What is GST?
GST is a tax of 15% – it’s added to most products and services that are sold within NZ.
When you are a consumer (i.e. go and buy your groceries from PaknSave) you don’t really notice GST – as the price is usually GST inclusive.
Once you are a business owner – this is where you start to notice GST – as people in business tend to talk in GST exclusive amounts (for example a website designer quotes you $2000 + GST to design your website). This takes a bit of getting use to. The reason business owners tend to talk in GST exclusive amounts, is because we know that the GST is not ours, we have to pass this tax onto IRD
When should businesses need to register for GST?
Business owners need to register for GST if they turnover was more than $60k in the last 12 months (or expected to turnover $60k in the next 12 months). Please note the 12 months is rolling – this means it’s not related to the calendar or financial year, but just the last (any) 12 months.
You can register for GST voluntarily (before you earn $60k) – this can be a good idea because you can claim the GST on all your set-up purchases (like new assets and setting up an office).
Considerations:
If you sell to mostly consumers (B2C), registering for GST immediately helps you with your pricing as you charge GST straightaway and therefore don’t need to put your prices up later. You can also get into good practice of collecting the GST (on your sales), minus any GST you have paid (on purchases) and returning this GST to the IRD.
If you sell to businesses (B2B), this is not so important, but the business you are selling to doesn’t get to claim GST on their expense. Also, when you are not registered for GST, for other businesses, sometime the perception can be that you are just starting out, or it’s just a “side hustle”.
Advice when registering
When you register for GST you should not include GST in your current price – GST should be added to your price. This means, for your customers , the price will increase.
When you register for GST – you need to understand your filing frequency and accounting basis – starting off on the wrong frequency or basis is annoying to change , and can be costly. Speak to your accountant or bookkeeper before registering for GST. If you don’t have one, please reach out to me, and I will be happy to have a 10 min chat.
How GST works in your business
Please note, my examples below have payment basis in mind. There are two options for your GST basis – payment basis (pay GST when payment has been received) or invoice basis (pay GST on the date of the invoice). Speak to your accountant or bookkeeper to find out which basis you need to be on. More information here.
When you are charging GST on the products or services you sell, you need to think about your business as just a vehicle. Picture this, your business is a freight train, which stops and collects GST (sale), holds the GST for a while (in your separate bank account) and then drops off the GST (returns it to the IRD) periodically.
You don’t need to return all of the GST collected on your sales if you've also paid GST on your purchases – you only have to return the difference.
For example – for the month of June you were paid by your customers (sales) $1000.00 including GST, you would have collected $130.43 of GST.
In June you also paid $400 (including GST) in business purchases – this means you would have paid $52.17 worth of GST.
The amount you will need to return to IRD is $130.43 - $52.17 = $78.26
How to think about GST in your business
GST shouldn’t really come into your business financial decisions – as again, it’s not your money, you are just the freight train. You can be eligible for refunds of GST if you have paid more GST than you have collected. But this means that you are spending more money than you are making – not really good business! This can sometimes be a timing thing, but the goal is not to get GST refunds.
You may often hear that when you buy a new vehicle or another similar large purchase, that you will get the GST back, infact salespeople often use this as a tactic, and while it’s true there are some considerations.
· The GST will be returned within your GST return, so if this return includes a lot of sales – you won’t exactly get the GST amount back in your hand.
· If this asset purchase includes personal use, you can only claim the business portion of GST
· When you sell this asset , you need to pay the GST back on the sale price.
Some supplies and international products and services don’t incur GST or are GST-exempt. Imports also follow different GST rules. If you're trading outside of NZ, importing or exporting, or handling many exempt transactions, I recommend consulting a bookkeeper to assist with your GST returns!
What business owners must do when they are GST registered
Being GST registered, is even more reason to get a bookkeeper, as your financial compliance needs to be up to scratch – you want to make sure you are claiming all the GST you possibly can, but you also want to make sure you are not overclaiming – avoiding a large bill at the end of the financial year, which you will have to pay back.
Xero populates the GST return for you, and while that does make it easier for us all, it’s not necessarily correct – Xero relies on correct input. So, if you have forgotten to add GST to your invoices, treated entertainment expenses incorrectly (as they are only 50% claimable), overclaimed GST on an asset that includes personal use (like your vehicle) or claimed GST on transaction that don’t have GST (like subscriptions or overseas software companies) – your GST return is wrong.
If you have any questions regarding your GST or would like to chat about our monthly services, please book a call with us.
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