Everything business owners need to know about GST
We’ve all heard of GST, (short for “Goods and Services Tax”) as we’ve had to pay it! It’s that annoying tax that makes goods and services more expensive right?
But what about if you are the person selling the goods or service? GST from this angle is far less understood and can be far more complicated.
In this article, we deep dive into everything GST answering all those nitty-gritty questions, including, when you should register for GST, the rules around filing your returns, and which accounting basis could be right for you.
Let’s get started!
Why do we have GST?
GST is collected from business owners via the Inland Revenue Department (IRD) and was first introduced in New Zealand in 1986 to increase the government’s taxation revenue total. This revenue is then allocated out by the elected government, at that time, to support New Zealand’s key sector needs, such as the health, education, and social security sectors.
How much is GST?
GST is usually charged at 15% on top of a good or service’s GST exclusive value. i.e. a good that would have a GST exclusive value of $100 would then have a GST inclusive value of $115.
How do I calculate the GST inclusive or exclusive price?
If you wish to find out what the GST inclusive price is of a good or service that is GST exclusive, simply multiply the GST exclusive price by 1.15 or divide by 20 and multiply by 23. Conversely, to get the GST exclusive price of a good or service, divide the GST inclusive price by 23 and times by 20.
For example, if your price is $100 and you wanted to calculate the GST inclusive price you would:
- multiply it by 1.15
- $115 is the GST inclusive price.
And to calculate the GST Exclusive price of $100 you would:
- Divide it by 23 = $4.35
- Multiply by 20 = $86.96
- $86.96 is the GST exclusive price
How do I calculate the GST component of a GST inclusive price?
If you wish to work out the GST component of a GST inclusive sales price, you can either divide it by 1.15 or use the below formula:
- Multiply the total sales price by 3.
- Divide the result by 23.
For example, if the total price is $115:
Make sure you don’t calculate 15% from the total price as this will be incorrect.
When do I have to register for GST?
A business must register for GST when:
- It is making or intends to make taxable supplies, supplies that by law GST must be charged on.
- If you envision the business making taxable supplies of $60,000 turnover in the next 12 months (making GST exclusive sales of that value).
- If the business has made taxable supplies of $60,000 turnover in the last 12 months
The IRD has a great resource that takes you through this process.
When should I register for GST?
Outside of the above enforced parameters, the decision to register for GST or not can be quite tricky as sometimes making sales at the beginning of operating a business can be slow.
Our advice on whether to register for GST sooner or later can be impacted by the following factors:
- how quickly you envision earning revenue.
- whether or not there are significant costs prior to earning revenue (i.e. running costs, stock, property, plant, and machinery, etc.)
If you are expecting significant costs prior to earning revenue, we would suggest registering for GST sooner rather than later, so you are able to claim the GST back on those purchases. Whereas if what you are supplying to the consumer does not require much setup costs, for example, a contracting graphic designer who sells their time, or someone who doesn't expect they will come close to meeting the required threshold. In these examples, registering later on would be advisable.
Remember you can only charge GST if you are registered for GST, and likewise, if you are registered for GST, you must pay it.
Do I have to have a registered company to register my business for GST?
The answer to this question is simple, no you don’t have to be a registered company to register for GST, you simply must be undertaking a taxable activity. What’s that you ask? Well in GST terms a taxable activity means you are completing an activity, such as selling or intending to sell a good or service, to another person for money or reward, for a continuous period or regularly. The activity doesn’t have to be profitable to count as a taxable activity.
If you do decide to register your company for GST the best practice for registering your company for GST is to take the time to get everything set up properly, not just your software but also ensuring you have registered the entity appropriately.
Sadly, it’s not as simple as telling the IRD I want to be GST registered and you’re good to go, you will need to specify what basis you are going to account for GST to the IRD. There are three types of accounting basis, the most common two being the payments (cash) basis and the invoiced basis, and the less common one being the hybrid basis. We expand on the 'payments' and 'invoice' basis below:
Payment basis:This is where you file your GST based on the income you have received and the expenses you have paid within the GST period (i.e. cash must have been received or paid)
Invoice basis:This is when you file your GST return based on accrual accounting. In this instance the date of your invoice for both incoming and outgoing payments matters a lot as you will account for GST based on invoices issued and bills received within your GST period rather. The date that cash is received or paid is irrelevant.
There are advantages to both payment basis’, however, if you are a cash-poor business (at least initially) you would most likely be better off on a payment basis. This is because your cash balance will be more likely to align with your GST payment due at the end of the following month. With the invoice basis, if clients take longer than expected to pay, this can result in there not being enough cash in the bank at the time the GST payment is due.
Xero can help! Once you have decided which accounting basis you wish to use and have set this up in your Xero, Xero can attribute GST for you in the right place at the right time. Xero recognizes the terms of those two settings and understands when it does/doesn’t attribute GST based on these two accounting bases.
If you would like advice around when to register, get in touch with our knowledgeable team
Registering for GST
Once you are ready to register the process can be completed via the IRD or in some cases, like here at RightWay your accountant can do this for you.
If you are a sole trader registering for GST, your GST number is your personal IRD number
How often do I have to do a GST return?
A GST return must be filed for every taxable period, depending on the GST frequency you have chosen.
How do I know what my GST frequency is?
