The basics business owners need to know about GST

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.

Which businesses need to register for GST?
Capturing your GST information – your GST basis
Understanding a GST period
Charging GST
Claiming GST
GST example – selling to an individual and selling to a business

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 GST. If 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

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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

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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.

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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. 

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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

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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.

Appliances Limited The purchaser
A business (Appliances Limited) sells two coffee machines at $100 plus 15% GST each.

One machine is sold to an individual to use at home.

The other is sold to another business (Bedding Limited), which is registered for GST, to be used in its office.

Each microwave is sold for $115. This is calculated as follows: 

$100 + [$100 x 15%], which is:

$100 + $15 = $115

Individual

Takes the coffee machine home and uses it

Bedding Limited

Puts the coffee machine in its office for employees to use

What happens with the cash? Receives $230 (two microwaves at $115 each) Individual

Pays $115

Bedding Limited

Pays $115

What happens with the GST? Appliances Limited must pay the GST portion ($30) to Inland Revenue. Individual

Nothing – the consumer ends up paying the GST to Appliance Limited

Bedding Limited

Because the coffee machine is used for business purposes, Bedding Limited receives $15 back from Inland Revenue

Financial statements As the $30 never belongs to the business (it belongs to Inland Revenue), the financial statements of Appliance Limited will show income of $100, not $115. Individual

Not applicable

Bedding Limited

As Bedding Limited receives $15 back from Inland Revenue, the actual cost is only $100. This will be included in its financial statements as an expense.

Net impact Appliances Limited forwards the $15 to Inland Revenue, and Bedding Limited gets $15 back. The net impact to Inland revenue is nil, because the transaction is between two businesses.

When selling to the individual, Inland Revenue receives $15 (via Appliances Limited) – the consumer has ultimately paid the GST.

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Our Support team is always happy to answer your questions, so just get in touch via support@beany.com or call 0800 755 333.

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