Kellett Accounting Solutions Limited
Tax specialists for network marketing and home based business professionals
To GST or not to GST, that is the Question!
- GST, or Goods and Services Tax, is 15% that is added to the price of most goods and services in New Zealand. There are a few notable exceptions, with the main ones being interest, residential rental and overseas transactions, including international airfares.
- Once your business income (i.e. income, NOT profit) exceeds $60,000 per annum, you are required by law to be registered for GST. (So if your income is hitting $5,000 most months, you'll need to look into this asap). Many people therefore decide that they'll just ignore GST until they get to that point.
- This is an option, but in many cases, it's not the best choice.
- You can voluntarily register for GST at any time, and in all bar a very few cases, I would recommend that you do.
- Reasons for registering for GST:
- You're actually better off if you're registered for GST, as you'll be able to claim back the GST on your tax deductible expenses (adjusted for private use if applicable) which all have GST on them anyway. For example, if you have an expense that's fully tax deductible of $115 including GST, you'll be able to claim back $15 through your GST return and a maximum (this is using the highest tax rate) of $33 through income tax, so total of $48. If you're not registered for GST, you can get back $37.95 through your income tax return.
- Your expenses often exceed your income, especially while a business is new. This will often result in GST refunds which can help your cashflow.
- While you pay GST on pretty much all your expenses whether or not you're GST registered, many companies will only pay GST on income to people who are GST registered, so your cashflow is also improved (albeit temporarily since you do have to pay that GST on to the IRD) by being registered.
- As I mentioned above, once your income hits $60,000 per annum, you must be registered for GST by law (before that it's voluntary). Especially for network marketers and self-employed people who earn commission income, that can happen quite quickly, which is one reason I recommend registering before you need to.
- It makes sure you treat your business like a business, getting you into good habits from the beginning, and forcing you to update your records at least twice a year (preferably every 2 months).
- It helps with income tax planning; once you're making GST payments rather than receiving refunds, it's time to start thinking about putting aside money to cover your income tax.
- As long as you're returning GST on a 2-monthly basis, it gives you the option of calculating provisional tax based on your cashflow (as reflected by your GST returns). Obviously this isn't an issue until you start making profits, but it can be really beneficial to have this option if your income isn't predictable, or if it increases throughout the
Reasons to NOT register for GST:
- If you offer goods or services to individuals (rather than businesses) who aren't GST registered. This means your customers won't be able to claim back the GST on your costs and, if they have a choice, they may choose one of your competitors who doesn't charge GST (effectively their prices will be perceived to be 15% lower). If a customer is GST registered, they can claim back the GST they pay you, so their cashflow is unaffected.
- You don't want the stress of putting the information together. Of course, I'm always happy to do clients' GST returns (I LOVE doing GSTs!), but you will need to provide me with the information, and pay me.
Registering for GST is pretty easy, but since there are a few questions that can have implications you may not think of, here's a guide to the process.