TAX DIRECTIONS. What you need to know about GST

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1 TAX DIRECTIONS Information to help your business Information to help your business What you need to know about GST IR 214 April 2014 IR 214 June 2007 This brochure gives you an overview of GST (goods and services tax). For more detailed information about all aspects of GST, read our GST guide (IR 375) and the other publications referred to in this guide. You ll find these on under Forms and guides. You ll also find plenty of general information about GST on this site. WHAT IS GST? GST is a tax on the supply of most goods and services in New Zealand. It also applies to imported goods and some imported services. GST is charged on the price of most goods and services sold generally at a rate of 15%. If you re registered for GST, you charge your customers GST. Most businesses increase their prices accordingly, but there s no requirement for you to do this. You will also need to complete and send GST returns to us. You pay us GST on the supplies you make (ie, on your sales) and claim a credit for the GST you pay to your suppliers (ie, on your business expenses and purchases). If, during a particular GST return period, there is more GST payable on your sales than the GST you ve paid on your expenses, you ll need to pay us the difference. If the GST you ve paid on your expenses is more than the GST payable on your sales, we ll refund you the difference. In some cases, for instance, where we require further information, we ll withhold the refund until we are satisfied that it is properly payable to you. Only registered persons can charge their customers GST or claim GST from us. WHO IS A REGISTERED PERSON? A registered person can be an individual in business, a partnership, company, trust or even a non-profit organisation. The business activity must be carried on continuously or regularly and provides, or be intended to provide, supplies of goods or services. To become a registered person you need to complete a GST registration (IR 360). You can do this at under Get it done online. For further information refer to our factsheet GST do you need to register? (IR 365). DO YOU NEED TO REGISTER FOR GST? You must register for GST if you re running a business and your annual turnover for this month and the last 11 months is more than $60,000 (excluding GST), or you expect it to be more than $60,000 over this month and the next 11 months. If your annual turnover does not exceed $60,000, registration is optional. If you haven t registered with us, but you re charging your customers GST, we treat you as being registered. You ll need to file GST returns and pay us the GST you ve collected. It s an offence not to apply for registration when your annual turnover exceeds $60,000. NON-RESIDENT GST BUSINESS CLAIMANTS Non-resident businesses that don t carry out a taxable activity in New Zealand, but receive goods or services here, may be able to register for and claim GST. For full details go to (keywords: non-resident GST)

2 WHAT IS TURNOVER AND HOW IS IT CALCULATED? Turnover is the total value of the supplies of goods and/or services (excluding GST) that have been sold from all your combined businesses. In most businesses this is the total amount of sales. Turnover also includes grants or subsidies you receive from the Crown or public authorities, or the value of barter transactions you make. To calculate your turnover you need to look at how much you ve sold over the last 12 months and estimate how much you think you ll sell over the next 12 months. If you have sold $60,000 worth or think your annual sales of goods and services will exceed $60,000 you must register for GST. WHAT DO YOU DO WHEN YOU VE REGISTERED FOR GST? You need to: keep full records so we can easily check your GST liability charge GST on all taxable supplies made in your business account for GST on taxable supplies made and received complete GST returns and pay any tax owing by the due date give tax invoices to other registered persons tell us about any changes, for example, if you stop being in business. TAX INVOICES You track your GST activities by using tax invoices. When you sell goods and services you need to give a tax invoice to your customers. When you buy goods and services you need to get a tax invoice from your supplier. However, we may approve exceptions to this general rule in cases where the buyer creates the tax invoice or where it would be impractical to issue a tax invoice. Tax invoices for sales or purchases of more than $1,000 (including GST) A tax invoice must show: the words tax invoice in a prominent place the name and GST number of the supplier the name and address of the customer the date the tax invoice was issued a description of the goods and services the quantity or volume of the goods and services, eg, litres of paint, hours of labour, kilos of apples the GST-exclusive price of the goods or services sold, the amount of GST charged, and the GST-inclusive price (or you can provide a statement that GST is included in the price). Tax invoices for sales or purchases of between $50 and $1,000 (including GST) We can accept a simplified tax invoice, but it must show: the words tax invoice in a prominent place the name and GST number of the supplier the date the tax invoice was issued a description of the goods and services the GST-inclusive price of the goods or services sold and a statement that GST is included in the price. For sales or purchases of less than $50 (including GST) A tax invoice is not necessary. However, to claim an expense, you need to keep proof of your purchase (eg, a receipt) and record details including: the date, description, cost and supplier. In most cases, you need to have a tax invoice before you can claim GST on an expense. The requirements for a tax invoice vary according to the amount of the sale. 2

