Like all taxes, GST can be complicated, but for most business owners it can be pretty straightforward once you get to grips with the basics. To do so, it’s necessary to understand how GST works.
Many business owners think GST costs them money, but in fact, as a GST registered entity, the typical business owner is merely acting as a paid (yes, paid!) tax collector of behalf of the IRD. This is because GST is only a cost to the final consumer, not to the GST registered business owner who can reclaim the GST he or she pays on purchases of goods and services.
For example, if I buy a jar of coffee for use at home, I cannot reclaim the GST, but if I buy coffee for my office, I can. In return for being able to reclaim the GST on purchases of goods and services, a GST registered business owner must add GST to the invoices he or she issues to his or her customers, collect it, temporarily hold the GST and then pay it to the IRD — after deducting the GST reclaimable on purchases and overheads. It’s much easier to understand if you’re in trades, services or you’re a professional because you can see the GST being added to the value of your services, unlike a retailer where prices are GST-inclusive.
For new or smaller growing businesses, knowing when to register (and for some, remembering to register!) can very important. If your customers are GST registered, early GST registration is best because that way, you maximise the GST reclaimable on purchases and overheads. On the other hand, if your customers are final consumers and cannot recover the GST, you may be better off delaying GST registration as long as possible, as then, you can either keep your prices lower to get more business or set your prices at the equivalent GST-inclusive level and keep the additional money yourself. Watch out though because there are some traps for the unwary.
Watch out too for how often you should prepare your GST returns. Monthly is best if you’re going to get refunds (like a property developer client of mine) but otherwise, I normally recommend bi-monthly. Six-monthly is too long a gap because the GST due mount up to alarming levels, and it’s difficult to remember what’s what that long ago!
The GST registration basis is important as well. Don’t register by default on the invoice basis, as then you’ll be paying GST on invoices issued but not paid, which is daft. However for others, like exporters or retailers (who don’t give credit) for example, it may pay to register on an invoice or hybrid basis.
The other important thing is actually pay the GST. This may sound strange but many business owners seem to think that the IRD is a useful finance provider, not realising perhaps that with the penalties charged by the IRD for late payment, it is in fact a very expensive source of finance — far more than a bank or even a credit card! The key to success here is to remember that the GST is not your money; you are just the temporary custodian!
Although GST is straightforward for most business owners, there are a whole heap of complexities that are best handled by an experienced business accountant who deals with business owners, so seek advice if you’re unsure. Better still, get your accountant to prepare or check your GST returns. It’s total peace of mind (or should be!), and if you choose the right accountant, it’s cheaper than you think!
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 adviser.