For New Zealand sole traders, understanding GST (Goods and Services Tax) is essential. This article aims to simplify GST, showing you how to handle it from start to finish. We’ll cover what GST is, when you need to pay it, how to register, calculate, and file your GST returns. By the end, you’ll feel more confident in managing your GST, ensuring you stay on top of your business finances.
What is GST?
GST (Goods and Services Tax) is a 15% tax added to the price of most products and services. Most things you buy have GST added to the price.
When you sell products or services you might need to add GST to your prices and pass the GST to the IRD when you file your GST returns.
You can claim the GST back on your expenses. When filing your GST return, you work out the difference between the amount of GST you collected on your income and the GST you paid on your expenses. If you collected more GST than you paid, you pay the balance to the IRD when you file your GST return. If you paid more GST than you collected, you can get a GST refund from the IRD.
You can choose to file and pay GST returns monthly (12 returns per year), 2-monthly (6 per year) or 6-monthly (2 per year).
Do I Have to File and Pay GST?
You do not have to register for GST just because you start a business. However, you do need to register for GST if you made over $60,000 in the last 12 months, or if you expect you will make over $60,000 in the next 12 months.
The $60,000 income limit does not include the following income types:
- Salary and wages
- Benefits, pension and student allowance
- Long-term rental income (short-term rental should be included)
- NZ interest
How to Register for GST
You can register for GST on the IRD website at any time:
- Log into myIR.
- Select the ‘I want to…‘ tab.
- Select ‘Register for new tax accounts‘.
- Select your IRD number.
- Select ‘Goods and services tax (GST)‘.
- Complete all the sections under ‘General info‘ and ‘GST registration‘.
- Submit your registration.
During the registration process you will be asked to select your ‘return filing frequency’ and ‘accounting basis’.
- Filing frequency – Refers to how often you need to file your GST returns. The default is ‘Two-monthly – periods ending in odd months’ and this is the recommended option in most cases. If you’d like to file GST more often you can select monthly, or if you want to file less often select ‘Six-monthly’. If you select six-monthly you will also need to select the filing months. The filing months refer to the last month of the GST periods. ‘March and September’ is usually the best option because it aligns with the financial year.
- Accounting basis – Refers to when you account for GST. With the ‘Payments basis (cash)’ option, GST is calculated on your transactions (when you receive the money). With the ‘Invoice basis (accruals)’ GST is calculated when you issue the invoice (when you don’t yet have the money). The payments basis option is best for most sole traders, because this prevents you from getting caught out having to pay GST on income that you might not have received yet.
Once registered for GST you need to:
- Charge GST to your customers
- File GST returns
- Pay any GST you owe to the IRD
Charge GST to your customers
When you become GST registered you need to start charging GST at 15% to your customers. This involves adding GST to your prices (for example, $100 plus GST for a total of $115). You also need to add GST, and your GST number, to your invoices.
You do not need to charge GST to overseas clients/customers. The income you receive from overseas customers is know as Zero-rated supplies.
When your GST return becomes due, add up all the GST amounts from the income you received within the GST period. This amount will be included in your GST return as the ‘Total GST collected’. Also add up the total amount of Zero-rated supplies you earned during the GST period and include it in your return.
How to Calculate the GST on Expenses
If you’re GST registered you can claim back the GST portion of your business expenses in your GST return.
Calculating the GST on expenses is a two step process:
- Calculate the GST amount: When working out GST on an expense you first need to seperate the GST amount from the expense amount. Here’s Inland Revenue’s recommended formula to find the GST amount from a GST inclusive price: GST Inclusive Price x 3 ÷ 23 = GST Amount.E.g. if your car insurance bill is $250 then the GST amount is $32.61 and the GST exclusive amount is $217.39. You can also use an online GST calculator.
- Apply business use percentage: Next, you need to work out how much of the expense is for business use and how much is for personal use. If the expense only relates to business use you can claim 100% of the GST. However, some expenses, such as vehicle expenses or home office expenses, often involve personal use and business use. You can only claim the business use portion of the expense – this is known as making an “adjustment”.E.g. if you use your vehicle 50% of the time for business, then the GST claimable portion will be $32.61 x 50% = $16.31. And the income tax claimable portion is $217.39 x 50% = $108.70.
When your GST return becomes due, add up all the claimable GST amounts from the transactions that happened within the GST period, and include the total amount in your GST return. This amount is referred to as ‘Total GST paid’ in your GST return.
Be sure to claim the GST portion of the expense only in your GST return and not in your income tax return as well.
How to File GST Returns
When your GST return becomes due follow these instructions to file your return:
- Log in to myIR.
- Click Returns and transactions under ‘GST’ in your summary.
- Click File return for the due period.
- Select GST components (you can also use ‘Total sales and purchases’).
- Enter the Total GST collected on your income.
- Enter any Zero-rated supplies – this is income that is exempt from GST and won’t effect the amount of GST you pay.
- Click Next.
- Enter the Total GST paid on your expenses and click Next.
- You should now see a Total GST to pay or a Total GST refund figure. Check the declaration box and click Next.
- Adding attachments/receipts is optional, click Next.
- Select if you would like to make payment (generally it’s easier to make payment now rather than later). If you select yes, then follow the steps to make payment.
- Click Submit.
And that’s it, your GST return has been submitted. Well done! Your first return might take a while but they will get easier and faster with practice. To make filing GST returns fast and effortless, use Solo’s automatic GST returns.
How to Pay the Amount Due to IRD
Use the payment options provided when completing your return to pay the due amount to the IRD. Or visit your online banking and use the ‘pay tax’ function to make payment.
Filing GST returns with Solo
With Solo it’s never been easier to automatically calculate and file GST returns. Solo automatically calculates GST on income and expenses directly from your bank transactions and generates ready-to-file GST returns – simply copy and paste the figures from Solo into your online return.