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The technology sector presents unique GST challenges and opportunities for New Zealand businesses. From software development to cloud services and digital products, understanding how GST applies to technology businesses is essential for compliance and effective financial management.

GST Basics for Technology Businesses

Registration Requirements

Like other businesses, technology companies must register for GST if their taxable supplies exceed (or are expected to exceed) NZ$60,000 in any 12-month period. For technology businesses, taxable supplies typically include:

• Software sales and licenses
• IT consulting and development services
• Cloud-based services and subscriptions
• Digital product sales
• Hardware sales
• Support and maintenance services

Most established technology businesses will exceed this threshold and need to register for GST.

Determining Business Location for GST

Technology businesses often operate across borders, raising questions about whether they are conducting business in New Zealand for GST purposes. Factors indicating a New Zealand business presence include:

• Having staff or offices physically located in New Zealand
• Having servers or other infrastructure in New Zealand
• Having a New Zealand domain name or targeting New Zealand customers specifically
• Receiving a significant portion of income from New Zealand customers
• Being incorporated or registered as a business in New Zealand

These factors help determine whether a technology business has sufficient connection to New Zealand to require GST registration.

GST on Software and Digital Products

Software Sales and Licensing

The GST treatment of software depends on the delivery method and customer location:

• Software sold to New Zealand customers (whether on physical media or by download) is subject to GST at 15%
• Software sold to overseas customers may qualify for zero-rating (0% GST)
• Software licenses follow similar rulesÔÇöGST applies based on where the customer uses the software
• Ongoing subscription licenses typically create a series of periodic supplies for GST purposes

The documentation and delivery method should support the GST treatment applied, particularly for zero-rated exports.

Software as a Service (SaaS)

Cloud-based software services have specific GST considerations:

• SaaS provided to New Zealand customers is subject to GST at 15%
• SaaS provided to overseas customers may qualify for zero-rating if it meets the requirements for exported services
• The ongoing nature of SaaS creates regular GST obligations throughout the subscription period
• Freemium models (with both free and paid tiers) only attract GST on the paid components

Technology businesses should implement systems to correctly identify customer location for GST purposes.

Mobile Apps and Digital Content

For mobile applications and digital content:

• Sales through app stores to New Zealand customers are subject to GST
• Many app stores handle GST collection and remittance for developers
• Direct sales of digital content (e-books, music, videos) to New Zealand customers attract GST
• In-app purchases by New Zealand users are subject to GST

App developers should understand the GST handling by their distribution platforms and ensure their own compliance obligations are met.

GST on Technology Services

IT Consulting and Development Services

For businesses providing technology consulting or development:

• Services provided to New Zealand clients are subject to GST at 15%
• Services provided to overseas clients may qualify for zero-rating if they meet the exported services criteria
• Time and materials billing typically creates GST obligations as invoices are issued
• Fixed-price contracts may create GST obligations at milestones or completion

Clear contracts specifying the nature, scope, and location of services help establish the correct GST treatment.

Remote Technical Support

Technical support services have specific GST considerations:

• Support provided to New Zealand customers is subject to GST at 15%
• Support provided to overseas customers may qualify for zero-rating
• Bundled support (included with product sales) follows the GST treatment of the main supply
• Support contracts typically create periodic supplies for GST purposes

The location where the support service is effectively used or enjoyed is a key factor in determining the GST treatment.

Web Hosting and Infrastructure Services

For providers of hosting and infrastructure:

• Services provided to New Zealand customers are subject to GST
• Services provided to overseas customers may qualify for zero-rating
• The physical location of servers is less important than the location of the customer
• These services typically create periodic supplies for GST purposes

Providers should implement systems to identify customer location and apply the correct GST treatment.

Zero-Rating for Exported Technology Services

Requirements for Zero-Rating

Technology services provided to overseas customers may qualify for zero-rating (0% GST) if they meet specific criteria:

• The services must be supplied to a person who is not resident in New Zealand and not present in New Zealand when the services are performed
• The services must not be directly in connection with land or movable property in New Zealand
• The services must not be physically performed in New Zealand to a person who is in New Zealand at the time
• The services must not be the supply of a right to services that will be performed in New Zealand

Many technology services meet these criteria when provided to overseas customers, but careful analysis is required for each situation.

Documenting Zero-Rated Supplies

To support zero-rating of technology services:

• Maintain evidence of customer location (IP addresses, correspondence, contracts)
• Document the nature of the services provided
• Retain evidence that services were performed remotely or outside New Zealand
• Include appropriate zero-rating statements on invoices
• Keep records of payment from overseas

This documentation helps support the zero-rating position in case of an Inland Revenue review.

