Chartered Accountant Timothy Quinn leads Tax & Accounting at Lawpath. 16+ years in tax advisory, specialising in startup growth and expansion. Passionate about supporting entrepreneurial clients with early-stage investment incentives, restructuring, international exit strategy planning, and more.
An input tax credit is a vital concept for Australian businesses registered for the Goods and Services Tax (GST). It enables you to reclaim the GST you’ve paid on business-related purchases. Despite its importance, many business owners find the GST system confusing, especially when it comes to preventing double taxation on the same goods or services.
This article will clarify what an input tax credit is, how it works in practice, what you can claim it on, and how to avoid common mistakes. By the end, you’ll have a clear, practical understanding of input tax credits and how to manage this aspect of your business taxes.
Table of Contents
What is an input tax credit?
An input tax credit in Australia, also known as a GST credit, is a credit your business can claim for the GST included in the price of work-related goods or services that you have purchased. If your business is registered for GST, you can offset the GST you pay on your business inputs against the GST you collect on your sales.
This mechanism ensures you only pay GST on the value you add, preventing the “tax on tax” effect and improving cash flow. The credits you claim are reported through your Business Activity Statement (BAS), which is how you reconcile the GST collected and paid to the Australian Taxation Office (ATO).
How input tax credit works in practice
The basic mechanism
When your business buys goods or services, you usually pay 10% GST on top of the price. Let’s say you purchase office supplies costing $1,100, $100 of which is GST. If you run a GST-registered business, you can claim back that $100 as an input tax credit on your BAS.
Input tax credit example: If you collected $500 GST from your customers but paid $100 GST on your purchases, you only need to pay the net $400 GST to the ATO.
This system helps businesses avoid double taxation and keeps cash flow healthier.
Requirements for claiming GST credits
To claim input tax credits, the ATO requires that:
- Your business must be registered for GST.
- You must have a valid tax invoice for purchases over $82.50.
- The goods or services must be used for business purposes, either wholly or partly.
- The purchase price must include GST.
- You must have paid or be liable to pay for the goods or services.
- The purchase cannot relate to making input-taxed supplies (such as financial supplies or residential rent).
Personal expenses or non-creditable purchases are excluded from claiming input tax credits. That means that if you use the goods or services partly for private purposes, you can only claim the GST input tax credit for the business-use portion.
What can you claim input tax credits on?
You can claim input tax credits on a wide range of business expenses, including:
- Inventory and raw materials
- Software and digital subscriptions used for business
- Business equipment such as computers and office furniture
- Contractor and professional services
- Utilities and rent for business premises
- Business-related travel and accommodation (subject to GST rules)
However, some items are excluded from ITC claims, such as:
- Wages and salaries (these are not subject to GST)
- Loan repayments and interest
- Entertainment expenses (generally non-creditable)
- Purchases for personal use or private consumption
- Certain motor vehicle purchases above depreciation limits (special rules apply)
These rules help ensure that only legitimate business expenses attract GST credits, maintaining fairness and compliance.
Legal Health Check for Small Business
Uncover your small business’ legal gaps in minutes with this award-winning tool.
How to claim your input tax credits
If you have eligible input tax credit claims, follow this step-by-step guide to make a claim.
1. Understand the BAS process
Input tax credits are claimed by lodging your Business Activity Statement (BAS) with the ATO. Depending on your business size and GST turnover, you’ll lodge your BAS either monthly, quarterly, or annually.
On your BAS, you report the GST collected on your sales and the GST paid on your business purchases. The difference — your net GST payable or refundable — is then settled with the ATO.
2. Check your eligibility
Before claiming, ensure you meet the ATO’s requirements:
You have registered your business for GST.
If the purchase is above $82.50, including GST, it should have a valid tax invoice.
You are using the goods or services for business purposes, fully or partially.
The purchase price includes the GST.
You have already paid for or are liable to pay for the goods or services.
3. Gather and organise your records
Keep digital or physical copies of all tax invoices and receipts related to your business purchases. The ATO requires you to retain these records for at least five years after the relevant BAS is due.
Good record-keeping is crucial, as the ATO may request to see your documentation during a review or audit.
4. Use cloud accounting software
Many businesses streamline the GST process by using cloud accounting software. These platforms can:
- Automatically track GST on invoices and purchases.
- Generate BAS reports.
