This article is for Australian Dealerships that adhere to the Notional Input Tax Credit (NITC) requirement.


This is when the Dealership does not claim the relevant input tax credits for unit purchases until the units are actually sold.  These withheld input tax credits are referred to as NITC.


This may also includes trade-in units on deals where the customer is receiving the benefit of a tax credit for the trade-in but the Dealership is not claiming the tax credit (or the input tax credit on the trade in) until that trade-in unit is later sold. 


Also, in this scenario, there are additional restrictions where the trade-in is later resold for a lesser value than the credit given to the customer who traded it in.


GL accounts involved in NITC entries


There are as many as 4 GL accounts involved in accounting entries related to NITC which are:

  • GST on purchases
  • GST on sales
  • GST NITC
  • NITC expenses

Purchased inventory units


This is standard practice for any products received a Vendor Tax Invoice is processed in Blackpurl and then integrates to your accounting application and there is typically a GST on Purchases component to the Vendor Tax Invoice.


However for the Dealership to account of the NITC and not claim the GST on Purchases component until the unit is sold, the Vendor Tax Invoice is processed as follows:


Typical accounting entries for one of these vendor bills.


GL AccountDebit 
Credit
Accounts Payable
$5500
Unit Inventory$5000
GST on purchases$500


To withhold the GST as NITC we also generate the following journal entry separate from the vendor bill.


GL AccountDebit Credit
GST on purchases
$500
GST NITC$500


At a later date, when this unit gets sold, we need to record that the withheld GST can now be claimed.

 So we include the following entries in the COGS journal entry for the deal.


GL AccountDebitCredit
GST on purchases$500
GST NITC
$500



Units traded in on deals where the customer is receiving the benefit of a tax credit for the trade-in also has a requirement to withhold the tax credit given to the customer until that traded in the unit is later sold.




Example: Trade-in unit from a deal


Let’s look at a typical deal which has a trade-in on it.


A customer buys a $11,000 unit and trades in a unit that has a value of $3,300. Their net sale is $7,700 (this is tax included pricing). Here is what the accounting entries look like for this deal.


GL AccountDebitCredit
Unit Sales
$10000
Used Unit Inventory$3000
GST on sales
$700


Because of NITC, the tax credit the customer benefited from in their deal, $300 in this example, needs to be withheld until that traded in unit is sold at a later date. So in the COGS journal entry for the deal, we include the following entries to withhold this tax credit.


GL Account DebitCredit
GST on sales
$300
GST NITC$300



Selling a traded-in unit


When the traded-in unit is sold we can then claim the tax credit that was withheld from the deal. With these units there is an additional condition that the final input tax credit claimed will be reduced if the unit is sold for less than what it was traded in for.


Taking the trade-in from the example above let’s assume it was resold for $4,400 (tax incl) which is NOT less than the original trade-in value. In the COGS journal entry for the deal selling this trade-in we include the following entries to claim the tax that

was withheld when the unit was traded in


GL AccountDebitCredit
GST on sales$300
GST NITC
$300


BUT, if that trade-in was resold for $2,200 (tax incl) which IS less than the original trade-in value, the entire $300 which was withheld cannot be claimed. Only $200 of it can be claimed and the remainder gets expensed. Therefore with this scenario, in the COGS journal entry for the deal selling this trade-in, we include the following entries to claim a portion of the tax that was withheld when the unit was traded in and the remainder gets expensed.


GL AccountDebitCredit
GST Sales$200
GST NITC
$300
NITC Expense GL$100