GST and the Sole Trader - TCE Accounting (Tasmania)
“Explain how GST is collected and paid by a sole trader and record GST in transactions.”
GST is a 10 percent tax a registered business adds to its sales (GST collected) and pays on its purchases (GST paid, an input tax credit). The business is a collector for the ATO, not the bearer: it remits the net of GST collected less GST paid, recorded through a GST clearing account.
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.
A liability account that records GST collected on sales (credits) and GST paid on purchases (debits). Its balance shows the net amount owing to, or refundable from, the ATO at the end of the period.
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.
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.
GST collected on sales increases the liability owed to the ATO (credit GST clearing). GST paid on purchases reduces that liability (debit GST clearing). The net credit balance is paid to the ATO; a net debit balance means a refund is due.
Worked example
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 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:
Step 2: Calculate GST paid on purchases and expenses
The purchases and expenses figure of 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:
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:
A credit balance means the trader owes the ATO . 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 for the quarter; the settlement entry debits GST clearing and credits Cash , 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 to find the GST and by to find the total. If a price is GST-inclusive, the GST component is the total divided by 11, because the inclusive price is 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.
, and the base (GST-exclusive) amount . For a GST-exclusive base, and the inclusive total .
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.
GST collected is not income and GST paid is not an expense. They pass through the clearing account on their way to or from the ATO. Recording GST collected as part of Sales overstates revenue and profit, and the figure never belonged to the business in the first place.
Exam-style questions
Questions in the style of TASC exam questions on this dot point, each with a worked answer. They are written by ExamExplained unless tagged "Past paper"; the year shows the paper a question is modelled on.
Practice7 marksDuring the September quarter a registered sole trader made GST-exclusive credit 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 (credit GST clearing).
The purchases and expenses are GST-inclusive, so the GST inside them is the total divided by 11: GST paid (debit GST clearing).
Net GST clearing balance credit, so is owed to the ATO.
Settlement entry: Debit GST clearing ; Credit Cash , which clears the account to nil.
Markers reward applying to the GST-exclusive sales, dividing the GST-inclusive purchases by 11 (not by 10), the correct net credit balance, and the settlement entry.
Practice4 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.Show worked answer →
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.