3 WHAT SUPPLIES DO YOU PAY GST ON? You are liable for GST on most of the sales of goods and services that you make. If you do jobs after normal business hours or in the weekend ( perks or cashies ), you need to pay GST on these too. Other supplies subject to GST are: the sale of fixed assets (eg, plant, equipment, buildings) insurance payments that compensate for lost, stolen, or damaged assets (eg, trading stock, plant, equipment, buildings) grants and subsidies (including wage subsidies) from the Crown or a public authority. Tax on schedular payments If you re registered for GST you charge GST on goods and services supplied. Tax is deducted from the GST-exclusive amount you charge. Example Dean is an independent salesperson and is registered for GST. He promotes and sells some products on behalf of Kate, a manufacturer, and gives her a tax invoice setting out his commission: GST-exclusive commission $1,200 GST at 15% $ 180 GST-inclusive commission $1,380 The rate of tax on commission is 20 cents in the dollar. Kate calculates tax of $240 ($1,200 x 20%). She deducts it from Dean s fees and pays him the balance: Dean s fees (including GST) $1,380 less tax on schedular payments $ 240 Kate pays Dean $1,140 If you receive schedular payments and calculate the value of goods and services you ve supplied using your bank statements, you will under-declare these supplies unless you add the amount of the tax to the amount of the bank deposits. Dean must pay GST on $1,380 the amount of his fees. He calculates his supplies by adding up his bank deposits. He must add in the tax to ensure he pays the right amount of GST: Bank deposit $1,140 plus tax on schedular payments $ 240 Dean puts this amount in his GST return under total sales and income $1,380 Zero-rated supplies Some sales and purchases are charged at 0% GST rather than 15%. These are known as zero-rated supplies. The most common examples are sales of exported goods and services, and the sale of a going concern. A going concern is a business (or part of a business) with everything it needs to carry out its operations (eg, land, buildings, trading stock, equipment). The supply of a going concern will be zero-rated where: both buyer and seller are registered for GST, and they agree in writing for it to be the supply of a going concern, and they intend the supply to be a taxable activity (eg, a business) capable of being carried on as a going concern by the recipient. If you re buying or selling a business or a property we recommend you talk to a tax advisor, or call us before you complete your purchase/sale. Real estate transactions can get complicated and there may be a significant financial risk if you re not fully aware of the tax implications. 3

4 WHAT SUPPLIES DON T YOU PAY GST ON? Salaries and wages You don t pay GST on any income you earn as an employee. Sale of private property If you sell private property (eg, household goods or your private car), you don t charge GST to the buyer. Goods or services exempt from GST Some supplies are exempt from GST. The most common examples are financial services such as the payment or collection of interest, and the supply of renting a residential dwelling. You don t pay GST on exempt supplies. WHAT EXPENSES CAN YOU CLAIM? Generally, you can claim GST on your expenses or purchases if: the goods or services you have purchased are for the principal purpose of making taxable supplies in your business, and you hold a tax invoice from your supplier. Purchase of fixed assets You can claim GST when you purchase a fixed asset if you acquire or use it for the principal purpose of making taxable supplies in your business. WHAT EXPENSES CAN T YOU CLAIM? You can t claim GST on interest, salary or wages, or any private (non-business) expenses. If you take any business assets for your private use the business is charged GST on those drawings at the open market value of the goods supplied. Also, in most cases, you can t claim GST input tax on expenses where you don t hold a valid tax invoice for the goods or services supplied. You don t include exempt and zero-rated expenses or purchases in your GST return as you didn t pay any GST to acquire those exempt or zero-rated supplies. ADJUSTMENTS Sometimes, you may need to make adjustments in your GST return. A common adjustment is for private use (when you use business assets for your personal use, or when a private asset is used in the business). To help you calculate the amount of adjustment on your GST return use our GST adjustments calculation sheet (IR 372). Go to under Work it out. If an expense or asset is partly for business use and partly for private use, you need to make a private use adjustment so you only claim a GST credit for the business portion of the expense or asset. The method of apportionment you choose must ensure a fair and reasonable result. You may need to make an adjustment for the change of use of goods or services acquired. For example, you may have acquired goods or services to use privately and then use them in the business (taxable activity). Refer to our Tax Information Bulletin Vol 17, No 3 (April 2005), page 20 for further information about these adjustments. You can find our Tax Information Bulletins on under Newsletters and bulletins. If you re making a private use adjustment for a car, you could keep a logbook to help you calculate the apportionment. Generally, a three-month test period may be used for the subsequent three years, provided your business use of the vehicle does not change by more than 20%. Private use adjustments are made by sole traders and partnerships. Companies and employers registered for FBT (fringe benefit tax) don t need to make private use adjustments FBT covers private benefits received by shareholder-employees and employees. Those taxpayers would generally need to make a GST adjustment for the fringe benefits in their FBT return. Refer to our Fringe benefit tax guide (IR 409) for more detailed information. 4

