27th July, 2021
Many small business owners are rightly concerned about making errors with Goods and Services Tax (GST), so here are some of the more common and costly to avoid.
As I wrote in my last piece on this topic, if you expect your business to bring in revenue of over $60,000 over the financial year, then you should be registered for GST.
But even once you’ve made the call, there’s plenty more you’ll need to know about how your business handles GST in order to get it right.
Also as mentioned previously, the simplest way to project your revenue is by accurately reporting and tracking past income with robust online accounting software, which also helps manage GST more efficiently.
But, if you’re looking for particular GST mistakes and errors to avoid making yourself, I’ve compiled five more below.
Ignoring the third and most-rarely used GST basis, the hybrid basis, unless your business turnover exceeds $2 million, you can either register for GST on an invoice basis or a payments/cash basis.
If you register for the invoice basis option, you account for GST according to the date of the invoices. Select payments/cash basis and you account for the GST when the amount is paid.
It makes a huge difference to first-time business owners, because registering for GST on an invoice basis means you could be paying GST earlier than necessary. In addition, it makes your bookkeeping much more complex.
Business owners are able to submit GST returns on a monthly, bi-monhtly or six-monthly basis. For some, the instinctive reaction is to space those returns out as much as possible, opting for six-month intervals.
But if you’re getting GST refunds, it makes sense to register on a monthly basis to stay on top of the reporting.
That’s because of the sheer amount of data management and bookkeeping work associated with GST and accounting in general.
It’s necessary to think carefully and take advice about your business structure and what entity to use for your GST registration, as many make expensive mistakes trying to save a few dollars at this point.
Forgetting to change it when your situation changes is equally as bad.
Take the example of a sole trader who begins advertising a room to rent on AirBnB without consulting with an accountant.
The income from their AirBnB attracts GST, which they didn’t find out until it’s time to do the end of year accounts.
All this results in an unexpected large bill at tax time — and that can be crushing for a small business.
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This is one that catches many people out when it comes to GST, whether it’s related to a business or not.
The amounts of GST are significant and property purchases and sales are very visible as the IRD receive an illuminating printout of property transactions from the Land Registry Office, which they match to taxpayer records.
GST on property transactions is extremely complex and even lawyers often get it wrong, as there are a number of scenarios where it can go awry.
For example, when you purchase property should you claim the GST even though you were not charged GST by the vendor? What happens upon the sale of property, should you pay the GST on the sale proceeds? And there are other scenarios too, for instance, when there is a change of use of the property, which is a common occurrence.
Perhaps you have commercial premises that you decide to convert to residential or vice versa, or you bought a residential property and decide to do some property development. All require careful consideration to avoid expensive mistakes.
I wholly understand that bookkeeping is a chore for those in business, but getting it right makes work life a lot easier.
Your business won’t have a chance to thrive unless the admin is dealt with properly, so it’s important to get the right bookkeeping system even if you have to lay out some hard-earned cash. With a low monthly outgoing, getting some decent accounting software like MYOB is not exactly expensive but it does enable you to prepare GST returns efficiently and quickly.
It’s about time that hand-written manual books and records or third-hand corrupt spreadsheets (which don’t add up or cross-cast) were consigned to history, along with chalk and slate and abacuses!
It’s certainly true to say that GST can be a tricky tax for those who don’t deal with it regularly.
It costs a lot less than you might think to get your GST returns prepared or at least checked over by a professional before submission, so save yourself some money and get peace of mind by working with an expert.
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.