The cloud of confusion over GST treatment of business-to-business journal entries that net the final payment may soon be lifted with a draft ruling from the ATO, according to a leading accountant.
"Our view is this ruling will bring some clarity to the issue in relation to when the entries are to be brought to account," says Ken Fehily, PricewaterhouseCoopers indirect tax partner and national GST practice leader.
While the ruling should provide some certainty, Fehily notes it may also provide some surprises as a number of businesses will be completely unaware of the potential GST liability they have been, or may be, incurring.
He says potential snags occur where businesses that have mutual dealings with each other reconcile related transactions at a particular point in time and work out who owes what on a net basis. This follows with a single cash payment after all the offsets.
End of financial year is often the time when business-to-business journal entries that net the final payment are made and offsetting accounts are reconciled and paid out.
"These journal entries could lead to very significant GST issues," says Fehily, "even though the use of journal entries is not done to avoid GST or any other taxes."
The key question, he says, is "how do you know if your journal entries lead to a GST liability or credit?"
Take the following example.
If A sells goods worth $100 to B during the year, and B supplies services worth $80 to A during the year, a single payment of $20 from B to A may be made at the end of the year.
Fehily points out this can create GST issues, which include the following: In this case, A has a GST liability on the $100, and B has a GST liability on the $80, and they both also have potential claims for input tax credits. But some might record a single entry of $20, which is not correct.
Both need to record the full values of all transactions in their journals, books and BASs. And both need to issue tax invoices to ensure that they can both claim credits, or they will both have GST liabilities and no credits.
In many cases, he says, the ATO will accept that, as long as such is agreed to by the parties, each need only bring GST to account (on the full $100 and $80 in the above example) when the journal entries are done, rather than when the supplies occurred.
Fehily says the ATO has shown common sense in accepting that journal entries made in, for example, September, that relate to supplies made during the year, and are therefore going to be recorded in the books as at year end (that is, June 30), do not need to be accounted for until the book entries are actually made (that is, September). However, credits still cannot be claimed until tax invoices are swapped.
However, he notes that even if the ATO accepts the above delay, if the parties issue invoices as well as making the journal entries, this could bring forward the liability to the time of issuing the invoice.
Fehily also points out there is an additional complication if the businesses decide to make this a "barter arrangement" instead.
"If they agree that it is a barter, then they could very well each have GST liabilities that apply when the supplies were actually made, not later," he says.