5 Other common adjustments are for: entertainment expenses home office expenses bad debts barter arrangements (when you re paid in goods or services instead of money) GST paid to New Zealand Customs. Refer to our GST guide (IR 375) for more information about adjustments. SECONDHAND GOODS If you buy goods from someone who isn t registered for GST, or if you buy goods from someone who used the goods privately, you won t be charged GST and you won t get a tax invoice. You can still make a claim if the goods are secondhand and used for the principal purpose of making taxable supplies. Secondhand goods don t include new goods, new primary produce, rented or leased goods, or livestock but they do include land. Record the following information to support your claim: the name and address of the supplier the date of the purchase a description of the goods the quantity of the goods the price you paid. If you later export the secondhand goods (and zero-rate them), you need to make an adjustment. See our website /gst for more information. THE DIFFERENCE BETWEEN EXEMPT AND ZERO-RATED SUPPLIES Exempt supplies aren t subject to GST. Zero-rated supplies are subject to GST, but at a rate of 0%. Exempt supplies If you re running an exempt activity you don t pay GST on the income you receive and you can t claim any expenses related to the activity. If your total business is making exempt supplies you can t register for GST. Example Sarah owns a house which she rents out. This is an exempt activity. She doesn t pay GST on the rental income she receives and she doesn t claim the GST on any expenses she pays (eg, rates, insurance, repairs). If this was her only activity she could not register for GST. Zero-rated supplies If you re running a zero-rated activity, you charge GST at the rate of 0% on your income. You can claim expenses that relate to the activity. You may register for GST but, if your annual turnover (including zero-rated supplies) exceeds $60,000 you must register. Example Blair exports kiwifruit to Japan. This is a zero-rated activity. He charges his Japanese customer GST at the rate of 0%. He files GST returns and claims the GST on expenses related to the production of the kiwifruit (eg, fertilisers, sprays). 5

6 GST taxable period categories Category Taxable period Who can use it? A B 2 months (periods ending on the last day of January, March, May, July, September and November) 2 months (periods ending on the last day of February, April, June, August, October and December) All registered persons (except those with an annual turnover above $24 million) All registered persons (except those with an annual turnover above $24 million) C 6 months Only registered persons with an annual turnover of $500,000 or less* D 1 month All registered persons. Note: Category D must be used by those with an annual turnover of over $24 million * People with an annual turnover of greater than $500,000 may qualify for six-monthly returns in certain circumstances. Please see our GST guide (IR 375) for more information. GST RETURNS The purpose of a GST return is to record your income and expenses and calculate the GST you owe us or the refund you re entitled to. The GST return covers your taxable activities in a taxable period. You can choose any category of taxable period you like, subject to the restrictions in the table above. If you don t choose a period when you register, you ll automatically be given a two-month taxable period to align with your balance date. If you re registered for GST and liable for provisional tax your taxable period must be aligned to your balance date when choosing the two-monthly or six-monthly option. CHOOSING AN ACCOUNTING BASIS Which transactions go in what GST return? The timing depends on the accounting basis you use. There are three accounting bases: 1. invoice basis 2. payments basis 3. hybrid basis. If you don t request an accounting basis when you complete your registration form, we ll allocate you the invoice basis. Generally, the payments basis isn t permitted where annual turnover exceeds $2 million. In any case, a person may qualify to use the payments basis where we are satisfied that due to the nature, volume, and value of the taxable supplies made by the person, it would be appropriate for the person to file GST returns on a payments basis. 6

