As of 1 April 2019, Little Biz Online will be GST registered.
Thanks to Chris Mercer from MBP Advisors + Accountants for this blog post…
Any consumer or business will inevitably have to deal with GST. Whether your business is registered from day one or you wait until you cross the threshold to register, you will have many things to consider from the basics of understanding GST through to the complexities of GST and your unique business.
Below we will give you a quick run through of some of the key things you need to know when working with GST and hopefully answer some of your burning questions.
What is GST?
In its simplest form, GST is a consumption tax. This means that it is charged based on when you consume a product or service and where you are when you consume it. For many of us, we will ‘consume’ products and services from other businesses in NZ and as such, those businesses collect GST from us on the purchase and pass it on to the IRD. This applies to everything from what you buy at a supermarket for your family to the pens you buy for work.
The capture-all simplicity of the tax is what makes it one of the most regular taxes you will interact with on a daily basis and probably not even notice it.
Times Are Changing
It is becoming harder and harder to avoid GST. The laws capturing GST on goods and services are constantly evolving. In recent years we have seen the introduction of the ‘Netflix Tax’ on digital products. This coming year will see the introduction of the ‘Amazon Tax’ to capture goods from larger overseas providers into the local tax regime.
All of these changes are designed to make the tax system fairer for both local businesses and multinational corporations. The result is that locally manufactured goods are subject to the same taxes as those imported from overseas, evening the playing field.
It is an increasing rarity for purchases you make in the course of business to not attract GST. If you are taking steps to avoid dealing with GST, you may be placing your business on a difficult footing moving forward.
The GST Threshold
There is often some confusion about when a business is required to register for GST and collect it on its sales.
The $60,000 threshold is pretty well known. What is less understood is that this annual threshold applies to a rolling 12-month period. It isn’t limited or reset by calendar of financial year cycles. Many small business owners have got caught out by slowing sales or closing up over the end of the financial year to avoid cross the threshold, only to jump in full speed in April and end up crossing the threshold with out even knowing it.
Business to Business Products and Services
If your business is trading in business to business (B2B) products or services, it may be best to consider registering for GST sooner rather than later.
Many businesses simply expect other professional businesses to be registered as well. There is a clear benefit in making the processing of paperwork between the businesses easier as there is no need to double check a businesses gst status to confirm if they really aren’t registered.
There are also perceived advantages. One of these perceived advantages is that you must be more professional and successful if you are registered for GST and therefore a good choice over an unregistered business. Another is that there is a perception that since the business can claim back the gst they pay to you as a deduction against the gst they collect from their customers, they get a 15% discount. Neither of these things are really true but it is astounding the number of business owners we deal with that hold one or both of these perceptions.
Limiting your Business to Avoid GST
Many small business owners are tempted to limit their turnover on an annual basis in order to avoid having to register for GST. If you are running a small side-gig then this might be a viable option to avoid all the extra paperwork. However, if you require your business to provide for you and your family, you will need it to be able to deliver a comfortable income and not be artificially limited.
The Reality of an Average Income
The reality is that if you are after an ‘average’ life with an ‘average’ income in New Zealand, you’ll be targeting around $55,000 per year as taxable, take-home profit from your business. This has some serious implications regarding GST, especially if you want to limit yourself to stay under the threshold.
For example, if you want to earn $55,000 profit and stay under threshold, you’ll need annual revenue of no more than $59,999. If you are selling products, this means you’ll have to buy all your stock for less than $10,000 and sell them all for 6 times purchase price on average. This may be achievable with the right product. However, it leaves no room for freight, advertising office expenses and most importantly, no money for even a basic website so customers can actually find you and buy from you.
If you’re serious about your business, start treating GST as an inevitability and an opportunity rather than a threat to avoid.
Claiming GST on Business Expenses
Its not all bad news with GST. Yes, you have to collect 15% on all your sales as tax revenue for the government but you also get to deduct 15% off all of your purchases and expenses related to the business as well. This can be invaluable to help with cashflow, especially when you are starting out or importing large shipments of products.
What expenses can you claim? The short answer, almost all of them. Any expense linked to your income generation is a deductible expense. Most of these will have a claimable GST portion. The main exclusions are finance and banking services which are all exempt from GST.
If you aren’t familiar with GST or uncertain about its impact on you your family and your business, do your research, ask a professional and make some informed decisions. There is no need to rush into registering or avoid ever registering just to avoid the hassle. With the right advice and support, it’s a walk in the park.
Chris Mercer is the Managing Director of MBP Advisors + Accountants. MBP are a proactive accounting and business development firm who are dedicated to helping small businesses across New Zealand to thrive. If you have any further questions about your business and its tax needs, feel free to get in touch with the team at MBP for a free chat on 0800 86 85 86, or head to their website and book in a chat with Chris at a time that suits you.