Non-recoverable tax

Hi there, I recently started having to collect PST in my area and am struggling to figure out how to implement it properly in Manager. The form I was given by the local govt says I need to implement it as a “non-recoverable tax”. I cannot find a way to do this in manager.

When I create a sales invoice with items that are subject to this tax, it works fine, it increments the PST liability account properly and all is good. When I make a purchase that also includes PST, it is effecting the liability account and reducing the amount I am supposed to pay, this is NOT how it needs to work.

Wave accounting uses a perfect example for what I am trying to accomplish, available here:

The problem is my expenses (such as office paper) are having their PST deducted from the tax payable account that PST is using.

Is there a way I can get around this? Or is this not an implemented feature yet?

If I understand you correctly, all you need to do when you purchase an item subject to PST is record the full cost, including the tax, as your expense. The seller is obligated to collect the tax from you and pay it to the government. Normally, you would not be required to separately record a sales tax on purchases. The fact that you have included it in the expense is going to result in it being deducted from your income.

Having said that, let me caution you that I am giving general information, not specific tax advice. What I said may not apply in your jurisdiction for any number of reasons. The phrase “non-recoverable” generally means that the tax you collect as the agent of the government on sales cannot be offset by taxes you pay on purchases you make. That’s because the tax collected belongs to the government, and of course the tax man wants his money. This is why tax payable appears as a liability and neither income nor expense.

But you do get the benefit of having paid the tax on your purchases by virtue of recording it as an expense, where it reduces net income.

Unfortunately, I was told this will not work. I have to report the amount of PST paid, combining the tax with the item would not allow me to do this.

Your interpretation of “non-recoverable” seem to match with what I am reading on the govt. forms. I need to pay PST on items that my business consumes, and not on items that are resold to the customer. The only difficulty is that they want all the totals reported.

You need 0% tax code which you can apply to purchases subject to PST. Then you can get a report which will give you total purchases subject to PST (if you need to know PST paid, you will need to work out PST component manually which should be easy if you already know total purchases).

That doesn’t really work as there are multiple tax codes involved, it screws up the math that the “spend money” system uses to calculate the tax. I think I found an easier way to do this, at least easier for me. I just tested it with a couple invoices and it seems to do what I want. I just created a tax code with all the components except PST, and I enter PST separately on a different line selecting an expense account I created called “PST Paid” with no tax. The total works out correct and the math is done correctly for the other tax codes. Is there any other issues with this method that I am not seeing?

Invoice Subtotal: 15.00
GST: $0.75
PST: $1.05
Total: $16.80

Under “Spend Money” I enter $15.75 on line 1, with a tax code of GST only. and $1.05 on line 2, into the PST Paid account, with no tax code.

Technically speaking, you shouldn’t have an expense account called PST Paid. If you paid for telephone, PST amount should be allocated to Telephone account.

I don’t really understand why you need this workaround though. I don’t think any workaround is required.

If you are being charged GST+PST but only GST is recoverable, then make a tax code with single tax component (GST). Then use this tax code on all purchases where you pay GST/PST.

The only thing to keep in mind is that if you are using this tax code on purchase invoices, make sure the purchase invoice is entered with amounts which are already tax-inclusive.

A perfectly good simple work around, its only (minor) short coming is that while the PST is grouped as required the actual expense accounts will be understated by the value of the PST, but the outcome you have achieve out ways that consideration

@lubos Wouldn’t this method apply the GST to the item + PST Instead of applying it to just the item? Using tax inclusive items would require a lot of work when I have to figure out the tax of each line separately. Unless I’m missing something, I do see what you mean about having PST allocated to the correct expense category though.

I just tested is and it does apply it to the item + PST when calculating GST, so that won’t work.

What did you test? Entering purchase invoice with amounts being tax-exclusive and applying GST/PST tax code?

GST is 5%, PST is 7%

Subtotal on this receipt is $21.08, GST is $1.05, PST is $1.48, Total is $23.61.
The GST is coming up at $1.12 in the liability account.

Because as previously stated “I have to report the amount of PST paid, combining the PST tax with the expense would not allow me to do this.”

@Brucanna Right, even if this was doing the math correctly I still have that issue.

$23.61 CAD is purchase. $1.12 CAD goes to GST liability account.

How do you figure out PST? You can go to Tax Summary report to see total purchases subject to GST/PST tax.

If total purchases are $23.61 CAD, then PST amount will be:

$23.61 / (100+5+7) * 7 = $1.48 CAD

Manager will not tell you PST amount but it’s easy to calculate from total purchases subject to GST/PST. The formula is:

Total purchases subject to GST+PST / 112 * 7 = PST amount

If the total of the purchase is $23.61, the GST total should be $1.05, not $1.12, the taxes are not compounding taxes.

I have no problem doing the math to figure out the total for PST paid, but I don’t see a way of doing this.

I read through my tax document again and you’re right, I need the PST totals to go into the expense accounts for the respective items and not a PST paid account. I’m still not seeing a way to accomplish this though :(.

You are correct. When you set up tax code like that, effective tax for GST is not 5%, it’s approximately 4.67%. But this is getting probably too confusing.

I guess the best approach would be to extend custom tax codes so you can enter both tax components GST+PST at 5% and 7% and mark PST tax component as non-recoverable.

Right, I totally forgot about effective tax rates, creating a tax code with GST at 4.67% fixes the issue. Is this essentially what the non-recoverable option would do? Or is there more to it?

Yeah, pretty much. The only issue is that 4.67% is rounded figure.

The exact effective rate is:

5 / 107 * 100 = 4.6728971962616822429906542056075%

You might enter effective rate 4.6772% (4 decimals) just in case so when it comes to large amounts, GST amount will be still accurate.

Ok, I will do that and see if I encounter any issues. Thanks for the help both of you :slight_smile: