Input tax credits (ITCs) — also called GST credits — allow registered businesses to recover the GST component of business purchases. In practice, errors in ITC claims are one of the most common reasons the ATO raises BAS amendments or flags an entity for review. This guide covers the fundamentals, the tricky categories, and the documentation rules you need to get right.
The Four Conditions for a Valid ITC Claim
The GST Act sets four conditions that must all be satisfied before an ITC is claimable:
- You are registered for GST. Only GST-registered entities can claim ITCs. If a client is approaching the $75,000 turnover threshold and has not registered yet, any GST paid on purchases before registration is not recoverable.
- The acquisition is creditable. The purchase must be used (or intended to be used) in carrying on your enterprise. Purely private purchases do not qualify.
- The supply to you was taxable. The seller must have charged GST. Purchases from unregistered suppliers, GST-free supplies, and input-taxed supplies do not generate a credit.
- You hold a valid tax invoice (for purchases over $82.50 including GST). This is the documentation requirement that trips up the most businesses.
What Counts as a Valid Tax Invoice
For purchases over $82.50 (GST-inclusive), the ATO requires a tax invoice showing: the words "tax invoice"; the supplier's name and ABN; the date of issue; a description of what was supplied; the GST amount (or a statement that the price includes GST); and the total price. For supplies over $1,000, the recipient's identity must also appear.
In practice, supplier invoices from established businesses usually meet these requirements, but watch for: quotes issued instead of invoices, receipts that omit the supplier's ABN, and invoices from overseas suppliers (which are generally not subject to Australian GST — different rules apply).
Electronic tax invoices are fully acceptable. The ATO does not require paper originals, but you do need to be able to produce the records if asked — a bank statement alone is never sufficient.
Partial Claims: Mixed Private and Business Use
When a purchase is partly private and partly business, only the business-use proportion is claimable. The most common examples:
Home office expenses. A sole trader using a home internet connection 40% for business can claim 40% of the GST. The apportionment method must be reasonable and consistently applied.
Mobile phones. Same principle. Keep records of business-use calculations — the ATO's data matching program cross-references employer-provided devices against FBT returns, and inconsistencies get noticed.
Motor vehicles (see below for the special rules). A vehicle used partly for private travel requires apportionment unless the employee keeps a logbook or the vehicle is exempt from FBT (for example, a taxi or a vehicle that cannot carry passengers and is used in a particular way).
Motor Vehicles: The Special ITC Rules
Motor vehicles attract specific rules that many bookkeepers get wrong.
For vehicles with a GST-inclusive price up to the luxury car limit (currently $80,567 for fuel-efficient vehicles and $69,152 for others in 2025–26), the ITC is limited to 1/11th of the car limit, not 1/11th of the purchase price. If a client buys a $120,000 SUV, the maximum ITC is capped accordingly — not calculated on the full purchase price.
Running costs (fuel, servicing, insurance, registration) are not subject to the luxury car ITC cap. They are apportioned normally based on business-use percentage.
Entertainment Expenses: ITCs Are Generally Blocked
Entertainment expenses — meals, hospitality, functions — are specifically excluded from ITC claims under the GST Act unless FBT applies to the benefit. In practice:
- A working lunch you buy for yourself while travelling for business: claimable (not entertainment in the legal sense).
- A client dinner at a restaurant: not claimable in most circumstances.
- A staff Christmas party where FBT would apply: the ITC is claimable because FBT applies to the benefit.
The entertainment distinction catches many small businesses. The safest approach is to flag all meals and hospitality expenses for review rather than applying a blanket rule.
Input-Taxed Supplies: No ITC Available
Some supplies are input-taxed rather than GST-free. The practical difference is significant: for GST-free supplies (like most healthcare and food), the supplier charges no GST but can still claim ITCs on their purchases. For input-taxed supplies, the supplier charges no GST and cannot claim ITCs on related purchases.
The most common input-taxed supplies are financial services and residential rent. A residential property investor cannot claim ITCs on property management fees, repairs, or insurance — those expenses relate to input-taxed supplies. This surprises many property investors who are otherwise GST-registered for another business activity.
Timing of ITC Claims
ITCs must be claimed in the BAS for the period in which you receive the tax invoice (or make payment, if that comes first for cash-basis entities). There is a four-year time limit to claim missing ITCs — but waiting too long creates administrative complexity and risks the original invoice being unavailable.
If a tax invoice is received after the relevant BAS period has closed, claim the ITC in the next available BAS rather than amending prior periods (unless the amounts are material enough to warrant it).
Getting ITC claims right requires discipline around documentation, consistent apportionment methodologies, and staying current with the specific rules for motor vehicles and entertainment. For bookkeepers managing multiple clients, building a checklist into your month-end close process is the most reliable way to catch issues before they reach the BAS.