7 Accounting for supplies you ve made Accounting basis When to account for supplies that you ve made How Invoice Payments Hybrid When you issue an invoice or receive a payment, whichever comes first. If you receive a part payment you need to return the full amount of the sale When your customer pays you. You only return the amount of the payment you receive When you issue an invoice or receive a payment, whichever comes first Add up all payments you ve received from your customers, add your closing debtors and deduct your opening debtors* Add up all payments you ve received from your customers Add up all payments you ve received from your customers, add your closing debtors and deduct your opening debtors * Closing debtors are unpaid customer invoices at the end of the taxable period. Opening debtors are unpaid customer invoices at the start of the taxable period. Accounting for your expenses to purchase supplies Accounting basis When to account for supplies you have acquired How Invoice When you receive a tax invoice Add up all business payments you ve made to your suppliers, add your closing creditors and deduct your opening creditors* Payments Hybrid When you pay your supplier provided you have a tax invoice. You only claim the amount of your payment made When you pay your supplier provided you have a tax invoice Add up all business payments you ve made to your suppliers Add up all business payments you ve made to your suppliers * Closing creditors are unpaid supplier invoices at the end of the taxable period. Opening creditors are unpaid supplier invoices at the start of the taxable period. Invoice basis Advantages You may claim for GST on purchases before making payment. However, if you re claiming secondhand goods, you must make a payment before you can claim the credit for the purchase. Disadvantage You may have to account for GST to us before actually receiving payment. Payments basis Advantages The payments basis is suitable for small businesses using a cash system. Usually, you only account for GST when you receive payment from the customer. This benefits you if you give lengthy periods of credit to customers. Disadvantages You can only claim for GST on purchases or expenses after paying the supplier. Hybrid basis This is a combination of the payments and invoice basis. It can be a complicated system for record keeping and is not generally used by small businesses. 7

8 Changing your accounting basis You can apply in writing to Inland Revenue to change the basis of accounting. An adjustment is required following any change. Refer to our GST guide (IR 375). If you use the payments basis and your annual turnover exceeds $2 million you must tell Inland Revenue. Builders and recipients of progress payments or delayed settlements. There are special timing rules for progress payments and delayed settlement transactions. Our GST guide (IR 375) gives more details. DUE DATES In most cases, you need to file your GST return, and pay any GST owing, by the 28th of the month following the end of the taxable period. For example, if your taxable period ends on 30 June, the due date for your return and payment is 28 July. There are two exceptions around Christmas and Easter. For taxable periods ending on: 30 November your due date is 15 January 31 March your due date is 7 May. If the 28th (or 15 January, or 7 May) falls on a weekend or public holiday, you can file and pay your GST on the next business day. The quickest way to file your returns and make sure we receive them is electronically. Go to and click on Get it done online RECORD KEEPING One of your responsibilities as a business person is to keep business records. We could audit you at any time so record keeping helps you file accurate returns and also proves to others that your figures are correct. We may charge penalties if you don t meet your obligations. There are good business reasons to keep records: you ll have better control of your business raising finance will be easier you ll probably save time and money you ll be in a better position if you sell your business. You should keep: tax invoices receipts cheque butts deposit slips bank statements logbooks cashbooks working papers showing your calculations. Records can be either paper or stored on electronic media. If you aren t already keeping your records electronically (eg, disk, tape) we strongly suggest you consider it. This will make it easier for you to find information if we request it. How long must you keep your records? You need to keep your business records for at least seven years even if you stop being in business in the meantime. Your records must be in the English language and be kept in New Zealand. In some situations we may authorise a person to keep their records in another language or offshore. For more information about this and record keeping in general, please read our Smart business (IR 320) guide. 8

9 WHAT DO YOU DO WHEN YOU STOP BEING IN BUSINESS? If you ve stopped being in business, or if your turnover for the next 12 months will be less than $60,000, you can apply to cancel your GST registration. You ll still have to file returns up to your approved cancellation date. The final return is due on the last working day of the month following the cessation of your GST registration and covers the part of the last taxable period when you were registered. Please make sure you account for all money owed to you by your customers, and all money you owe to your suppliers. Example Jane files GST returns six monthly March and September. She ceases her business on 25 May Her final return will cover the period 1 April 2010 to 25 May 2010 and is due by 28 June If you cease your taxable activity you must, within 21 days, advise us (write or call) of the date you ceased and whether you intend to carry on any taxable activity within the next 12 months. If we re satisfied that you re not carrying on a taxable activity, we may cancel your registration, to take effect from the last day of the taxable period when you ceased activity. HAVING TROUBLE PAYING YOUR GST? It s good business sense to plan ahead so you can pay your GST on time. If you don t do this we ll charge interest and penalties for each month the debt remains unpaid. However, if you really can t pay on time, we can help, but it s important that you: file your returns with the correct information, even if you can t pay the GST, and contact us as soon as possible, preferably before the due date. In most cases you ll qualify for an arrangement where you can pay instalments over a period of time. If you keep to the terms, we won t charge you any monthly incremental penalties during the term of the arrangement, although interest and an initial 1% late payment penalty will be payable. Our Standard Practice Statement 05/11 states our policies about instalment arrangements. You ll find it in our Tax Information Bulletin Vol 17, No 10 (December 2005). Can t pay your GST because your customers are slow in paying you? Consider changing to the payments basis. Generally, you only pay GST on your income after your receive payment from your customer. If you have a tax advisor, check with them to see if the payments basis is right for you. Adjustment when you cancel your GST registration If you keep any assets for yourself after you stop being in business, you need to pay GST on the market value of the assets. Please see our GST guide (IR 375) for more information. 9

