GST accountant questions (was Re: Inventory and GST)

[marthter]

Err, I think the Mr. Osvald's "overcomplicating" of the question has 
been trumped by Mr. Busby's! :-)

Canada also has a Goods and Services Tax (and sales tax varying by 
province).  Of course I agree it would be nice if GnuCash always had up 
to date tax plug-ins for every jurisdiction in the world (and a plug-in 
architecture to accept all those quirks).  But I don't think the numbers 
of users, developers, and tax accountants in the user base will ever be 
big enough to pull that off.

My solution has been to first wrap my head around the main numbers that 
the goverment wants from me: basically how much GST did I pay to other 
businesses while buying stuff for my business, and how much GST did I 
collect on the taxman's behalf while selling stuff to my customers.  In 
GnuCash, I've handled this by splits:  each purchase is, for example, 
from assets:bank, partly to office expense and partly to GST expense.  
And each sale is partly from product income and partly from GST income, 
to assets:bank.  (I haven't tried the invoice tools yet, so I don't know 
if that would help.)  This has worked for the numbers I need each quarter.

My question is for any real accountants out there:  If I sell a product 
and collect GST on it (which has to be forwarded to the taxman 
quarterly), it seems that that money (which I am calling GST Income) 
should be increasing both my assets (because it goes in my bank account 
- for a while at least), AND increasing my liabilities (because I have 
to forward it to the taxman quarterly).  How can one income item go into 
two places?  Is there a "right" way to account for this?  Perhaps I 
shouldn't really be calling it income at all?  My hunch is that there 
may be two "right" ways to do it, and either are okay as long as you are 
consistent.

Also, when I forward the GST that I've collected to the taxman, should I 
just call that a negative entry in GST income (and decrease to my bank 
account accordingly)?  That thinking doesn't seem to work with the 
notion that the GST I've collected is increasing my liability, and then 
when I forward it to the taxman, that reduces my liability.  Which 
thinking is correct?

Regards.

~Martin



p.s. An interesting spin on the "what is taxable?" question (hot chicken 
vs cold chicken, etc).  As I understand it, EVERYTHING in Canada is 
taxable, it is just that some things (like cold chicken and other 
groceries) are currently taxed at a 0% rate.  This was glossed over by 
the people who argue that essentials should not be taxed, yet it allows 
the government to raise the rate in the future with a mere federal 
budget announcement, rather than passing a whole new law through 
Parliament to change the definition of what is taxable.


Bret Busby wrote:

>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.
>
>  
>
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