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30 Aug 2018
The first question is what type of business is it? Most business income is GSTable; the main exceptions are residential rental income and some specialized financial service products (such as loans, interest, currency exchange, stocks and shares) which are exempt.
If the annual turnover (excluding exempt income) either is or is expected to be greater than $60,000 per year, then you are required to register for GST.
There is a choice whether you want to prepare GST returns monthly, two monthly or six monthly. Most businesses opt for filing every two months. If annual turnover is less than $500,000 you can choose to file six monthly. If you are a large business and turnover exceeds $24m, you are required to file GST returns monthly.
You also get to choose whether you want to file on an invoice basis or a payments basis. Invoice basis means you pay GST as soon as you raise an invoice and claim GST as soon as you receive an invoice from a supplier. Payments basis as the name suggests means that you only pay GST once a customer has paid you and cannot claim GST until you have paid your supplier. Most businesses opt for the simpler payments basis, which also means you don’t have to pay GST until a customer pays you. If your annual turnover is above $2m you must use the invoice basis.
Now let’s assume that turnover is initially going to be below $60,000. There is no obligation to register for GST, but you may want to register voluntarily.
If you are registered for GST, you can claim back the GST which you have paid on products, assets, and other expenses relating to the business. It is quite common for a new business to incur substantial set up expenses, acquiring the initial equipment to run the business which they would like to reclaim GST on.
If you decide to register for GST to be able to claim the GST you have paid, you must charge GST on your sales or services.
The most important question is – who are your customers? If your customers are other businesses who can claim back the GST, as they are GST registered, then it is more likely that you want to be GST registered. You can charge your price and add GST, as the business customer will claim back the GST from the IRD.
If you mainly provide goods or services to customers who aren’t GST registered, you probably want to avoid being GST registered if possible.
For example, a lawn mowing contractor who mainly cuts commercial blocks or olive groves, probably wants to be GST registered, as his customers can reclaim the GST element from the IRD.
Contrast this with a lawn mowing contractor who does mainly residential property – his customers will be paying the full value of the invoice and not reclaiming anything back from the IRD. Therefore, the contractor will not want to make his invoice 15% higher (than his non-GST registered competitors) by having to charge GST. If he sticks to competitive price, the GST registered contractor will be less profitable as he has to give part of his net income to IRD as GST.
If you are looking to start a business, the IRD have made some good “Introduction to Business” videos which are worth watching. Click on the link here https://www.ird.govt.nz/help/demo/intro-bus-vids/
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