GST - Snags and starters
When starting your business, GST can be a tricky issue. Because the NZ tax system is based on a voluntary calculation basis, it can lead to incorrect calculation of GST the repercussions are only felt years later. There are several cases where returns are incorrectly prepared leading to high penalties and imprisonment. We have prepared a quick GST 101 below which covers the basics and things you should look out for:
1. Register – Do or do not, there is no try.
You need to register for GST if you are carrying out a taxable activity and your turnover (revenue) is $60k or more (in last 12 months or expected in next 12 months). You can voluntarily register for GST if your turnover is less than $60k. Why might you want to register for GST?
You can claim the GST on expenses relating to your business and get your bookkeeping sorted in advance. This is particularly useful as most new businesses incur a higher level of expenses – claiming back the GST can help inject much needed cash into the business. However, note if you register you need to add GST to your sales and file returns regularly.
2. GST – to add or to subtract?
Typically GST is charged at 15% meaning you need to charge 15% on top of the net GST price. This is particularly important as you will either add GST to your prices or take GST off the price
For example, if a product is priced at $1,000, you can either add GST ($150) and sell the product for $1,150 OR you can subtract it from the amount received ($130.4). In situation A you will receive $1,000 and situation B $870. This choice can really affect your underlying profits and your competitiveness – Choose wisely!
3. GST zero-rated and GST exempt – They’re not the same thing!
When a sale is GST zero-rated, it means they are subject to 0% GST. These mostly relate to non-local products and services and land– most exported goods and services such as duty-free goods, exported services and land transactions.
When a sale is GST exempt, it means they are not subject to GST. These involve most financial services, residential dwellings and the supply of fine metals. So the question is, what’s the difference? Both appear to have nil GST applied!!
The key difference is zero-rated sales need to be recorded and included in your GST return AND you can claim GST on expenses against those zero-rated sales. For GST exempt supplies, you cannot claim any GST relating to those supplies.
Here’s the rub: if your business involves standard, zero-rated and exempt supplies it can become tricky to keep track of your sales and the correct GST treatment. For example, some developers build and develop a piece of bare land with a residential property – waiting for a sale they temporarily rent out the property. This trips many alarms and you can be required to return back GST you claimed in the tens of thousands of dollars! As an exporter, you may be underclaiming on your expenses and missing out!
If you are thinking of starting a business, we can help you set up and navigate your GST compliance requirements.