GST on Meals – Why half of 5 is not 2.5
If you follow me on Facebook, you’ll have seen the post regarding my annoyance of high end bookkeepers (and maybe some accountants) who can not get the Goods and Services Tax code for Meals correct. Do you want to know something?……..IT ISN”T 2.5% <she hinted>.
Now I usually try not to get too bean counterish when writing blogs however this one may get a bit dry….. but it is worth it so you understand my frustration. Lets look at the issue in hand. You can only claim half of the GST deduction for “Meals and Entertainment”. Most people know and understand this. What they don’t understand is why you can’t just take 5% and split it in half.
See if the following example makes sense to you:
David is a high level executive and likes to treat his hard working staff to lunches in fancy restaurants. His meal (excluding tip) is $1,000 plus tax of $50 for a grand total of $1,050.00. Now we have already established that only half of the GST on meals can be claimed (often set up in a chart of accounts as “GST Paid”). So $25 can be claimed as an Input Tax Credit and the other $25 gets put into the Meals and Entertainment account.
Going back to the good ol’ days of manual entry ledgers the entry would look like this:
Dr. Bank Account $1,050.00
Cr. Meals and Entertainment $1,025.00
Cr. GST (Meals) $ 25.00
Follow me so far?
I’ve always said that math and bookkeeping (or accounting) have very little to do with each other however in this instance we need to look at the math.
Ask any grade 6 school student what is 2.5% of $1,000 and they will rightly tell you $25. So why do intelligent business owners believe that $25 is 2.5% of $1,025. If you have “stupid software” that keeps giving you an error message or over rides your entry this could be why.
I use Quickbooks and know that if I enter $1,050 as the total amount of my “cheque”, then enter the Meals and Entertainment account at $1,000 with a GST (Meals) code of 2.5% the GST box will auto fill at $25 and I’ll get an error that my entry doesn’t balance…… and the “stupid software” is right. It doesn’t balance. So I change the Meals and Entertainment amount to $1,025 happy in the knowledge I’ve fixed the problem…. Only the stupid software then changes the GST amount to $25.63 and I still don’t balance.
The reason is in the math. Now I don’t know about you but it has been a loooong time since I was calculating percentages and fractions in school so if you have forgotten how this works don’t feel bad. So has everyone else over the age of 19. Let me refresh your memory:
25/1025 = 0.0243 x 100 = 2.439%…………. and that ladies and gentlemen is the correct tax code for your GST on Meals and Entertainment.
Okay, okay I have to admit it. I wasn’t the smarty pants who figured this out all on her own. This is the skill level I was taught by the wonderful people I worked with in public practice! How does that old saying go? “If you are the smartest person in the room, you’re in the wrong room.”