Discussion (INT1031_07-04_COMPmay19_01-20)

The GST is a tax on the supply of goods and services which is ultimately borne by the final consumer but is collected at each stage of the production and distribution chain. The terms ‘taxable supply’, ‘input taxed’, ‘input tax credit’, ‘GST-free’ and ‘registered entity’ have the same meaning as in A New Tax System (Goods and Services Tax) Act 1999.

The GST component of the consideration promised by a customer does not constitute revenue of the vendor. This is because the transaction gives rise to a present obligation to remit the amounts of the tax collected to the taxation authority. This is reflected in AASB 15, paragraph 47, which states that amounts collected on behalf of third parties (for example, some sales taxes) are excluded from the transaction price and, therefore, revenue.

Where an entity undertakes taxable and GST-free activities, it is entitled to claim input tax credits and recover from the taxation authority the GST included in the purchase price of supplies. This Interpretation reflects the view that in these cases the GST is not part of the cost of the asset acquired or the expense incurred. This is consistent with the Framework for the Preparation and Presentation of Financial Statements, which states that ‘expenses are recognised in the income statement when a decrease in future economic benefits related to a decrease in an asset or an increase of a liability has arisen that can be measured reliably.’ It is also consistent with AASB 102, which provides that the cost of purchase of inventories does not include taxes that are subsequently recoverable from the taxing authorities. In addition, AASB 116 Property, Plant and Equipment and AASB 138 Intangible Assets require assets acquired to be recognised at their cost, being the amount of cash or cash equivalents paid or the fair value of the other consideration given to acquire an asset at the time of its acquisition or construction (production). Therefore, recoverable GST would not be included in the cost of acquisition.

Where an entity undertakes input-taxed activities, the amount of the GST incurred comprises part of the cost of acquisition of the related asset or expense item to the extent that it is not recoverable from the taxation authority. This is because, in these cases, the entity cannot recover the amount of the GST included in a transaction from the taxation authority and, therefore, must sacrifice future economic benefits and suffer a decrease in equity resulting from the amount of the GST included in the price of the supplies.

In some cases, an entity carries on a business that comprises a mix of input-taxed activities and taxable activities and GST-free activities. In these circumstances, the entity is not entitled to claim an input tax credit in respect of its input-taxed activities. In these cases, the legislation provides that the related GST is apportioned between input-taxed and other activities in measuring the recognised amount of the acquisition cost. In some cases, periodic adjustments will need to be made in respect of the apportionment. Where the related item is a depreciable asset, consequential adjustments will need to be made to reflect revisions of the acquisition cost and carrying amount of the asset. These adjustments are in the nature of revisions of the depreciable amount and would be accounted for in accordance with the requirements of AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors.

Receivables and payables are required to be recognised on a gross basis, that is, inclusive of the amount of the GST. This is because the total amount of the transaction as represented by the price is the amount that will be paid or received by the entity. In addition, the net amount of GST receivable from, or payable by the entity to, the taxation authority is also recognised as part of receivables or payables in the statement of financial position.

AASB 107 requires cash flows to be classified as arising from operating, investing or financing activities. This Interpretation reflects the principle that all cash flows of the entity, including those relating to the GST component of a receipt or payment, should be reported on a gross basis in the statement of cash flows in accordance with AASB 107. The Interpretation also specifies that the GST component of financing and investing activities which are recoverable from, or payable to, the taxation authority should be classified as part of cash flows from operating activities. This means that investing and financing cash flows are presented net of the GST that is recoverable from, or payable to, the taxation authority and all cash flows relating to GST recoverable from, or payable to, the taxation authority are included in operating cash flows.