- Help ensure accuracy and compliance.
- Store digital copies of tax invoices for easy retrieval.
5. Adjust for private use or changes
If you are partly using a purchase for private purposes, only claim the GST credit for the business-use portion. If your actual business use changes from your original estimate, you may need to adjust your claim in a future BAS.
6. Lodge your BAS
You can lodge your BAS online via the ATO Business Portal, through your accounting software, by mail, or with the help of a registered tax or BAS agent.
Make sure to lodge your BAS by the due date to avoid penalties and to ensure you claim your input tax credits within the strict four-year time limit.
7. Receive your GST refund (If Applicable)
If the GST you paid on purchases exceeds the GST you collected on sales, the ATO will refund the difference directly to your nominated bank account.
Get on demand legal advice for one low monthly fee.
Sign up to our Legal Advice Plan and access professional legal advice whenever you need it.
Common mistakes businesses make
Several common errors can cause problems with input tax credit claims.
- Claiming GST credits on personal or non-business expenses: Only claim GST credits for goods and services you use in your business. Carefully separate personal and business expenses, and apportion claims if something is used for both.
- Using incorrect or invalid tax invoices: Ensure you have a valid tax invoice for purchases over $82.50 (including GST). The invoice must show the supplier’s details, ABN, and the GST amount. If unsure, request a corrected invoice before claiming.
- Double-claiming GST credits on the same purchase: Keep clear, organised records and regularly review your BAS entries to avoid claiming GST credits twice for the same expense.
- Claiming GST credits before receiving the goods or services: Only claim GST credits in the BAS period when you have actually received the goods or services, or when you have paid or are liable to pay for them.
- Failing to adjust claims when business use changes: If your business or private use of an item changes, adjust your GST claim in your next BAS. For mixed-use expenses, only claim the business-use portion and review usage regularly.
- Claiming GST on GST-free or input-taxed items: Check each invoice to ensure GST was actually charged. Don’t claim credits on GST-free items (like basic food, exports, or certain health services), bank fees, wages, or government charges.
- Using the wrong tax code for capital purchases: Report business assets over $1,000 in G10 (capital purchases) on your BAS, not in G11 (non-capital purchases). Consult your accountant if you’re unsure about the correct classification.
- Not keeping accurate or complete records: Maintain detailed, organised records of all tax invoices and receipts for at least five years. Use cloud accounting software to help track and store documentation.
To avoid these pitfalls, always verify that purchases are business-related, keep proper documentation, and review your claims carefully before lodging your BAS.
When to speak to an accountant
While many businesses can manage input tax credit claims themselves, professional advice is valuable when:
- GST claims involve complex or mixed-use purchases.
- You are unsure about eligibility for certain expenses.
- You face an ATO audit or compliance issues.
- Your business is growing, and GST obligations are becoming more complicated.
An accountant can help ensure your GST claims are accurate and compliant, preventing costly mistakes and penalties.
Want more?
Sign up for our newsletter and be the first to find hand-picked articles on topics that we believe are crucial to successfully scale your unique small business.
By clicking on 'Sign up to our newsletter' you are agreeing to the Lawpath Terms & Conditions
FAQ
Do I need a tax invoice to claim input tax credits?
Yes, you generally need a valid tax invoice to claim input tax credits for purchases over $82.50. This invoice must show the supplier’s details and the GST amount.
Can I claim GST back on purchases used partly for personal use?
You can only claim the GST credit for the portion of the purchase used for business purposes. The private use part is excluded, and you may need to adjust your claims if your use changes.
What happens if I make a mistake with my GST claim?
If you make a mistake, you can usually correct it in your next BAS or amend previous BAS lodgements. It’s important to keep accurate records and seek advice if unsure.
Making input tax credits work for you
Input tax credits are a powerful tool that helps Australian businesses like yours reduce their GST liability and improve cash flow. By understanding what these credits are, how to claim them properly, and avoiding common mistakes, you can keep your business financially healthy and compliant with ATO requirements.
For tailored advice and support with your GST obligations, consider consulting a professional accountant or using trusted services like Lawpath that can ensure business tax compliance.
Don't know where to start?
Contact us on 1800 529 728 to learn more about customising legal documents, obtaining a fixed-fee quote from our network of 600+ expert lawyers or to get answers to your legal questions.
