An introduction to GST

Getting to grips with the principles of GST might seem complicated, but if you get to know the ins and outs of GST it can have a big impact on your tax bill. So it’s well worth taking the time to understand it better.

On this page:

• What is GST?
• Exemptions to GST
• Why you should register for GST
• Registering for GST
• Cancelling your GST registration

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What is GST?

GST stands for Goods & Service Tax. It’s a tax built into the price of virtually all products or services you can buy or sell. GST is currently set at 15%.

As a GST-registered business, you collect GST on behalf of the Government by building it into the prices of your products and services, and then you claim GST back on the products or services you’ve bought as business expenses. If you’re not GST-registered, you can’t do this.

So the basic principle of GST is you end up paying  Inland Revenue the difference between the GST you collected on what you sold and the GST you paid on the supplies you bought for your business by filing regular GST returns with Inland Revenue throughout the year. Your GST returns will show that you either have GST to pay or you will be receiving a GST refund.

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Exemptions to GST

There are four types of GST supplies: Taxable, Exempt, Zero-rated and Special.

But most small businesses should only really be concerned with the first two categories.

Zero-rated goods or services include products or services from New Zealand supplied overseas (eg. Exports) or, in some circumstances, a land transaction. Zero-rated supplies still have to be recorded on your GST returns.

Refer to this Inland Revenue list to see if any zero-rated supplies apply to your business.

Special goods or services are those, like hire purchase goods, that can’t be classed as a normal, straightforward transaction so they have to be accounted for with special rules.

Refer to this A–Z list of special category goods and services from Inland Revenue.

Taxable

If it’s a taxable supply, it should have GST built into its price. Of course, a taxable supply isn’t just one that sees you make a profit – the term also applies to loss making supplies and supplies sold by non-profit bodies. So if you’re being paid a dollar figure of any size for supplying goods or a service, GST probably applies.

Exempt

Exemptions to the above rule are:

• The letting or renting of a residential property.
• Interest on funds.
• Donated goods and services sold by a non-profit body.
• Certain financial services.
• Salaries and wages paid to an employee (but not a wage subsidy paid by Work and Income New Zealand).

If you think your business activity might be exempt from GST, consult your accountant.

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Why you should register for GST

Once your business starts to turn over more than $60,000 a year, you’re required to become a GST-registered business. However, for some businesses it’s worth voluntarily registering from day one. For example:

• If your expenses are greater than your income in the early phase of your business, then registering for GST may mean you can claim GST refunds.
• If you are an exporter, you will be able to claim GST on your expenses but your exports will be zero-rated, so you will be in a GST refund position.

If you charge GST you must register regardless of your turnover. This applies to self-employed taxi drivers, for example.

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Registering for GST

You have to make some decisions before you start the registration process to make sure filing GST returns and claiming GST is practical for your business situation.

You can register online through myIR secure online services. If you don’t have an account, register online at Inland Revenue’s website.

Before you register, you need to have:

• An  IRD number.
• A BIC (business industry classification) code.
• A chosen accounting basis.
• A chosen taxable period.

IRD number

Getting an IRD number is vital. You need one to do business in New Zealand, and it’ll act as your GST number as well.

If you haven’t got one already, fill out IRD number application - individual (IR595) if you’re a sole trader, or IRD number application – non-individual (IR596) if you’re registering a new partnership, company, non-profit organisation or trust/estate.

BIC code

To find out your appropriate BIC code, go online to the Business Industry Description website. You’ll need this to correctly fill out the GST registration form.

Accounting basis

Your accounting basis is how you claim and charge GST. There are three options:

• Payments basis.
• Invoice basis.
• Hybrid basis.

On a payments basis a GST transaction is considered to occur when payment is made or received.

On an invoice basis it is considered to occur when:

• an invoice is received or issued, or
• you receive or make a payment (whichever comes first).

Hybrid basis is a hybrid of the first two and is only really designed for large exporting businesses that can’t charge GST on what they sell overseas. It’s fairly complicated and should only be tackled with advice from your accountant.

The majority of small businesses use the payments basis because the invoice basis allows for the possibility of having to pay GST to Inland Revenue before the invoice is paid by the customer.

However, once your turnover exceeds $2 million a year, you have to move on to an invoice or hybrid basis unless you get permission from Inland Revenue to stay on a payments basis.

Taxable period

A taxable period relates to the frequency at which you file your GST returns, and your choice is really down to how much business you’re doing. You can file:

• Once every two months.
• Once a month.
• Once every six months.

If your business has a significant turnover and you’re piling up GST invoices and receipts, you won’t want to have to wade through a massive pile of paperwork twice a year.

Equally, if your turnover isn’t generating a high level of paperwork, you might want to just file your GST returns twice a year.

Most small businesses opt for the standard two-monthly taxable period, but there are restrictions depending on the level of your turnover. Businesses turning over more than $500,000 a year can’t opt for the six-monthly option, while businesses that think they’re on course to turn over $24 million in a year have to start filing every month.

Together, your chosen accounting basis and taxable period form the backbone of your GST record-keeping.

Register for GST with Inland Revenue.

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Cancelling your GST registration

You should cancel your GST registration if you stop trading. You may cancel your GST registration if your turnover for the next 12 months is going to be less than $60,000.

However if your turnover falls below $60,000 you may continue to be GST registered on a voluntary basis.

You can cancel your GST registration when you file your final return through myIR secure online services. If you’ve already filed your last GST return then call Inland Revenue on 0800 377 776.

If you haven’t yet filed your last GST return, you can:

• Email Inland Revenue using your secure online services account.
• Call the phone number above a few days after sending in your return.
• Include a letter with your final return if you plan to send it by post.

You will then receive a notice of the cancellation date, which will be the last day of a taxable period.

You should take care when cancelling your GST registration, because the cancellation can result in GST becoming payable to Inland Revenue.

For further assistance, read Inland Revenue’s GST guide (IR375) or use the Inland Revenue Tool for business.

Find out about meeting your GST obligations.