Setting up tax codes in the system to be able to easily get auditable totals for the Australian tax office’s Business Activity Statement (BAS) it not that straight forward.
The system comes with a system used tax exempt category but if you use this invoices (both sales or purchases) that are marked as Exempt do not appear on the tax proof listings and hence you can’t get the totals of tax free sales and purchases that are required for the statement. Equally, using just one exempt tax code for GST means that deriving total export sales has to be a manual exercise. The same is true for capital expenditure purchases but as law firms typically don’t do much of this it is less of an issue.
The way to get around this is to set up two new tax codes, Exempt (Local) and Exempt (Overseas), both with a zero percentage taxation rate. The system provided exempt rate should be not be used. Unfortunately, it can’t be deleted so I would recommend renaming it to something obvious like “Do not use”.
Once this is done set up the WIP codes to be used by the system to be either GST or Exempt (Local), depending upon the nature of the charge. Typically Official Fees and Foreign Associates charges should be Exempt (Local) although there may be other charges, such as international couriers, that may also be exempt of tax.
Local clients should then have their tax code set to blank so that the tax coding will be picked up from the WIP items.
Foreign clients should be set to Exempt (Overseas). Billing will use this tax code to calculate the tax, overriding the tax code recorded WIP codes, and report the revenues under this category so total export sales can be derived.
Local suppliers need to have their tax code set to GST and the tax treatment should be inclusive or exclusive as applicable.
IP Australia is a special supplier however and needs to be set to Exempt (Local) and Tax Inclusive. The tax treatment of Tax Not Applicable, even though it seems obvious to use that one, should not be used as this means that any invoices will not be recorded on the Tax Proof Listing. The default expense account also needs to be set to an account that doesn’t require disbursement to WIP so that Lodgement/Fees Lists can now be entered without being forced to disbursements to be recorded against a case. I’ll go into processing lodgement or fees lists below.
Foreign Suppliers need to be set to Exempt (Overseas) and Tax Inclusive. Once more, the tax treatment of Tax Not Applicable should not be used. If this is used the suppliers invoices will be excluded from the tax report.
The next trick is then to ensure that all accounts payable transactions that need to be reported on the BAS are processed through the Purchase function in Accounts Payable, even if the GST component is exempt. If they are entered through the Manual Payment process as a one off payment or as a withdrawal through the Cash Book then they will not be considered for tax reporting as these to functions have no GST capability.
The biggest load of transactions here will be the payments for lodgements to IP Australia, ie. the official fees, whether the fees list is generated automatically from Inprotech or raised manually. These need to be entered as a purchase and then manually paid using the purchase option. One one thing to be aware of here is that IP Australia as a supplier will default to not disbursing invoices, therefore, if a sales order for fees or invitation to pay is to be processed and disbursed to a case then you will need to change the expense account to one that will force the disbursing to WIP. This means that the operator has to know to do this. Another option is to set up another supplier for IP Australia with a default disbursable account. Then the operator has to know to use this! Six of one, half a dozen of the other.
Other AP transactions that could be an issue here are financial services transactions that have a GST component and are automatically debited from the bank account, eg. lease payments, American Express card commissions, fees for foreign exchange payments. The temptation here is to take these up through the cash book but if you do that the GST component can’t be captured and processed (and you definitely want to capture these ones because this is GST that you are paying and can claim!). Raise them as a purchase invoice and pay them through manual payments to both get them on to the cash book for bank reconciliation and record them on the tax proof listing for BAS processing.
Equally it is not possible to register GST against general journals in the General Ledger so any transactions here that affect GST have to be put through the relevant sub ledgers.
The net result of the above is that the BAS worksheet can be created as follows:
G1 - report total of sales and tax from the Sales Tax Proof listing
G2 - total of sales for Exempt (Overseas) category from the Sales Tax Proof Listing
G3 - total of sales for Exempt (Local) category from the Sales Tax Proof Listing
G11 - report total of purchases and tax from the Purchases Tax Proof listing
G14 - total of purchases for Exempt (Overseas) and Exempt (Local) categories from the Purchases Tax Proof Listing
I haven’t discussed capital expenditure purchases as there usually aren’t very many of these so they have to be handled manually. Alternatively a separate tax code can be established for this and the reports will then total against this code.
The most important thing though is the set up of the client and supplier details. If this is not done properly then non-taxable items won’t appear on the reports. Not a complete show stopper in terms of the statement because the tax to be paid is always correct but the audit-ability is less complete.
I have a little Excel spreadsheet that mimics the worksheet and adds up the totals once you enter the above so if you want a copy drop me an e-mail. I don’t have much experience in this area in other jurisdictions, eg. VAT in Europe, but I am sure the principles are the same.
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