10 common GST mistakes small business owners should avoid

Deciding whether or not to register for GST can be tricky for new businesses, as it’s hard to predict your business turnover in the next 12 months.​

As a small business owner, freelancer, or contractor, registering for GST too early means you might lose the competitive edge on pricing, as you are charging an additional 15% on top of your sale price for goods and services. On the other hand, If you register for GST too late, you will face interest and penalties from IRD, which can be costly. It is your responsibility to register GST with IRD the moment your business turnover is over $60,000.​

If your business turnover is less than $60,000 per year, you can choose not to register for GST.​

If your business ceased trading, you may want to cease your GST registration with IRD asap. This can save you some paperwork and admin. You don’t have to constantly file nil returns all the time, as IRD requires you to prepare a ‘final return’. Often includes the valuation of any assets remaining in the business, have been given away or sold.​

Read more: The basics small business owners should know about GST​

For better cash flow, we recommend you put money aside for GST. We have seen a lot of business owners who spend all the money they make during the month back into business, without considering GST to pay. When it comes to the due date, they often have difficulty meeting the payment, resulting in interest and penalties owing to IRD. A good suggestion is to keep 15% of your sales for the month in a separate bank account. If you’re GST registered, you’ll need to pay the GST collected from your customers minus GST paid to the suppliers in the same GST return period. However, 15% of the sales will have you covered.​

You can’t claim GST on private use of your business assets. If you need some help deciding which business assets you need to adjust, or how to calculate GST for your business, you should seek advice from your accountant. They are familiar with the rules, and can help you make appropriate adjustments in the GST filing period. ​

If you purchased your business assets using your personal account, you should let your accountant know. Otherwise, the claimable GST amount will be missed.​

Sometimes, GST can’t be claimed against overseas suppliers. This is often overlooked by small business owners. A simple rule here is - if you are going to claim GST on a purchase, your supplier should return GST on the sale. If you purchased something from overseas, your supplier is not going to return GST on that item to IRD in NZ. In this case, you cannot claim GST on the purchase.​

You may or may not claim GST on non-resident digital service providers. If the digital service provider is GST registered in New Zealand, you can claim the GST component on the expenses.​

Another common mistake is between exempt supplies and zero-rated supplies. For example, bank fees, Stripe fees and Paypal fees are exempt supplies from GST. Read more on GST special transactions.​

When you enter a hire purchase agreement for any assets or equipment, you can claim all the GST upfront in the GST period, as you are taking ownership of the assets or equipment. All your repayments of the hire purchase are considered a loan repayment, which you can’t claim GST for again. ​

If you only have the right to use assets or equipment for a limited period of time, you can claim GST on each payment. In this case you are renting an asset. As this is considered a rental expense, you claim GST as you go. Leasing and hire purchase agreements must therefore be carefully considered for GST purposes. ​

If you purchase second-hand goods for business use from an unassociated person (e.g., not a family member or relative), the GST component on the cost generally can be claimed back even though the seller is not GST registered. Examples of this include vehicles and trading stocks. ​

However, if you purchase from an associated non-GST registered person or sell second-hand goods to your company, there are limitations on GST claims you can make or/and how much you can claim in order to prevent an unfair advantage. We recommend you seek professional advice from an accountant or a tax agent. ​

If you’re GST registered, GST on home expenses can be claimed in each GST return period, or at the end of the financial year. It’s worth noting that rent and mortgage interest is GST free.​

1. Calculate the GST amount on your home office expenses
If your electricity bill is $115 in August, the GST exclusive amount is $100 ($115/1.15) and the GST amount on the electricity bill is $15.​

2. If you’re using the actual cost method, apply the percentage of your home office against your total home area on the GST amount​

If your home office takes up 10% of your total home area, you’ll need to apply this 10% to the GST amount in Step 1. Therefore, the claimable GST amount on the electricity bill is $15*10% = $1.5. ​

If you’re using IRD’s Square Metre Rate to work out your home office expenses, you can’t claim the GST on your utilities. ​

Read more: Home office expenses: a tax deduction guide for business owners​

GST on motor vehicles can be tricky. There are 2 types of motor vehicle spending. We will look at those now. ​

If you purchase a motor vehicle in your business, but use it for partially private use, you can only claim the GST on the business portion. The same logbook percentage applies here. If you purchased a motor vehicle for $34,500 and use 30% for private use. The GST you can claim on it is $1,350 ($34,500*3/23*0.3).​

When you have a motor vehicle, you will have running costs to claim. The same rule applies here. You can only claim the business portion of the GST on all motor vehicle-related expenses - this could be your petrol costs, WOF, registration or repair & maintenance. ​

However, some business owners may have a motor vehicle in their personal names and use it sparingly for their business. In this case, keeping a logbook and making private adjustments could be too much work to be worthwhile. In this case, they may choose to claim the mileage as per IRD. It is important to remember if you claim motor vehicle mileage, you can’t claim any GST. ​

Read more: What motor vehicle expenses can I claim for my business?​

In New Zealand, GST filing frequency is monthly, two-monthly, and six-monthly. How much revenue you generated in any 12-month period will impact which filing frequency you choose. For example, you’re eligible for the six-monthly filing frequency if your sales is under $500,000, or you can opt in for the monthly filing frequency if your sales are over $24 million. You can read more details on IRD's website here.​

GST filing frequency has an impact on your cash flow. If you have regular sales and purchases within a short period time, you can register GST for monthly or bi-monthly depending on how much paperwork you’re willing to put up with. However, if your sales and purchases fluctuate in a short period of time, but stay stable for a longer period, then you can register for six-monthly filing. By the time you need to file your GST, you would have stable sales vs purchases. To be more precise, if your business receives GST on a regular basis, it’s wise to register for the monthly GST filing period so you can receive GST refunds as early as possible from IRD. If your business makes GST payments on a regular basis, you should consider registering for a longer GST period. You can change your filing frequency in myIR.​

IRD requires all businesses to keep accurate and complete records for at least 7 years. These records include invoices, receipts, bank statements and more. GST-registered businesses must keep receipts or invoices for items that are over $50. If the item costs less than $50, there is no need to keep a tax invoice. However, it’s essential to keep some kind of record, for instance a receipt.​

To increase record-keeping efficiency, you can utilise software(e.g., HubDoc). These apps allow you to take photos of your receipt using your smartphone and then upload them to your cloud-based softwares (e.g., Xero). ​

However, with eInvoicing growing in popularity, IRD is making improvements on GST record keeping. Please read more about eInvoicing and new GST rules from 1st April 2023 here.​

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We have a dedicated team of certified accountants and a support team to take care of your business no matter where you are, so you can focus on growing your business. We take out the ‘fluff’, break down the barriers and get things done. Looking out for you is what we are all about. Get started for free today.​