Goods and Services Tax (GST) is an integral part of running a business in New Zealand. For small business owners, understanding GST is essential to ensure compliance, avoid penalties, and maintain smooth operations. In this guide, we’ll break down the basics of GST, its requirements, and tips on how to manage it effectively.
What is GST?
GST is a 15% tax added to most goods and services sold in New Zealand. It is a consumption tax, meaning the end consumer bears the cost, but businesses are responsible for collecting and remitting it to the government. Small businesses that meet specific criteria are required to register for GST and regularly file returns.
When Do You Need to Register for GST?
You must register for GST if:
– Your business turnover exceeds NZD 60,000 in any 12-month period.
– You expect your turnover to exceed NZD 60,000 in the next 12 months.
– You charge GST on any goods or services.
Voluntary registration is also an option for businesses that haven’t yet met the threshold but want to claim GST on purchases.
GST Registration Process
Registering for GST is simple and can be done through the Inland Revenue (IRD) website. Once registered, you will need to choose a filing method that suits your business, which can be either monthly, two-monthly, or six-monthly.
GST Filing Methods
1. Invoice Basis: This is the most common method and is based on the date when the invoice is issued. You claim or pay GST regardless of whether you have received or made payments.
2. Payments Basis: Suitable for smaller businesses, under this method, GST is claimed or paid only when payments are received or made.
3. Hybrid Basis: A combination of the two, used in specific situations.
How to Calculate GST
To add GST to your product or service, multiply the price by 1.15. For example, if you sell a product for NZD 100, the GST-inclusive price will be NZD 115. When calculating GST on expenses, divide the price by 1.15 to separate the GST component.
Filing GST Returns
Once registered, you are required to file regular GST returns with the IRD. The return frequency depends on your chosen filing method. Here’s what you’ll need to report:
– Total sales and income (including the GST portion)
– Total purchases and expenses where GST was paid
– Any adjustments, if applicable
Remember, even if no GST is due for a particular period, you must still file a return.
Claiming GST on Business Expenses
As a GST-registered business, you can claim GST on any goods or services purchased for your business, provided you have a valid tax invoice. This helps reduce the overall GST you need to pay. For example, if your business paid NZD 115 for office supplies, you can claim the NZD 15 GST portion back from the IRD.
Common GST Mistakes to Avoid
1. Late Registration: If you delay registering for GST when required, you may face penalties and interest charges.
2. Not Keeping Proper Records: Ensure that all sales and expenses are properly recorded and supported by tax invoices.
3. Missing GST Filing Deadlines: Missing the filing date can result in penalties and may trigger an audit.
What Happens If You Deregister?
If your business turnover drops below the NZD 60,000 threshold or you decide to close your business, you may deregister for GST. However, this involves adjusting for any assets on which you’ve claimed GST in the past.
Tips for Managing GST Efficiently
Use Accounting Software: Accounting software like Xero or MYOB can automate GST calculations and ensure your returns are accurate and submitted on time.
Keep Accurate Records: Ensure every GST-related transaction is recorded and that you retain all supporting documents for at least seven years.
Seek Professional Advice: GST can be complex, especially if your business involves international sales or mixed supplies (some taxable, some non-taxable). Consulting with a professional accountant can save time and prevent costly mistakes.
Conclusion
Understanding and managing GST is critical for small businesses in New Zealand. While it may seem complicated at first, with the right tools and advice, you can stay on top of your GST obligations and focus on growing your business. If you need further assistance or tailored advice, RAKS Consulting Ltd. is here to help.
Feel free to reach out to our team for expert guidance on all tax-related matters, including GST compliance.