10 COMMON GST PROBLEMS We ve found people often get it wrong in these areas: Problem area Helpful tips Where to get more information Not registering for GST when your turnover exceeds $60,000 Register with us as soon as it becomes clear your turnover will exceed $60,000 over the coming year GST do you need to register? (IR 365) Not declaring all your income Paying expenses from cash takings (this can cause you to underdeclare the supplies you make) Claiming private expenses Not accounting for private use of business assets Don t forget those cashies and perks. Consider making a voluntary disclosure Make sure you add back your expenses when you are calculating your day s income Remember to only claim your business-related expenses Make private use adjustments (if you re a sole trader or a partnership) Contact us if you have any questions and see our guide Putting your tax returns right (IR 280) Contact us if you have any questions GST guide (IR 375) GST guide (IR 375) GST on fringe benefits Make an adjustment in your FBT return Fringe benefit tax guide (IR 409) Not keeping adequate records Real estate transactions (including buying or selling your business) Keep your tax invoices and write up your records as you go Get tax advice from a professional before you complete your purchase/sale GST guide (IR 375) Contact us if you have any questions MADE A MISTAKE? If you haven t filed a GST return or if you ve made a mistake in one, you can make a voluntary disclosure. This is when you tell us what s wrong with your taxes before we find out in some other way. There are significant benefits for you in making a voluntary disclosure (including reduced penalties), but you ll need to make a full and complete disclosure. For more information, please read our guide Putting your tax returns right (IR 280). However, if you made the mistake of not claiming the GST you paid on expenditure at the correct time you can, in most cases, claim the GST input within two years of being entitled to claim it. 10

11 PENALTIES AND INTEREST If you don t meet your GST obligations, eg, you fail to file a GST return, you could be prosecuted and, if convicted, be fined up to $50,000 and/or receive a five-year prison sentence. A person convicted of fraud may get a sentence of up to seven years. NOTES: Shortfall penalties If you understate the amount you ll be liable for in your GST return we may charge you penalties ranging from 20% for lack of reasonable care to 150% for evasion. However, shortfall penalties are reduced if you ve made a voluntary disclosure or you have a good compliance record with us. Late payment penalties These apply when you don t pay GST by the due date. We charge an initial 1% late payment penalty on the day after the due date; 4% on the amount outstanding seven days after due date, and a further 1% each month after that. If you have a good payment history with us we may contact you before we charge the late payment penalty. Late filing penalties If you don t file your return by the due date, you may have to pay a late filing penalty. The penalties are: $50 for each return on the payments accounting basis $250 for each return on the invoice or hybrid basis. Interest When you overpay the amount that is due, we ll generally pay you interest from the day after the due date. If you underpay we ll charge interest on the amount outstanding from the day after the original due date. These rates may change at any time, so please check our website for the current rates. 11

12 Have you checked out our website lately? Our website is easy to find your way around, and could help you save time. You ll find some of our most helpful services at: Get it done online Register as an employer Register your business for GST, FBT and a range of other tax types File your IR 3, IR 4, GST and FBT returns Work it out The tax on your taxable income PAYE tax on wages or salaries How long it will take to pay off your student loan Tax due dates Forms and guides You can read our publications, forms or returns online and print them out Contact us Make an appointment to see us Send us a general enquiry Find a phone number myir secure online services Inland Revenue s online services make it quicker and easier to manage your tax and entitlements. All your key information is in one place, making it easy to find balances and due dates, and update your personal information. Register for a myir secure online services account today and: request and confirm personal tax summaries file an EMS or IR 3 tax return register for GST and file your GST return instantly update your bank accounts, phone numbers, addresses and details view payments to or from Inland Revenue (including child support) apply for/manage your Working for Families Tax Credits see if you re due a refund. myir is available 24 hours a day, seven days a week. Go to myir, and click on Register to find out more. If you re also registered for voice ID and forget your password, you can reset it at any time. It only takes a few minutes to register. Call and follow the instructions. Make sure you have your IRD number handy. 12