Input Tax Credit
A credit for GST included in the price of goods and services purchased for business use, offsetting GST collected on sales.
An input tax credit (ITC) allows GST-registered businesses to claim back the GST paid on purchases and expenses used in their business. Input tax credits are offset against the GST collected on sales (output tax), and only the net amount is remitted to the ATO. This mechanism ensures GST is ultimately borne only by the final consumer, not by businesses in the supply chain.
To claim an input tax credit, you must: be registered for GST, have a valid tax invoice from the supplier, have paid or be liable to pay for the purchase, and the purchase must relate to a creditable (GST-liable) sale you make. You cannot claim ITCs for purchases related to making input-taxed sales (e.g., residential rental income) or for private/domestic expenses.
If your business makes both taxable and input-taxed sales, you need to apportion your input tax credits. For example, a financial services company that makes mostly input-taxed supplies can only claim a portion of the GST on general overheads. The ATO provides various apportionment methods, and you should choose the one that gives the most fair and reasonable result for your circumstances.
How it works
An input tax credit is the mechanism that lets a GST-registered business recover the GST it pays on its own purchases, so that GST doesn't pile up at every stage of a supply chain and only the final consumer ends up bearing the cost. To claim one, four conditions all need to be satisfied: you must be registered for GST, hold a valid tax invoice from the supplier, have paid for (or be liable to pay for) the purchase, and the purchase must relate to a creditable sale — one that itself attracts GST when you make it.
In practice, input tax credits are claimed through the Business Activity Statement, where the GST paid on eligible purchases during the period is offset against the GST collected on sales, and only the net figure is remitted to (or refunded by) the ATO. This is why accurate, complete tax invoices matter so much for a GST-registered business — a missing or invalid tax invoice for a purchase means the input tax credit can't be claimed, effectively turning what should have been a recoverable cost into a real one.
Businesses that make a mix of taxable sales and input-taxed sales — a common situation for financial services firms, or any business with a residential rental component alongside a taxable business — can't simply claim back all the GST on general overheads, because input tax credits relating to input-taxed sales aren't available. These businesses need to apportion input tax credits between the two categories of activity using a fair and reasonable method, and getting the apportionment wrong is a common area of ATO scrutiny during GST audits.
Example: claiming an input tax credit on office supplies
A GST-registered business buys office supplies for $550, including $50 GST, and holds a valid tax invoice for the purchase.
Because the business makes fully taxable sales, it can claim the full $50 as an input tax credit on its next BAS, offsetting it against the GST it has collected from its own customers — effectively reducing the net cost of the supplies to $500.
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Goods and Services Tax (GST)
A 10% broad-based consumption tax applied to most goods, services, and other items sold or consumed in Australia.
Business Activity Statement (BAS)
A form lodged with the ATO to report and pay GST, PAYG withholding, PAYG instalments, and other business tax obligations.
GST-Inclusive Price
A price that already includes the 10% GST component. The GST amount is 1/11th of the inclusive price.
GST-Exclusive Price
The base price of a good or service before 10% GST is added.
Australian Business Number (ABN)
A unique 11-digit number identifying a business entity to government and the community.