Hey there accounting fans, last time I wrote about how GST works, this time I will be writing about what it means to be a GST registered business!
What does it mean to be a GST registered business?
It means that you are now responsible for collecting GST from your customers and returning that amount to the government.
But since you are GST-registered, you can also start claiming back the GST you have paid on the goods and services you have bought from other GST-registered businesses!
This means that when you file a GST return to the government, you take all the GST you have collected on sales, minus all the GST you have paid through purchases and you return the balance to the Government.
For example:
Travel Fun Inc is a GST-registered business. At the end of their two-month GST period they have collected GST in sales worth $1500 and they have incurred GST in purchases worth $700. This means that they return $800 to the government in their GST return.
If you happen to incur more GST on purchases than on sales, then you will get a refund from the Government. See this other example:
Hot Tops Ltd is a GST-registered business. At the end of their two-month GST period, they have collected GST in sales worth $300 and they have incurred GST in purchases worth $500. This means that they get a refund of $200 from the government.
A GST refund is a good thing right? Yay!
No, it isn’t – because it means that your business is spending more money than it is making! You’re running a business! Not a charity!
Ideally you want to be paying for GST more often than you receive refunds on GST! It means your business is making money!
So, GST registered businesses can claim GST on all expenses right?
No.
You can only claim GST on purchases made from GST-registered businesses. If the business you are buying from is not GST-registered, you CANNOT claim GST on those purchases.
Also, some classes of expenses are GST-exempt – but this largely depends on the current tax laws in your country. In NZ, certain GST exempt expenses include:
- Interest expenses
- Residential rent expenses (Commercial rent still incurs GST)
- Purchases made from overseas businesses that are less than $1,000 in amount*
- And others… – go talk to your accountant!
*please note that if the overseas business carries out regular taxable activities in NZ, they are still liable for GST (like Google, Microsoft, Apple, Facebook etc etc).
And as mentioned before, private sales do not incur GST either.
It is also worth noting that if you sell services to customers overseas, you DO NOT have to collect GST from them. But again, this is an area you will want to double check with your accountant or tax agent first.
So let’s summarise this GST guide:
- GST is a tax that is collected by GST registered businesses from their customers.
- EVERYONE that buys GST goods and services from a GST registered will be paying GST on their purchase.
- GST registered businesses can claim GST on their purchases against GST they have collected from their customers when calculating their GST return.
- Certain types of expenses and transactions are exempt from GST (only a few).
- And there you have it! A simple two-part guide to GST. Join me again next time when I discuss when is the best time to register your business for GST!
In the meantime,
Stay positive!