(5 minute read – GST registration)
Hi there accounting fans!
We’re back with some hard hitting tax stuff and today we’re going to take a look at GST!
The GST advice in this article is for NZ businesses. If you’re outside NZ, you may want to double check with a local accountant for more specific advice.
If you’re not sure how GST works, you need to read this article to find out more!
So let’s tackle the main question posed by this article: Is GST registration important for your business?
Is GST registration mandatory for you?
In Aotearoa NZ, if you are making more than $60,000 NZD in sales over the last 12 months or predict that your sales will be higher than $60,000 over the next 12 months – it is mandatory for you to be GST registered.
This sales figures is based on GST taxable activities. This pretty much covers most business activities in NZ with a few exceptions. Like income on residential properties (rental, boarding, etc) and income derived from investing activities (interest income, funds income, etc.).
Please note that the threshold is SALES and not PROFIT. Sales are what you bill your customers. Profit comes after deducting expenses from your sales.
Need a refresher on income, expenses and profit? Check out this article.
If this is you. Stop reading and go and register for GST if you haven’t done so already. GST is part and parcel of your life and you have no choice on the matter. Good luck!
Is GST registration required in your industry?
Some industries that hire contract workers may have a common practice of tacking on GST onto all their contractor invoices. For example, Hospitals and some private clinics may insist on paying our their contractors GST inclusive amounts. If you work for a business that does this, you will have to get GST registered.
Please note that once you are GST registered, you need to make sure that ALL your clients get charged GST. You can’t pick and choose which clients to collect GST on.
Do you need GST registration to access funding/assistance?
Some types of funding, such as the Regional Business Partner Network funding requires that businesses be GST registered. Even if they have sales of less than $60,000 a year. If you are looking to apply for this funding (which we are a service provider for!) you must be GST registered. No ifs, no buts.
Don’t want to get GST registered? Then you can’t access the funding. It’s that simple.
Are you a pre-revenue firm?
Some businesses require a huge amount of capital outlay. This can be a purchase of fixed assets, upfront licensing fees and other expenses. Often, research heavy startups will be in a pre-revenue (not making money) stage for some time. In this case, being GST registered will allow you to claim refunds on GST expenses while the business is loss making.
It may be tax efficient to be GST registered if you expect a huge amount of expenditure at your business start-up. Bear in mind that this efficiency diminishes once you start making a profit.
What about everyone else?
Good question.
If you don’t fall into any of the above categories, my professional advice is to not get GST registered. There are quite a few myths abound why GST registering is ‘important’. So let’s debunk some of those myths:
GST Registration myth #1: Being able to claim back GST refunds
This is the biggest myth there is out there. Being GST registered DOES allow you to claim back GST expenses, yes. In fact, you can get GST refunds if you’ve spent more than you’ve earned for that period. Yay! Everyone loves refunds – which is one of the main sells of being GST registered.
However, GST paid on expenses are simply set off against GST that you’ve collected on sales. Occasionally you may get a refund. But if you are ALWAYS getting refunds this means that:
- The vast majority of your clients are based overseas (you don’t charge GST to overseas clients)
- Your business is failing OR
- You’re committing tax fraud.
90% of the time you will be making GST payments and not getting refunds (assuming most of your clients are based in Aotearoa). This is a sign of a healthy and thriving business.
It is possible that at the start up phase, you will be spending more than you are earning (see pre-revenue firm above). But if that is the case you still want to work hard on your business’ money making ability ASAP. Claiming GST refunds all the time is nothing to be proud about.
GST Registration myth #2: It is more tax efficient
No, it’s not. Not for your average profit making business anyway.
If you are not GST registered, when you spend on your business, the WHOLE amount (including the GST) are deductible for income tax. Let’s take an example:
Example #1: No GST Registration
Yooru Ltd is not GST registered and they purchase a $115 keyboard from Noel Leeming (which is GST registered). When calculating their income tax payable for the year, they take their sales amount of $1,000 (it’s a slow year). And then they minus the whole amount of $115 for the keyboard. This results in a taxable income of $885. At 28% corporate tax this is tax payable of $247.80
Example #2: With GST Registration
If Yooru was GST registered, they would only be able to deduct $100 as an expense. Because $15 (15% of the expense) would be set aside for GST. This means that their income tax payable would be $1,000 minus $100 which is a taxable income of $900. At 28% corporate tax this is tax payable of $252.
Also, remember for that $1,000 of sales, Yooru would have to return $150 GST they collected from their customers to the IRD for GST. This can be offset with the $15 they paid for the expense, but it’s still a net GST to pay of $135 to the IRD ($150-$15).
From the simple illustration above, you can see that your income tax is lower if you are not GST registered. The impact of being able to claim GST expenses is offset by the fact that you are still paying GST on amounts collected from your customers. In other words it is negligible.
Sure, if you’re making a big purchase like a car or some other plant and machinery – you might look at that fat GST refund and think ‘wow that would be cool to claim all that back!’
But you need to remember that if you’re not GST registered, that GST amount goes towards the value of your fixed asset and gives you more to claim back for depreciation (which will further reduce your income tax payable).
And look, if you’re going to make a loss anyway, that loss can be carried forward and used to offset any profit you make in the future.
GST registration myth #3: It’s good for cash flow
So from a tax point of view, being GST registered doesn’t help. But hey, if you spend more than you earn, at least you can get GST refunds within the financial period. You don’t get cash refunds from the IRD if you make a loss under income tax.
But look, if your entire cash flow strategy hinges on getting cash refunds from the government, you’ve got a problem. You have more pressing issues to worry about than whether or not your business should be GST registered.
To register or not register for GST?
To keep it simple – if you are a small business earning less than $60,000 a year for sales. Don’t be GST registered.
If you want to access funding or do work for businesses that requires their suppliers to be GST registered – then by all means, get registered.
If you are a pre-revenue firm with a huge capital outlay, then being GST registered can be more tax efficient at the start.
Otherwise there is no tax or financial benefit to being GST registered. Not to mention the additional legislative headache of having to manage your GST returns. Also, it is common for some accounting firms to charge extra to do your GST returns (not us at SH Advisory though!).
Keep it simple team, register for GST once it is mandatory to do so. No sooner than that.
Stay positive!