Goods and Services Tax (GST) is a form of value added tax introduced in New Zealand on 1 October 1986. The current GST rate in New Zealand is 15%. Taxpayers who are registered for GST have an obligation to file regular GST returns and pay GST to the IRD by certain dates.
Currently, if your turnover is expected to be more than $60,000 in the next 12 months you should register your business for GST.
It does not matter what business structure you are using – a Sole trader, a Company or a Partnership – all fall into the same regime of compulsory GST registration. The registration process is pretty straight forward, and this can be done online, or by your accountant.
Here is an example of how this value added tax works:
If you purchased a product and paid $115 for it, there is a GST credit in this amount of $15.
As part of your business activities, you will be adding value to the product and later selling it to your customer for, say, $184, which will include the GST component of $24.
The GST to pay will be only on the added value and will be calculated as $24 (GST collected via sale) less $15 (GST paid to the supplier), $9 is the GST to pay to the IRD on the added value.
GST: impact on cash flow
Your cashflow may be negatively impacted if you are required to be registered for the GST, but unable to increase your prices by 15%. We see this happening with service providers, who struggle to increase the prices due to competition, or customers’ resistance to an increase.
However, if you are registered and have been operating your business for a while, you know that there is positive impact on the cashflow as the GST payment is due to the IRD once every two months (the most common set up) and the business holds the collected cash and is able to pay other bills meanwhile.
Zero Rated for GST
Some GST transactions are zero rated. Generally speaking, these are exported goods and services, an example being when a person works remotely for an overseas customer. Also, real estate transactions between two GST-registered entities are zero rated. The most common transaction will be the sale of a real estate, where both the vendor and the buyer, are GST registered and the purchase comprises land.
Exempt from the GST
Certain transactions are completely exempt from GST. For example, financial services such as the bank fees, residential accommodation (rents), supplies by non-profit bodies, and the supply of fine metals (gold, silver) – all of which are GST exempt.
Some transactions are outside the scope of GST altogether such as gifts, or they may be made by entities that are not registered (and are not required to be registered).
The best practice is, if you are in doubt about GST, get in touch with your accountant. Tax laws are complex and a quick phone call today, can eliminate a costly problem tomorrow.
Talk soon!
Related: A quick history of tax, just in case you were wondering…
