Many small business owners (even those who’ve been in business for many years) get themselves worked up about GST but it’s generally pretty simple here in NZ providing you keep good business records.
The thing to remember about GST is that it’s NOT your money, it is merely additional monies you’ve collected from your customers and have temporary care of. In return for this duty, you are permitted to claim the GST added to your purchases and costs. How good is that? You are being paid to collect the GST!
Of course that’s easier to accept for those of us who issue sales invoices and then add GST to the value that we’re billing for. For those who charge a GST-inclusive price like retailers and cafe owners it becomes easier to get confused and think that the GST belongs to them, especially when the selling price of the goods or services is set by market forces and would be the same whether you were GST-registered or not.
In other countries (like the UK and India) GST is called VAT or Value Added Tax, the reason being that you are only being taxed on the value you add as the goods and services pass through your business or get created. I think this is a better name as it better explains how it works.
GST is becoming popular across the world as governments love it – easier to collect, hard to avoid, and unlike Income Tax it’s hidden in the cost of what you’re buying.
Business owners complain about their GST bills, but in general, the higher your GST bills, the better, as this means your sales are high in relation to your costs (unless or course say your wage bill is out of control).
With only a very few exceptions you have to add GST to virtually everything you sell and can claim GST on virtually everything you buy or every service you use. The main exceptions on the sales side are:
- Rents on residential property
- Land transactions (but watch out for the necessary conditions)
- The sale of a business as a going concern (likewise watch out for the required conditions)
On the outgoings side watch out for:
- Bank fees and interest
- Suppliers who are not GST registered.
Now there are some complicated areas, like for example on entertaining where its 50% claimable, assets used privately or where you sell both GST-able and non-GST-able items, so you will need to seek help with these.
Going back to good business records, many and varied are the ways that people try and account for GST. These range from third-hand corrupt spreadsheets which don’t add up, to adding up the ins and outs on their bank statements to using 10 year old accounting software which still calculates the GST at 12.5% but there’s no substitute for some simple to use, cheap accounting software. The software I find business owners get to grips with quickest is Banklink – no accounting knowledge required, very cheap, and very easy to use.