Common GST Mistakes and How to Avoid Them
Goods and Services Tax (GST) is a crucial aspect of business operations in New Zealand, but it can be a source of confusion and errors for many business owners. Understanding common GST mistakes and how to avoid them is essential for maintaining compliance and avoiding potential penalties. Let’s explore some of the most frequent GST pitfalls and provide guidance on how to steer clear of them.
Failing to Register for GST When Required
One of the most common GST mistakes made by small business owners in New Zealand is failing to register for GST when their turnover reaches the threshold.
How to Avoid This:
- Keep a close eye on your turnover. If your business has a turnover of $60,000 or more in a rolling 12-month period, you are required to register for GST.
- Use the IRD’s online tool to determine your eligibility if you’re unsure.
- Set up reminders to check your turnover regularly, especially as you approach the threshold.
Incorrectly Calculating GST on Sales and Purchases
Another frequent error is the incorrect calculation of GST on sales and purchases. This can occur due to using the wrong GST rate or failing to include GST in prices.
How to Avoid This:
- Familiarise yourself with the standard GST rate of 15% and any exceptions that may apply to your business.
- Use accounting software to help calculate and track GST automatically.
- Double-check your calculations, especially for large transactions.
- Ensure your pricing clearly indicates whether GST is included or excluded.
Not Keeping Accurate Records of GST Transactions
Keeping precise records of GST transactions is crucial for compliance. Failure to do so can result in penalties and difficulties during audits.
How to Avoid This:
- Implement a robust record-keeping system, either digital or physical.
- Keep all invoices, receipts, and GST-related documents for at least seven years.
- Regularly reconcile your GST accounts to ensure accuracy.
- Consider using cloud-based accounting software that can help automate record-keeping.
Claiming GST on Non-Deductible Expenses
Many businesses make the mistake of claiming GST on expenses that are not eligible for GST deductions, such as personal expenses or certain entertainment costs.
How to Avoid This:
- Educate yourself on what expenses are GST-deductible and which are not.
- Keep personal and business expenses strictly separate.
- When in doubt, consult with a tax professional or refer to IRD guidelines.
Mishandling GST for Overseas Transactions
Dealing with GST for international transactions can be complex, and mistakes are common.
How to Avoid This:
- Understand the rules for zero-rating GST on exports.
- Be aware that if your overseas client has a presence in New Zealand, you may need to charge GST at 15%.
- Keep detailed records of all international transactions and their GST treatment.
- Consult with a tax expert if you’re unsure about the GST implications of your international dealings.
Not Setting Aside Money for GST Payments
Many businesses, especially new ones, fail to set aside money for GST payments, leading to cash flow issues when it’s time to pay.
How to Avoid This:
- Open a separate bank account for GST funds.
- Regularly transfer the GST component of your sales into this account.
- Consider using accounting software that can help you track and set aside GST automatically.
Choosing the Wrong Filing Frequency
Selecting an inappropriate GST filing frequency can impact your cash flow and increase administrative burden.
How to Avoid This:
- Assess your business’s turnover and cash flow patterns to determine the best filing frequency (monthly, bi-monthly, or six-monthly).
- Consult with an accountant to help you choose the most suitable option for your business.
- Review your filing frequency periodically as your business grows or changes.
Misunderstanding GST on Capital Assets
The treatment of GST on capital assets, such as vehicles or equipment, can be confusing for many business owners.
How to Avoid This:
- Understand the rules around claiming GST on capital asset purchases.
- Be aware of the need to make adjustments for private use of business assets.
- Keep detailed records of asset purchases and their GST treatment.
- Seek professional advice for significant capital asset transactions.
Failing to Account for GST on Barter Transactions
Many businesses forget that GST applies to barter transactions, where goods or services are exchanged without money changing hands.
How to Avoid This:
- Treat barter transactions as you would normal sales or purchases for GST purposes.
- Issue tax invoices for barter transactions where applicable.
- Keep accurate records of all barter deals and their GST implications.
Not Reviewing GST Returns Before Submission
Rushing to submit GST returns without thorough review can lead to errors and potential audits.
How to Avoid This:
- Set aside dedicated time to review your GST return before submission.
- Cross-check figures with your accounting records.
- Use GST reconciliation tools provided by accounting software.
- Consider having a second person review the return if possible.
Navigating the complexities of GST can be challenging, but understanding these common mistakes and implementing strategies to avoid them can significantly improve your GST compliance. Remember, GST is not just about paying tax; it’s an integral part of your business’s financial management.
If you’re ever in doubt about GST matters, don’t hesitate to seek professional advice. The IRD also provides extensive resources and guidance on GST compliance. By staying informed and proactive, you can ensure that your business remains GST-compliant and avoids costly errors.
Lastly, consider investing in good accounting software and possibly the services of a qualified accountant. These investments can pay off by helping you avoid GST mistakes, saving time, and potentially reducing your tax liability through proper management of your GST obligations.
Remember, GST compliance is an ongoing process. Stay vigilant, keep learning, and don’t be afraid to ask for help when you need it. With the right approach, you can turn GST from a potential pitfall into a well-managed aspect of your business operations.