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TAX •  29 MARCH 2021 • 6 MIN READ

The basics business owners need to know about GST

a person is calculating using a calculator

GST (Goods and Services Tax) is a tax on most goods and services sold by businesses. While it feels like a tax on businesses, it really isn’t. Instead, it’s ultimately paid by people living out their day-to-day lives.

Businesses act like tax collectors for the government – charging an additional 15% on top of each sale, which they later forward to Inland Revenue.

A business’s process of forwarding the GST to the government is called a GST Return.

When do businesses need to register for GST

We’ve got a whole article about that, over here. In summary:

If you’re earning over $60,000 per annum, you must register for GSTIf you’re a sole trader, your GST number is the same as your IRD number and you won’t need to apply for a separate one. If you’ve formed a company, you need to apply for one, here.

If you’re earning under $60,000 per annum, GST registration is voluntary. It could be a beneficial move for you if

  • You want to claim back GST on a large asset purchase, and you’re fairly sure your sales will be over $60,000 at some point
  • Most of your sales are to overseas entities – you won’t collect GST on this income, but you can claim GST on the expenses you incur in NZ

Capturing your GST information – your GST basis

When you register for GST, you’ll need to select what’s called your GST basis. It’s how and when your GST records are entered into your GST Return (the process for forwarding GST to the government).

Your GST basis can be either:

  • A payments basis – whenever cash is received into or paid from your bank account, your GST is entered into your GST Return
  • An invoice basis – your GST calculation is based on the dates of invoices you send and receive, rather than what goes through your bank account
  • A hybrid basis – this is rarely used but follows the payments basis for the bills you pay, and an invoice basis for the bills you send

Understanding a GST period

In most circumstances, it’s up to you to decide how frequently you file returns. You can choose between six-month intervals, two-month or one-month.

Depending on your industry, there are pros and cons for each choice.

In some cases, though, you might not have a choice about either your GST period or your GST basis. It depends on your yearly revenue.

  • Less than $500,000 – choose any basis and frequency
  • More than $500,000 – you can choose any basis but only two-monthly or monthly filing
  • More than $2,000,000 – you must choose the invoice basis and can only file either monthly or every two months
  • More than $24,000,000 – you must use the invoice basis and file monthly

Our support team would love to have a chat if you’d like a hand to choose the right one for you.

Charging GST

Once you’re registered for GST, you can charge it. From now on, your invoices and receipts need to have your GST number (your business’s IRD number) clearly displayed. If you send out invoices for more than $50, they also need the following items:

  • The words “Tax Invoice”
  • Your business name, or trading as name, and your business IRD number
  • The date of the invoice
  • A description of what the invoice was for
  • The total amount payable, and clearly state that this amount includes GST

If your invoices are over $1,000, you also need to include:

  • The name and address of the buyer
  • The quantity of whatever they have purchased, with the GST exclusive and inclusive amounts separately noted

If you’re using an accounting system for invoicing, it’s usually set up to capture all the information you need. 

Claiming GST

You can claim GST on most transactions, and we’ll discuss in detail the situations when you can’t further down. Some of the transactions that commonly confuse business owners are outlined below.

GST can be claimed on the following

  • Asset purchases
    • You can claim GST on second-hand items even if the seller is not registered*
    • You can claim the GST upfront on assets purchased on finance
    • GST can be claimed on the market values of existing assets you bring into the business
  • Software providers
    • Subscriptions to overseas providers such as Microsoft, Spotify, FaceBook, Google AdWords, etc, can be claimed for GST
    • Reimbursements to employees for business costs (including motor vehicle), but excluding mileage reimbursements

* If you claim GST on the purchase of second-hand assets, GST must be paid when it’s sold

GST on property transactions (including land) is a complex area and you need specialised advice before signing any documents

GST cannot be claimed on the following

  • Transaction charges (known as financial services – which are all exempt from GST)
  • Bank fees
  • Interest expenses
  • Stripe, Paypal (and similar) fees
  • Loan fees
  • Merchant fees
  • Surcharge on credit card charges
  • Donations
  • Wages and salaries
  • Goods purchased overseas (but you can claim any import duty charged by Customs)
  • Services performed outside NZ
  • Penalties
  • Loans and loan payments
  • Sale of a business as a going concern
  • Sales of investments such as shares, bonds and term deposits
  • Payments to suppliers who are not registered for GST (except for second-hand assets as described above)
  • Sale of land between two people who are both registered for GST (known as compulsory zero-rating or CZR)
  • Allowances paid to employees
  • Residential rental expenses
  • Personal expenses

Example – comparing goods sold to a consumer and to a business

At the beginning of this post, we said that GST is ultimately paid by people living out their day-to-day lives. The example below shows how this happens.

GST example

Who are Beany? 

We’re an online accounting firm that is always right here for you, your accounting pain relief. The most advanced technology lets us work way more closely with you than a normal accountant world. ​

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.

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