the trader owes the ATO $2\,000$ . A debit balance would instead mean a refund is due.

Step 4: Record the settlement entry

When the trader pays the ATO, the GST clearing account is debited to extinguish the liability and Cash is credited for the payment. After this entry the clearing account has a nil balance, ready for the next quarter:

Account	Debit	Credit
GST clearing	$2,000
Cash		$2,000

Final answer: The trader owes the ATO $\$2{,}000$ for the quarter; the settlement entry debits GST clearing $2{,}000$ and credits Cash $2{,}000$ , leaving the clearing account at nil.

GST-inclusive versus GST-exclusive amounts

The single most important skill is reading whether a figure already includes GST. If a price is GST-exclusive, multiply by $0.10$ to find the GST and by $1.10$ to find the total. If a price is GST-inclusive, the GST component is the total divided by 11, because the inclusive price is $110\%$ of the base. A quick check: the GST is always one-eleventh of a GST-inclusive amount and one-tenth of a GST-exclusive amount. Confusing the two is the most common error in TASC GST questions, because dividing a GST-inclusive figure by 10 overstates the GST.

The business activity statement

A registered sole trader reports GST to the ATO on a business activity statement (BAS), usually each quarter. The BAS reports total GST collected on sales and total input tax credits (GST paid), and the net is paid to, or refunded from, the ATO. The GST clearing account in the ledger is the running record that feeds this figure: its credit balance at quarter end is the amount owing. After the BAS is lodged and settled, the clearing account returns to nil ready for the next period.

Not everything attracts GST

A few items are GST-free (for example, basic food, some health and education) or input-taxed, and wages, drawings, loan principal and interest do not carry GST. When a transaction has no GST, record the full amount to the relevant account with no entry to the GST clearing account. Recognising which transactions are outside the GST system avoids creating GST entries that should not exist.

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.

Exam-style practice questions

Practice questions written in the style of TASC exam questions on this dot point, with worked answer explainers. The year tag is the paper they imitate, not the source.

TCE 20227 marksDuring the September quarter a registered sole trader made GST-exclusive credit sales of

88\,000, GST-exclusive cash sales of

22\,000, and paid GST-inclusive purchases and expenses totalling $66\,000. There was no opening balance in the GST clearing account. Calculate the GST collected, the GST paid (input tax credits), and the net amount owing to or refundable from the ATO, and prepare the journal entry to settle the account.

Show worked answer →

Work the collected side, then the paid side, then net them.

GST collected $= (88\,000 + 22\,000) \times 0.10 = 110\,000 \times 0.10 = \$11\,000$ (credit GST clearing).

The purchases and expenses are GST-inclusive, so the GST inside them is the total divided by 11: GST paid $= \frac{66\,000}{11} = \$6\,000$ (debit GST clearing).

Net GST clearing balance $= 11\,000 - 6\,000 = \$5\,000$ credit, so $5\,000$ is owed to the ATO.

Settlement entry: Debit GST clearing $5\,000$ ; Credit Cash $5\,000$ , which clears the account to nil.

Markers reward applying $\times 0.10$ to the GST-exclusive sales, dividing the GST-inclusive purchases by 11 (not by 10), the correct net credit balance, and the settlement entry.

TCE 20234 marksExplain why GST collected on sales is treated as a liability and not as revenue, and describe how this affects the profit a sole trader reports.

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A full 4 mark answer explains the collector role and the profit effect.

GST collected is money the business gathers on behalf of the ATO; it never belonged to the business. Because the business has a present obligation to hand that money to the ATO, GST collected is a liability (credited to the GST clearing account), not revenue.

As a result, reported Sales and therefore profit exclude the GST. If GST collected were treated as revenue, sales and profit would both be overstated by the GST, and the business would also appear to keep money it is legally required to remit. By passing GST through the clearing account, profit reflects only the genuine trading margin. Markers reward the collector or agent point, naming the obligation that makes it a liability, and explaining that profit is unaffected because GST is excluded from revenue.