Should I Absorb GST or Add It to My Prices When I Register for GST?

GST is a 10% tax on most goods, services and other items sold or consumed in Australia. A GST-registered business generally includes GST in the price of taxable sales and may claim GST credits for GST included in eligible business purchases.

That creates two different questions:

They are not the same number.

Suppose you currently charge $100 for a service before registering for GST.

For an ordinary taxable sale, the GST contained in a GST-inclusive price is generally 1/11th of the total price.

If you don't want to calculate this manually, you can use our GST Calculator to add GST to a price or separate GST from a GST-inclusive amount.

If your existing selling price is $100 and you decide not to increase it after registering:

You can also calculate the ex-GST amount as:

Your customer still pays $100, but the full $100 is no longer business revenue excluding GST.

This does not necessarily mean your overall GST liability increases by $9.09 for every $100 sale. GST credits on eligible business purchases can reduce the net GST payable through your Business Activity Statement.

That distinction becomes important when deciding whether absorbing GST is commercially sustainable.

Looking only at GST on your sales can overstate the financial impact of registration.

A GST-registered business may claim GST credits for eligible business purchases where the ATO's requirements are satisfied. Broadly, the purchase must be for business use, include GST and meet the relevant creditability and record-keeping requirements.

Not every expense produces a GST credit.

For example, the ATO states that you cannot claim GST credits for wages or for purchases where there is no GST in the price. Purchases from suppliers that are not registered or required to be registered for GST also generally do not contain GST for you to claim.

A product business with GST-bearing costs

Suppose you sell a product for $100 and currently pay $55 GST-inclusive for materials.

After registration, assume the entire $55 purchase qualifies for a GST credit. $55 ÷ 11 = $5 GST. In this simplified example, your material cost after the $5 GST credit is effectively $50 for the gross-profit calculation.

For businesses selling mainly to GST-registered customers that can claim GST credits on their purchases, passing GST through may be less commercially significant than it is in a consumer market.

If a GST-registered customer makes a creditable acquisition from you and meets the ATO's requirements, it may be able to claim the GST included in your invoice as a GST credit.

A qualifying GST-registered business customer may be able to claim that $100 as a GST credit, leaving an effective ex-GST cost of $1,000, subject to its circumstances.

Do not assume every business customer can recover all the GST. Whether the customer is registered and whether its purchase qualifies for a GST credit both matter.

For price-display purposes, the ACCC states that where prices are displayed only to other businesses, GST does not have to be included in the displayed total price.

The commercial calculation is different when you mainly sell to households or other end consumers.

Ordinary retail consumers generally cannot claim GST credits on private purchases. Increasing a price from $100 to $110 therefore represents a genuine $10 increase in what the customer pays.

• Will customers accept the new price?
• How does your new price compare with competing businesses?
• How much gross profit can you afford to give up?
• How much GST can you recover on eligible business costs?

A residential cleaner, hairdresser, photographer or tradesperson may therefore reach a different pricing decision from a consultant selling predominantly to GST-registered businesses.

You might pass the full increase through on some services while increasing others by less than 10%. You might also review packages, minimum charges or service tiers instead of mechanically adding 10% to every existing price.

The important step is to calculate the effect on profit before changing your prices.

For most businesses, the GST registration turnover threshold is $75,000. The threshold is $150,000 for non-profit organisations, and special rules apply to some activities such as taxi and ride-sourcing services.

GST turnover is based on business turnover, not profit. The ATO also excludes certain amounts when calculating GST turnover, including GST included in your sales.

The ATO considers both:

• current GST turnover — generally the current month plus the previous 11 months
• projected GST turnover — generally the current month plus the following 11 months

Importantly, having current GST turnover at or above $75,000 does not always mean registration is required if projected GST turnover will be below the threshold. Conversely, projected GST turnover reaching the threshold can require registration even where current turnover is still below it.

Once you become required to register, you generally have 21 days to do so.

If you fail to register when required, GST consequences can apply from the date you should have been registered, even if GST was not included in the prices charged to customers.

If you believe you should have registered earlier, obtain advice appropriate to your circumstances. See the ATO's GST registration guidance.

GST registration can have a particularly noticeable effect on labour-heavy businesses because wages do not include GST and therefore do not generate GST credits.

Suppose your existing customer price is $100 per hour.

These figures are before taking account of eligible GST credits on other business expenses.

For consultants, contractors and tradespeople, GST registration can therefore be a sensible time to review the underlying charge-out rate rather than treating GST purely as an invoicing change. Use the Hourly Rate Calculator to test the underlying rate.

You can choose to keep the same GST-inclusive customer price, but the decision should be based on whether the resulting profit remains sustainable.

If absorbing some or all of the GST reduces profit per sale, calculate how much additional sales volume would be required to produce the same overall gross profit with the Break-Even Calculator.

The useful comparison is:

A business with mainly GST-registered commercial customers may approach the decision differently from a consumer-facing service business. A product business with substantial creditable GST-bearing inputs may also experience a different financial effect from a labour-heavy operator with few recoverable GST costs.

Registering for GST is therefore a good reason to review your actual pricing economics, rather than automatically adding 10% to every price or absorbing the GST without calculating its effect.