As the taxpayer, you can choose if your GST frequency is every 1, 2, or 6 months. The exception to this is based on your income.
|Filing frequency||Who's eligible|
The above table is sourced from, IRD's Changing your GST filing frequency, and is subject to change.
When is a GST return due?
A GST return is due by the 28th of the month after your taxable period.
There are 2 exceptions:
- The GST return for the taxable period ending 31 March is due by 7 May.
- The GST return for the taxable period ending 30 November is due by 15 January.
GST returns must be filled on time as no extensions are granted for GST returns and there are penalties for late payment. GST Returns have to be filled even if the return is nil.
How do I calculate the GST I owe?
The GST portion you owe can be calculated by following the below steps:
- Add up all the GST you have paid on business expenses in the taxable period.
- Add up the GST you have collected for goods or services supplied in the taxable period.
- Minus the total paid GST from the total collected GST and the remaining figure is what you owe the IRD for your taxable period
For a visual example of this please visit Xero and read their Working Out Your GST Return.
How do I file a GST return?
You can file your GST return either:
- in myIR
- through accounting software
- by filing a paper return – the IRD will send you a paper return if you do not have a myIR account, however, this option is being phased out by the IRD currently.
Bookkeeping tip: Coding your transactions as GST applicable.
While Xero can help you to code for GST, our bookkeeping team often find that clients may set up their own chart of account codes in Xero without using the Xero templates or simply create their own codes, but in either or both instances they forget to make the code GST applicable. In this case, Xero won’t attribute the GST out of any coding for that code. This error can cause a lot of headaches come GST payment time.
Why is GST so important in business forecasting?
When you are completing forecasting for your business, for example, a profit or cash forecast, it is important to consider the associated GST effects, such as, what you will have to pay to supply the good or service as well as the 15% tax you will need to pass on – for your forecast to have any accuracy.
Ensuring your forecast considers GST is especially important when you are trying to work out the best price for your product or service as a 15% decrease or increase can have a significant impact on your bottom line. For example, perhaps you know you want to sell a product for $100 you need to remember that you will actually only get $85 for that product as $15 will be passed on as a GST payment if you are GST registered.
Where possible it is best practice to sell your good or service GST exclusive to avoid any confusion. Especially, when selling to other businesses who are likely to be GST registered themselves.
On-selling items that have already had GST claimed on them
If you have already claimed GST for a business-related expense item, such as a car, and you on-sell that item, you will be required to pay back 15% of the sale price to the IRD as part of that taxable periods GST return. This often becomes an issue when a GST-registered person is selling to a non-GST-registered person who will use the item for personal use, as they can’t claim the GST portion back.
Do I need to consider GST when running payroll?
For a lot of businesses wages and salaries are one of the largest expenses, however, it’s important to note that wages should not have GST attributed to them. It’s important to make sure the code you have chosen for wages is not a code that automatically has GST attributed to it. If you are using Xero you can create a bank rule so that you don't need to think about this every time a transaction pops up on your bank feed. It will automatically reconcile the transaction with the correct GST amount.
What supplies are exempt from GST?
For more information about GST-exempt supplies, we recommend visiting the IRD's website and reading their article about Exempt supplies.
Can expenses in a foreign currency affect the GST portion of that expense?
Expenses for GST applicable services won’t always be charged in $NZD. A good example of this is digital marketing expenses incurred from running Google AdWords, which are charged in $USD, usually to a credit card. It’s important to note that the figure invoiced, including the GST portion, may differ from the figure billed. This can happen if the exchange rate changes, in the period between when the expense was invoiced and billed. This change will affect the GST calculation that was noted in the invoice and would need to be corrected for accuracy.
Deregistering for GST
If you close down your business or your business no longer is required to be registered for GST (as per IRD's rules shown above) you will need to deregister for GST via the IRD. This process can be completed via your MyIR.
If you do not deregister you will be required to keep filing GST returns and may have to pay GST for goods or services sold, even though you didn't collect GST on those items.
How can I stay on top of my GST payments?
At RightWay we encourage our clients to have their Accountant or Bookkeeper manage their GST returns. This way, minor issues can be addressed intermittently, rather than all at once as the accountant prepares your annual accounts. Not only does this practice result in a faster, more cost-effective annual return process, but it also eliminates a lot of stress. Issues such as searching for lost receipts (for purchases made a long time ago, that you don’t recall making), masses of re-coding, and an overload of queries from your accountant, can easily arise if the first time your accountant has seen your accounts is when they process your annual income tax return.
If this sounds like a good idea to you and you would like to discuss this further, please contact us so we can talk through the many options available to you.
Want to learn more?
For more information on GST check out our Better Business, Better Life podcast episode
Further Reading on the topic
Here are some other useful resources from around the web:
The above information is general and does not represent tailored advice for your business. For more specific guidance, get in touch with our team who can connect you with one of our accountants. For official tax advice from the Inland Revenue Department, get in touch with them directly or visit their website.
Read our other Accounting guides
Paying tax is a fact of life for anyone earning a living - businesses included. In this article, we discuss some of the aspects of tax compliance that you should be aware of as a business owner, including PAYE, Business Income Tax, business expenses, GST, balance dates, Kiwisaver, student loans, and actually paying your tax.
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