The purchase of a dining room table
An example of how a taxable supply works is detailed below in the production and eventual sale of a timber dining room table.
| Step 1: |
The timber is logged in a forest and transported to a sawmill where it is cut into planks. |
| Step 2: |
The timber yard purchases the planks from the sawmill and then grades and sorts the rough planks to prepare them for sale. |
| Step 3: |
The cabinetmaker buys the planks of timber from the timber yard and then crafts the timber into a dining table. |
| Step 4: |
The furniture retailer buys the dining table from the cabinetmaker and sells it to Rita (an individual consumer). |
Keep reading for a detailed explanation of steps 1 - 4.
Step 1
The sawmill cuts the trees down and saws the logs into rough sawn planks. These planks are then sold directly to the timber yard for $110 including GST ($10).
- When the sawmill operator fills in its GST return, it deducts any GST paid on inputs (assume $0) from the GST on the sale ($10).
- In this case the sawmill operator sends a balance of $10 to the ATO
- ($10 - $0 = $10 to the ATO )
The ATO has now collected a total of $10 GST to date.
Step 2
The timber yard grades and sorts the rough planks, ready for sale. The timber yard sells the planks of timber to the cabinetmaker for $220, including GST ($20).
- When the timber yard fills in its GST return, it deducts any GST paid on inputs (in this case $10 paid to the sawmill for the purchase of the timber) from the GST on the sale ($20), and sends the balance of $10 to the ATO.
- ($20 - $10 = $10 to the ATO)
The ATO has now collected a total of $20 GST to date.
Step 3
The cabinetmaker creates a design and fashions the timber into a dining table. The cabinetmaker then sells his finished product to a furniture retailer for $330, including GST ($30).
- When the cabinetmaker fills in his GST return, he deducts any GST paid on inputs (in this case $20 paid to the timber yard for the purchase of timber) from the GST on the sale ($30), and sends the balance of $10 to the ATO.
- ($30 - $20 = $10)
The ATO has now collected a total of $30 GST to date.
Step 4
The furniture retailer buys the timber dining table from the cabinetmaker for $330, including GST ($30).
The furniture retailer sells the table to Rita, the end consumer, for $440 including GST ($40).
- When the furniture retailer fills in her GST return, it deducts any GST paid on inputs (in this case $30 paid to the cabinet -maker for the purchase of the timber dining table) from the GST on the sale ($40). The furniture retailer then sends the balance of $ 10 to the ATO.
- ($40 - $30 = $10)
The ATO has now collected a total of $40 GST to date.
Conclusion
The total GST payable to the ATO on the timber dining table was $40. None of the above businesses bear the GST cost as it was totally paid by Rita (the end consumer) as part of the purchase price because it was a purchase for her home (and not for a business activity) If it was a purchase for a GST registered business carried on by Rita, then $40 may have been claimed as an input tax credit.
Helpful hint
In many countries, GST is called "VAT" which means "Value Added Tax". This example shows that the total tax of $40 is 10% of the total "value added" to $400.
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