GST-free and input-taxed supplies both have no GST charged on the sale, which makes them easy to confuse. To your customer they are indistinguishable — the invoice shows no GST either way.
To you they are opposites. One lets you claim back the GST on everything you buy to make the supply. The other does not, which quietly turns every GST-inclusive cost in your business into a cost that is about 9% higher than it looks.
The rule that actually matters
| GST charged to customer | GST credits on your purchases | |
|---|---|---|
| Taxable supply (the default) | 10% | Yes |
| GST-free supply | None | Yes |
| Input-taxed supply | None | No |
That middle row is the one people miss. GST-free is not "outside the GST system" — it is inside it, on favourable terms. You charge nothing and you still recover everything. It is the best position in the table.
Input-taxed is the row that costs money.
What input-taxed status actually costs
Take a landlord earning residential rent. They charge no GST, and when a $1,100 GST-inclusive repair bill arrives, the $100 of GST inside it is simply theirs to absorb. A commercial landlord — whose rent is a taxable supply — claims that $100 straight back.
Across a year of ordinary costs it adds up faster than most people expect. On $12,000 of GST-inclusive expenses in a year, agent fees, repairs, strata and maintenance together carry $1,090.91 of GST that a residential landlord never sees again.
It is not a pure loss, and this is the part that is usually missed in both directions. Unrecoverable GST is not a separate item you write off — it is simply part of the expense, so it is deductible against the rental income like the rest of the bill. At a 32% marginal rate that $1,090.91 returns $349.09, leaving a real cost of $741.82.
So the honest framing is neither "you lose the GST" nor "it does not matter". A GST credit returns 100 cents in the dollar. A deduction returns your marginal rate. The gap between those two is what the classification costs you.
The cost of being input-taxed
The GST you cannot claim back
Repairs, agent fees, strata, maintenance
Used only to value the deduction
Those expenses contain this much GST. A taxable or GST-free supplier claims all of it back. An input-taxed supplier claims
$1,090.91less, every year
It is not a pure loss though. Unrecoverable GST is part of the expense, so it is deductible against the rental income. After that deduction it really costs you
$741.82
The deduction returns 32.0% of it at this income. A GST credit would have returned all of it, which is why the classification still matters.
The GST inside a GST-inclusive amount is that amount divided by 11. Resident with hospital cover and no study loan. Work either direction in the GST Calculator.
Common GST-free supplies
- Most basic food — fresh food, bread, milk. Not restaurant meals, takeaway, confectionery or most snack food, which are taxable
- Most health services and medical aids
- Most education courses
- Exports of goods and services
- Some childcare
Common input-taxed supplies
- Financial supplies — loan interest, bank fees, share trading, most insurance
- Residential rent
- Sale of existing residential premises
Residential and commercial property are opposites
This is the single most valuable thing to know from the whole distinction, because the same person often owns both kinds.
- Residential rent is input-taxed. No GST on the rent, no credits on the costs
- Commercial rent is a taxable supply. GST on the rent, and full credits on the costs
A commercial property owner registered for GST recovers the GST on agent fees, repairs, insurance and legal costs. A residential owner does not. Two landlords, two nearly identical expense lists, and one of them is paying about 9% more for everything.
There is a third category people fall into by accident: commercial residential premises — hotels, motels, hostels, caravan parks and some serviced apartments. These are taxable, not input-taxed, even though people live in them. Short-stay accommodation run as a business is not residential rent for GST purposes.
The new-premises trap, and the five-year rule
New residential premises are taxable, not input-taxed. A developer selling a newly built apartment charges GST on the sale and claims credits on the construction.
But premises stop being "new" once they have been rented out as input-taxed residential accommodation for a continuous period of at least five years. At that point a sale is input-taxed like any other established home.
The sting is what happens to the credits already claimed. A developer who builds to sell, cannot sell, rents the property out instead and then passes five years has to reverse the GST credits claimed on construction, because the property turned out to be used for making input-taxed supplies. That is a large adjustment arriving years after the money was spent.
"Continuous" is stricter than it sounds. Short gaps between tenants are fine where the property is actively marketed for rent. Periods when it is used privately, left vacant with no attempt to lease it, or listed for sale do not count towards the five years.
If your business only makes financial supplies incidentally
The rule that input-taxed supplies block credits sounds alarming for any business that takes out a loan or holds an investment. It usually is not, because of the financial acquisitions threshold.
You stay under the threshold, and keep claiming your credits in full, as long as the GST credits relating to your financial acquisitions are both:
- less than $150,000 over the relevant 12-month period, and
- less than 10% of your total GST credits for that period
Both tests, not either. An ordinary trading business with a business loan is comfortably under it and claims everything as normal. Financial supplies only start blocking credits once they become a real part of what you do.
Above the threshold, not everything is lost either. Certain acquisitions used to make financial supplies attract a reduced input tax credit of 75% of the GST paid, and some attract 55%. It is a genuinely complicated area, and it is one of the few places where the cost of getting advice is reliably smaller than the cost of not getting it.
Should an input-taxed business register for GST?
Usually not for that activity alone. Input-taxed supplies do not count towards the $75,000 registration threshold the way taxable turnover does, and registering brings no credit benefit for them — you would take on quarterly BAS lodgment and gain nothing.
The calculation changes if you have taxable activities alongside. A landlord with residential rent and a separate consulting business registers for the consulting, claims credits on consulting costs, and still cannot claim on the rental costs. Registration is about the business, and the classification is about each supply.
Where a property is used for both — a shop with a flat above it — you apportion. Credits are claimable on the taxable share, not the input-taxed one, and you need a defensible basis for the split.
Frequently Asked Questions
Residential rent is input-taxed. The landlord charges no GST and cannot claim GST credits on related expenses. Commercial rent is the opposite — a taxable supply with full credits.
Yes. This is the key difference. GST-free supplies still allow full credits on the purchases used to make them, which is why GST-free is a better position than input-taxed rather than an equivalent one.
Roughly one-eleventh of every GST-inclusive cost, or about 9%. On $12,000 of annual expenses that is $1,090.91 of unrecoverable GST — though it stays deductible against your rental income, so the after-tax cost at a 32% marginal rate is about $741.82.
Most basic unprocessed food is, but restaurant and cafe meals, takeaway, most snack food, confectionery, prepared or heated food and soft drinks are taxable. A supermarket receipt is usually a mix.
Generally no — the sale of existing residential premises is input-taxed. New residential property is different and is usually taxable, until it has been rented continuously as residential accommodation for five years.
Almost certainly not. Interest is an input-taxed financial supply, but the financial acquisitions threshold lets you claim in full while the related credits stay under $150,000 and under 10% of your total credits. An ordinary business with a loan is well inside that.
You apportion. Claim credits on the taxable portion and not on the input-taxed residential portion, using a reasonable and defensible basis such as floor area.