Inventory and GST

[Bret Busby]

On Sun, 22 Jun 2003, George Osvald wrote:

> Date: Sun, 22 Jun 2003 22:41:00 +1000
> From: George Osvald <mail at okstudio.com.au>
> To: gnucash-user at lists.gnucash.org
> Subject: Inventory and GST
> 
> Two questions:
> How do I set up an Inventory of all products (broken down to parts if 
> possible)? Do I create a normal account under assets with all the products 
> and descriptions?
> Is quantity pricing possible in GNUcash?
> 
> How to set up GNUcash for Australian GST? I am using cash GST system and GST 
> is calculated only at the time of the transaction. I have to report GST paid 
> and received every quarter and then get a refund or pay. 
> Could I set two GST tax accounts. one for credits and another one for 
> payments? Then I would check all customers that GST applies to with GST 
> collected tax account and all the vendors with GST paid tax account.
> I would also need two AR/AP accounts. AR with GST, AR GST Free, AP with GST 
> and AP GST Free. Maybe another global AR and AP for totals without taxes.
> 

> 
> Is this correct or am I overcomplicating it?
> 
> 
> 

It is my understanding of the GST in Australia, that the GST applies to 
all customers; and that it is the goods/services which are 
differentiated - whether the chicken is above 20 degrees centigrade 
(room temperature), making it subject to GST, or, less than room 
teperature, making it exempt from GST, and, likewise, whether the 
coffee beans are ground or not, determining whether they are subject to 
GST, and all that rubbish.

The only differentiation as to whether parties (people, businesses, 
organisations) are subject to GST, applies to whether they are to charge 
GST (whether the vendor is to charge GST), and, not whether they are to 
be charged GST (whether the customer gets charged GST). If the party is 
registered for GST, then the party is entitled, and, required, to charge 
GST, otherwise the party is not entitled or required to charge GST.

You might want to contact the ATO, to clarify all of this.

I have previously obtained a ruling from the ATO, relating to the GST 
applicability to LETS (barter organisations) organisations and 
transactions. See http://www.busby.net/wallets/GST_Ruling.html , and the 
part "What is GST? An overview", for some brief information about 
charging of the GST in Australia.

I believe that, in terms of using GnuCash for GST reporting, the best 
thing to do (apart for programming for the variously continually 
changing reporting requirements), is to
1) include a field for the organisation using the application, to flag 
whether the organisation is registered for the GST; if yes, then all 
services have a GST component, and, the calculations for invoices and 
reports would then check for 2); and
2) include a field for the (yet to be created module) inventory 
component, where each inventory item has a flag field; something like 
"Subject to GST?"; and
3) include a field, dependent on 1), that is the GST rate (depending on 
the particular state/country, assuming that the GST rate is constant 
for the country, and not variable, depending on the item).

It must be considered, I believe, that GnuCash is (I believe) designed 
for international use, rather than for the specific accounting 
requirements of a particular country, and, as such, significant 
variations could apply for the implementation of tax inclusion. For 
example, in New Zealand, the GST applies to everything and (I believe), 
to all businesses. As an example, here in Australia, I am an Amway 
Distributor (this is NOT advertising or promotional). In Australia, an 
Amway Distributor may or may not be registered for the GST, so an Amway 
Distributor may or may not charge GST on the Distributor's component of 
pricing, and may or may not be paid GST by Amway, on bonuses, depending 
on whether the Distributor is registered for the GST. If the annual 
turnover of the Distributor's business, is greater than 50,000AUD, then 
the Distributor is required to be registered for GST, from memory. If 
the Distributor's annual turnover is less than the threshold, then the 
Distributor may be registered for GST, but is not required to register. 
Apart from that differentiation between the two countries, some product 
lines in Australia, are subject to GST, and, some are not. So, in 
Australia, using GnuCash for an Amway Distributorship business, with a 
GST component in the accounting system, would require two components 
(apart from the addition of the yet to be created Inventory System); the 
first being whether the Amway Distributor is registered for the GST, 
and, the second, being which particular inventory items are subject to 
the GST. As an example, toilet cleaner is subject to GST, as is laundry 
detergent and dishwashing detergent and toothpaste, and, pasta sauce, 
salad dressing, canned tuna (exempt for human food, subject to GST 
for pet food) are not subject to GST. All lines are subject to GST, in 
NZ, from my understanding.

