To be or not to be registered for GST, that is the question. While it is compulsory for businesses earning $60,000 and above per year to register for GST, those earning less have a choice. It’s this decision which we find that many business owners struggle with.
One of the services we provide involves helping our clients with their GST returns using Xero, as well as providing recommendations about whether or not to become registered for GST. Today we’re going to help explain:
- What is GST
- Pros and Cons of registering for GST
- Responsibilities when becoming registered for GST
- Filing your GST returns
- Using Xero to make GST filing a breeze
As always, the team here at InDeed We Can are here to help. If you have any questions or would like to discuss using Xero in your business, just give us a call.
What is GST?
Goods and Services Tax, aka GST, is a tax which is collected on top of the cost of a product or service sold in New Zealand. Currently sitting at 15%, GST is collected by GST registered businesses on behalf of the government, who then pay it to the government on a regular basis. The GST rate for exports and land sold between GST registered businesses is 0%.
It is compulsory for businesses with a turnover of more than $60,000 to register for GST, but many businesses earning less, especially B2B ones, choose to register voluntarily without meeting the income threshold. If you fail to register your business when you reach the threshold or know that during the upcoming fiscal year that you will reach it, you can face severe legal difficulties.
We spoke to Lynnette from Tree Gifts about her reasons for becoming GST registered from the beginning … “It was easier and gave us more credibility in the market with our corporate clients.”
When Corey from Good Oil Marketing became GST registered, he found the effects on his business were minimal.
Let’s look at the Pros and Cons of becoming GST Registered.
Pros and Cons of Registering for GST
GST will have an impact upon your business in a few ways; not just on the prices your clients or customers will pay. The positives of becoming registered for GST include:
- You can claim back GST on products or services your business has purchased from those who are registered for GST
- You can claim back GST on second-hand products your business purchases, even if the seller was not GST registered
- Regular GST returns help avoid the end of year accounting stress, as your accounts are kept up to date
Looking at the negatives of GST registration, they are:
- Need to raise your prices by 15% and charge GST to your customers or clients
- File regular GST returns, telling the IRD the amount of GST you have collected and are claiming back
- Paying GST you’ve collected through to the IRD
- Pay GST back to the IRD on assets you previously claimed it upon, but now don’t own
- Needing to issue tax invoices to your customers or clients
Choosing to become GST registered isn’t something that suits all businesses. In fact, many start-ups and small businesses choose not to because it can add another layer of complexity to running a business. They can also have a legitimate fear that their prices will become higher than those their customers are willing to pay, as well as higher than their competition charges.
Responsibilities When Becoming Registered for GST
In order to register for GST, you or your business (depending on your business structure) will need to have:
- An IRD number
- A myIR online account
- Details for your business bank account
- A classification code for your business industry
Your next job will be to decide upon how often you will file your GST returns. You have three options to choose from (but not all may be suitable for you):
- Each month – if your business has an annual turnover of more than $24 million, you must file monthly.
- Every two months – this is the popular choice amongst small businesses as it helps them keep on top of their accounts and ensure that they don’t end up with an unpayable GST return. This is also the default filing frequency.
- Every six months – if your business earns less than $500,000 per year, this may be an option for you.
Regardless of which filing frequency you choose, remember that you will need to save the GST you have collected for the IRD in order to pay it to them. Using a dedicated bank account where you transfer 15% of all sales into helps you avoid a GST bill you cannot pay.
Along with choosing your filing frequency, you also must select your accounting basis from one of two options (excluding the hybrid basis as this is too complicated for many businesses) :
- Payment basis – you will owe GST when a customer or client pays you
- Invoice basis – you will own GST when you invoice a client (or when you get paid)
Then we come to the responsibilities you must meet once your business is GST registered:
- Adding GST to all sales (follow the formula of your price x 1.15 to work this out)
- Issue tax invoices which contain your IRD number with each sale, which show the amount of GST collected and the total cost
- Keep your invoices and receipts to claim back GST you have paid
- File your GST returns with the IRD (Xero is great for this!)
- Pay GST you owe
Next, we’ll take a look into the filing of your GST returns.
Filing your GST Returns
Regardless of which filing frequency you have chosen, the information which needs to be included in your GST return remains the same. You can choose how to file it though: through myIR, Xero or by paper. You will need to include:
- The total amount of sales made during the period and the amount of GST collected
- The total amount of purchases made during the period and the amount of GST paid
- Any adjustments from past months, both income and expenses
- Any bad debts from customers
From here, you would subtract the GST paid from the GST collected, and you would see the amount of GST you owe or the amount you are owed. Or, more specifically, GST Collected – GST Paid = GST Payment (negative being your refund, positive is what you owe).
Using Xero to Automate GST Filing
Choosing to automate your GST calculations using Xero is a smart decision, as it can take away most of the pressure of filing the return. This is because Xero automates a lot of the GST tasks for you. It will collect data from both your sales and purchases, working out what your GST bill or refund is. As it is automated, it keeps a running tally of your GST situation, letting you see where you are at any time. This helps avoid nasty surprise GST bills!
Xero can also connect to your myIR account, making filing the return a breeze. You simply login to Xero, choose to file your completed return and connect to myIR. All of your data is then transferred to the IRD, with you just needing to make the required payment.