The Practice of Code

I run an Australian business and as such, I have to collect an extra 10% on top of what I charge my clients, in the form of a GST (Goods and Services Tax), which I then happily pass on to the government.

I have some clients that like to pay me via credit card, but with demand for this being quite small, it’s not worth it for me to invest in a merchant facility from an Australian bank which incurs monthly fees for such a privilege. Rather, I have a business grade PayPal account which I can use to accept credit cards payments, without requiring the payee to have a PayPal account themselves. In this scenario, PayPal does not charge me monthly fees, but rather they take 2.4% of the collected amount as well as 30 cents per transaction.

Passing on credit card surcharges in Australia is a completely acceptable and common practice, so in these cases, that is exactly what I do. However, things get a bit tricky because while I have to collect and document GST on the entire amount including this surcharge, the fees that PayPal takes do not include a GST component.

So, if you have a similar need, here’s how to calculate the total amount you should collect in order to comply with the GST, cover your PayPal fees, and still net your desired amount.

b = (a + 0.3) / (1 / 1.1 - 0.024)

(Where a is the amount of money you wish to collect after paying GST and PayPal’s fees.)

Here’s an example. Let’s say you’ve rendered services that you want to collect 2,500 for. If a client was simply paying via check or bank transfer, you would invoice them 2,500 + 250 (GST) = 2,750. However, because they want to pay via credit card through PayPal, you can plug 2,500 into the above formula, which will generate the answer of 2,824.91 as the GST inclusive amount that you need to charge them.

So, now that they’ve paid 2,824.91, how is it correctly distributed?

Well, PayPal is going to immediately withdraw their fees, which is 2.4% of 2,824.91 + 30c, which equals $68.10:

 2,824.91
-   68.10 PayPal Fees
=========
 2,756.81

Next, the government is going to want the GST from the total amount you collected (before PayPal took their fees). To work out the amount of GST from an inclusive amount, you need to first work out the exclusive amount:

Exclusive = Inclusive / (1 + GST Rate)

You can then determine the GST by subtracting the Exclusive amount from the Inclusive amount:

GST = (Inclusive - Exclusive)

Thus, the entire formula for calculating GST on one line would be:

GST = (Inclusive - Inclusive / 1 + GST Rate)

In our case, that’s 2,824.91 - 2,824.91 / 1.1, which equals 256.81. So let’s take that amount out to give to the government:

 2,756.81
-  256.81 GST
=========
 2,500.00

Voilà! You’re now left with the amount you originally wanted to collect in the first place!

You will need to adjust your tax invoice appropriately as the client must be made aware of the total amount of GST that they have paid, including the GST on the credit card surcharge:

 2,500.00 Services
+   68.10 Credit Card surchage
---------
 2,568.10 Subtotal
+  256.81 GST
=========
 2,824.91 Total (including GST)

There you have it.

Thanks to @nemesisprime89 for reminding me how to work out this kind of stuff.