Oh, and, in Australia, I believe that GST oriented accounting software, 
also has to include (where a party is registered for the GST), the 
party's ARBN and/or GST registration number, which are to show on all 
documents relating to the GST (invoices and GST reporting), from memory. 
That means a requirement for an extra one or two fields, the second 
being dependent on GST registration. That may or may not apply in NZ, I 
do not know.

And, as far as I am aware, the GST rate is different in NZ, so the field 
for the GST rate. would be required.

As all business are required to be registered for the GST in NZ, and, 
due to the reporting requirements, some small businesses 
(microbusinesses with small turnovers) closed down, and, that included 
some Amway Distributorships giving up in NZ.

However, while all of that applies to the (relatively) simple 
differences in the sales tax components between NZ and Australia, which 
both have GST, not all countries have GST - some still have wholesale 
taxes, which vary in their application between different countries, and, 
from what I understand, the wholesale and other sales tax rates, vary 
between different goods and services within the same country, and, from 
what I understand, from memory, in countries that are federated, like 
the USA, sales and/or wholesale taxes, apply to goods and services, with 
both state and federal components, like the monumental botch-up with 
petrol pricing in Australia, where, I believe, apart from the federal 
and state taxes levied on petrol, the GST also applies. We were led to 
believe that the GST would replace all the petrol taxes, when the 
election was held, that elected the government that imposed the 
horrendous GST system in Australia, but, that's another story.

So, after all of that.... I believe and suggest that, for GnuCash to 
incorporate tax components like Australian GST components, so it can be 
used for GST reporting, apart from the need for Inventory System 
module(s), it needs for local components to be written for each 
state/country, as applicable, which would require knowledgeable people 
in each state/country, to write the country-specific modules, as 
add-ons. I believe that the resultant modules and their output, would 
need regular updating, and checking, by a tax accountant, and/or the 
state/country-specific tax office, for legality, if the software is to 
be used for tax invoices and for tax reporting, as in Australia.

Then, the result would be, for example, that a person would instal 
"GnuCash-generic" (with, when it happens, an incorporated Inventory 
System... :) ), devoid of sales/wholesales taxes, and, if the party 
wants to incorporate sales/wholesale taxes into the accounting, then 
installing an add-on, state/country-specific module, specific to the 
state/country's particular taxes and reporting requirements, with the 
add-on module being updated as frequently as required, to keep pace 
with any changes as they occur. 

That is partly why accounting software in Australia, has become 
prohibitively expensive for microbusinesses; the software development 
people have an ongoing job, trying to keep up with the unstable GST 
requirements, and are required to continuously change the software.

As an example, when commercial accounting software in Australia, finally 
caught up with the introduction of the GST, from memory, Quick Books 
Professional was selling for about 300AUD; now it is (only a couple of 
years later) selling for about 1500AUD. Either it is expensive and very 
involved, to maintain GST-compliant software in Australia, in an 
attempt to keep pace with the unstable GST requirements, or, the 
Australian dollar is going the way of the second-world-war deutschemark, 
or, both.

It all sounds very complicated, and, would (I believe) take much work, 
on an ongoing basis (to keep up with the continuously changing 
Australian GST requirements, for example), but, I believe that that is 
the nature of what would be required.

I think, however, that an integrated Inventory System component (devoid 
of taxes, at this stage; start simple, get it up and running, THEN 
elaborate), as recently mentioned, would be a good step on the way to 
enhancement.

Disclaimer: I am NOT a tax professional or a qualified accountant, and 
this is all NOT professional advice - this is all from my understanding 
of the way things are.

-- 
Bret Busby
Armadale
West Australia
..............

"So once you do know what the question actually is,
 you'll know what the answer means."
- Deep Thought,
  Chapter 28 of 
  "The Hitchhiker's Guide to the Galaxy:
  A Trilogy In Four Parts",
  written by Douglas Adams, 
  published by Pan Books, 1992 
....................................................