GST: An Introduction
I’m writing this article to provide guidance to those filing their own GST returns, and those considering whether they should register for GST or not.
GST is a consumption tax, with the tax burden falling on consumers. Conveniently for the IRD and the Government, businesses collect this tax on their behalf and pass it over.
The threshold to register for GST is and expectation that revenue over the next twelve months will hit $60,000. The key word there being ‘expected’ which means you don’t have to have hit that threshold. Therefore, you can register when you have revenue of $0, which could be beneficial to cash flow - explained just below.
GST Maths
If your business serves other businesses, GST should not be a cost to you, but will generally provide a small financial benefit in the form of the GST claimed on your expenditure and asset purchases. Remember it’s only the net GST collected that’s paid over to the IRD. Say you collect $100 of GST on your sales, and claim $15 on expenditure, you only pay over the $85, and you keep the $15.
For businesses selling direct to consumer, unfortunately GST is a cost that is passed on to the customer. You can either increase your prices by 15% or take the 15% hit yourself.
To work out a GST inclusive price: Multiply the GST exclusive price by 1.15.
To workout the exclusive price: Divide the inclusive price by 1.15.
To workout the GST component of an inclusive price: Multiply the inclusive price by 3/23.
What you can claim GST on
Same general concept applies to GST as income tax, expenditure must be for business purposes, rather than personal
Business expenditure
Fixed asset purchases (computers, equipment etc.)
Second hand asset purchases
What GST CANNOT be claimed on;
Owners drawings
Interest payments – bank loans, overdrafts etc
Bank fees
Wages & salaries
Repayments on loans
Most higher purchase repayments (GST is claimed when the asset is financed, rather than on the monthly instalments)
Other GST tips
If trading is light, or a low volume of transactions, register for GST on a 6 monthly basis, rather than 2 monthly.
Note, this will change your provisional income tax instalments from three to two during the year. GST will be due in October and April, along with your provisional tax instalments.
Filing six monthly reduces your admin, as you are now filing two returns per year, instead of six.
‘Payments’ basis
There is often very little reason to register for GST on an ‘invoice’ basis. ‘Payments’ basis means you file based on what you’ve received in payments from your customers and what you’ve paid in expenditure or asset purchases.
‘Invoice’ basis is based on when you raised an invoice to your customers, meaning you’ll need to keep track of your invoicing and be accurate, which just simply adds more unnecessary complexity and risk.
GST practicalities
Always take out the GST from your business cheque account on a monthly basis and keep it in a separate GST bank account. Then, don’t touch it!
You can do this by reconciling your transactions in Xero and running a GST report for the month which will tell you the net GST to transfer to your GST bank account.
Otherwise, if not on Xero, you can export your cheque account transactions for the month, sum them all and calculate the GST on the total (making sure to delete any transaction that don’t have GST on them). Transfer this amount to your GST account.
GST is usually due on the 28th of the month after the GST period ends (this is the deadline for both filing your return and paying the GST to IRD). E.g. for the February - January GST period, your GST will need to be paid to the IRD by the 28th of March.
For six monthly filers, GST (and provisional income tax) will be due by the 28th of April and October.