GST-Free vs Input-Taxed vs Taxable Sales: What’s the Difference?
If you run a business in Australia, understanding how GST applies to your business and sales is very important—not just for compliance but also for better financial control.
According to Australian GST laws, your business income will divide into three broad categories:
- Taxable Sales
- GST-Free Sales
- Input-Taxed Sales
Each category has unique rules, GST treatment, and compliance obligations. Confusing between them could lead to incorrect GST reporting, missed GST credits, or ATO penalties.
Table of Contents
- What are Taxable Sales?
- What are GST-Free Sales?
- What are Input-Taxed Sales?
- Comparison Chart
- Examples
- FAQs
1. What Are Taxable Sales?
According to the GST Act 1999, a sale is taxable if:
- You are registered or required to be registered for GST
- There is consideration (payment)
- The sale is connected with Australia
- The sale is not GST-free or input-taxed
GST Impact:
- You must charge 10% GST on the sale
- You can claim input tax credits for any related business purchases
Example:
You’re a plumber based in Melbourne. You charge $1,100 for installing a hot water system:
- $1,000 is the service fee (taxable)
- $100 is GST
- You collect and report this $100 to the ATO
2. What Are GST-Free Sales?
Under Division 38 of the GST Act, some essential goods and services are GST-free:
- You don’t charge GST on these sales
- You can still claim GST credits on related purchases
Common GST-Free Categories:
| Category | Examples |
|---|---|
| Basic food | Rice, milk, eggs, fruit, vegetables |
| Education | Accredited school/TAFE/university |
| Health services | Medical checkups, pathology tests |
| Exports | Goods sold and sent overseas |
| Childcare | Approved childcare services |
| Religious services | Weddings, funerals in religious context |
Legal reference: GST Act s9-30(1) & Division 38
Example:
A GP clinic in Brisbane charges $100 per consultation. No GST is added. But the clinic can claim GST on electricity bills, stationery, or medical equipment.
3. What Are Input-Taxed Sales?
Input-taxed sales are a third category where:
- You don’t charge GST
- You cannot claim input tax credits for related purchases
This applies to sectors like finance or residential rentals where GST tracking is complex or unfair.
Legal reference: GST Act s9-30(2) & Division 40
Common Input-Taxed Categories:
| Category | Examples |
|---|---|
| Residential Rent | Long-term home rentals |
| Existing residential property sales | Sale of a second-hand home |
| Financial Services | Bank interest, super funds, share trading fees |
Example:
You rent out a house in Adelaide for $500/week:
- No GST is charged on rent
- GST credits are not available for related expenses (repairs, cleaning, etc.)
4. Comparison Chart
| Feature | Taxable Sales | GST-Free Sales | Input-Taxed Sales |
|---|---|---|---|
| GST Charged | Yes, 10% | No | No |
| Can Claim GST Credits? | Yes | Yes | No |
| Common Sectors | Retail, trades | Health, food, exports | Finance, housing |
| GST Act Reference | s9-5 | s9-30(1), Div 38 | s9-30(2), Div 40 |
5. Examples from Real Businesses
| Business Type | Sale Type | GST Treatment |
|---|---|---|
| Bakery selling cakes and bread | Mixed (Taxable and GST-Free) | Bread = GST-Free; Decorated cakes = Taxable |
| Online exporter | GST-Free | Goods shipped overseas are GST-Free |
| Real estate agent selling old homes | Input-Taxed | No GST on sale; no input credits for advertising |
| Marketing consultant | Taxable | Must charge 10% GST; can claim GST on software, tools |
6. Frequently Asked Questions (FAQs)
Q1. What if my sales include both taxable and GST-free items?
You need to charge GST only on the taxable portion.
Example: A grocery store invoice with fresh fruit (GST-free) and soft drinks (taxable).
Q2. What’s the main problem with input-taxed sales for businesses?
The biggest issue is you can’t claim GST credits, which increases your actual cost and can impact pricing and profit margins.
Q3. How do I know which category my sales fall into?
Refer to Divisions 38 & 40 of the GST Act or consult the ATO, a registered BAS agent, or accountant.
Q4. What if I wrongly classified GST-free sales as taxable?
You should refund the GST to the customer and adjust your BAS accordingly.
Final Takeaway
- Taxable = GST applies, and you can claim input credits.
- GST-Free = No GST applies, but you can still claim input credits.
- Input-Taxed = No GST applies, and input credits are not allowed.
Need Help With GST for Your Business?
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