3rd September, 2018
The Goods and Services Tax (GST) is a tricky tax to come to grips with for those who don’t deal with it on a day-to-day basis. As financial advisors and accountants, there are a few of the errors we see frequently made by businesses.
From the outset, the one consideration small businesses and sole traders should have regarding whether or not to register for GST is a matter of their expected income.
If you project income of over $60,000 over the financial year, then you absolutely should register in order to be compliant in the eyes of Inland Revenue. Not sure whether this is likely or not? The simplest way to project your revenue is by accurately reporting and tracking past income with robust online accounting software.
That being said, accountants regularly come across other issues that might trip up small businesses regarding GST, which we’ve compiled into the following helpful list.
For a new or small and growing business, deciding when and whether to register for GST can be tricky.
If your customers are private individuals and you register too early, you might be voluntarily giving up thousands of dollars.
If, on the other hand, your customers are GST registered, you could register to get the GST back on your outgoings. Register too late, and surprise surprise, the Inland Revenue may impose penalties and interest.
GST can’t be claimed on services and products sourced from overseas suppliers.
Often, these types of errors are unintentional and simply overlooked.
For instance, goods or services purchased through online companies such as MailChimp, iTunes, Facebook, or Google Apps are from overseas suppliers and cannot be claimed.
To be safe, check your invoices and receipts to see if NZ GST has been charged. Keep in mind as well that many smaller businesses and subcontractors are not registered for GST, which means it cannot be claimed.
When you’re purchasing assets or equipment for business use, you may claim a GST deduction, but the amount you can claim may vary depending on whether you are a company, sole trader or partnership.
Where the asset is to be used 100 percent for business purposes, it is normally fully deductible regardless of your trading structure.
However, where there is private use, such as with motor vehicles, sole traders and partnerships must make an adjustment to the GST claimed for the expected private use component. When a company is involved, you can normally claim all the GST, but you will need to pay some GST on every future GST return to compensate the Inland Revenue for that private use.
If you’re buying assets or equipment using asset finance, getting the GST correct often causes problems. If you’re taking ownership of the assets or equipment (or if there’s an option to take ownership), you can claim all the GST up front (subject to any private use above).
But if you just have the right to use the assets or equipment for a limited period, the GST is claimable on each payment. There are all sorts of leasing deals out there, so watch out because when it says it’s a lease, it may not be. Also be aware because sometimes GST only applies to part of the regular payment.
When you buy a second-hand item for business, you can generally claim the GST even if the vendor isn’t GST registered.
But if you’re the vendor (for instance, if you are selling something to your company or you’re buying from a related party), there are complex rules to prevent you from gaining what Inland Revenue would consider to be an unfair advantage. Always seek advice from an experienced tax advisor.
Whichever aspects of GST you’re dealing with, it’s always best to seek advice when in doubt. If you prepare your own GST Returns, build a relationship with a good accountant experienced in GST. Better still, find an accountant who throws in free tax and business advice as part of the deal.
The information provided here is of a general nature and only applies in New Zealand. You should not act upon this information without obtaining appropriate professional advice and only after a thorough examination of your particular circumstances by an experienced tax advisor.