Common Zero-Rating Pitfalls

Technology businesses should be aware of these common issues:

• Zero-rating services when the customer is temporarily in New Zealand
• Incorrectly zero-rating services that relate to New Zealand land or property
• Failing to collect sufficient evidence of customer location
• Incorrectly zero-rating services when the customer has a New Zealand presence

These errors can lead to GST shortfalls and potential penalties.

GST on Hardware and Physical Products

Hardware Sales

For technology businesses selling hardware:

• Sales to New Zealand customers are subject to GST at 15%
• Sales to overseas customers that are delivered outside New Zealand can be zero-rated
• Bundled hardware and software sales follow the predominant element rules
• Hardware provided as part of a service contract may have different GST treatment

The physical delivery location is a key factor in determining GST treatment for hardware.

Bundled Products and Services

Technology offerings often combine hardware, software, and services:

• The GST treatment generally follows the principal supply if one element clearly dominates
• If no element is dominant, each component may need separate GST treatment
• Contracts and invoices should clearly identify the different elements if separate GST treatment applies
• The time of supply for bundled offerings needs careful consideration

Businesses should document the basis for their GST treatment of complex bundled offerings.

GST on Imported Technology Services

Overseas Suppliers of Digital Services

Since October 2016, overseas suppliers of remote services (including digital services) to New Zealand consumers must:

• Register for New Zealand GST if their supplies exceed NZ$60,000 per year
• Charge and collect 15% GST on supplies to New Zealand consumers
• File GST returns and remit the GST to Inland Revenue
• Determine whether customers are in New Zealand and whether they are businesses or consumers

This "Netflix tax" ensures that overseas digital service providers compete on a level playing field with New Zealand suppliers.

GST Reverse Charge for Business Recipients

When New Zealand GST-registered businesses receive remote services from overseas:

• The overseas supplier doesn't generally need to charge GST if they know the customer is a GST-registered business
• Instead, the New Zealand business may need to apply the reverse charge mechanism
• This requires the business to self-assess GST on the imported service
• The GST is declared as both output tax and input tax in the same GST return (often resulting in a neutral position for fully taxable businesses)

The reverse charge helps maintain the integrity of the GST system for cross-border services.

Special GST Situations for Technology Businesses

Open Source and Free Products

For open source or free software and services:

• Genuinely free products without any consideration don't trigger GST obligations
• Freemium models with paid upgrades or features attract GST on the paid elements
• Donations related to open source projects may be outside the GST system if truly voluntary
• Advertising-supported "free" services may create GST obligations on the advertising revenue

The business model and revenue streams determine the GST implications.

Cryptocurrencies and Blockchain

For businesses involved in cryptocurrencies and blockchain:

• The supply of cryptocurrencies is generally treated as an exempt financial service for GST purposes
• Mining rewards and transaction fees in cryptocurrency are typically outside the GST system
• Exchange services between cryptocurrencies and fiat currency may be exempt financial services
• Blockchain services unrelated to cryptocurrencies follow standard GST rules

This is an evolving area of tax law, and specific advice may be needed for complex situations.

Marketplace Platforms

Technology businesses operating marketplace platforms have special considerations:

• Electronic marketplaces may be responsible for GST on supplies made through their platform
• The marketplace operator may need to register, collect, and return GST
• Commission or service fees charged to sellers are typically subject to GST
• Documentation should clearly establish the role of each party for GST purposes

Platform operators should understand their GST obligations for both their own services and third-party sales.

GST Compliance for Technology Businesses

Systems for Customer Location

Technology businesses need robust systems to identify customer location:

• IP address tracking (with appropriate privacy considerations)
• Customer self-declaration of location
• Payment method information (billing address, credit card country)
• Customer registration data
• Non-contradictory evidence policy

These systems help ensure the correct GST treatment based on customer location.

Accounting Software and Automation

Technology businesses can leverage automation for GST compliance:

• Implement accounting software that handles GST calculations based on customer location
• Automate tax invoice generation with correct GST treatment
• Use systems that track time of supply for recurring services
• Integrate payment gateways with GST management systems
• Popular options in New Zealand include Xero, MYOB, Moniaro Books, and QuickBooks

These tools can significantly reduce the compliance burden and minimize errors.

Record-Keeping Requirements

Technology businesses should maintain detailed GST records, including:

• Evidence of customer location and GST status
• Contracts and service agreements supporting GST treatment
• Tax invoices for all sales and purchases
• Documentation of the basis for zero-rating
• Records of imported services and reverse charge calculations

These records must be kept for at least 7 years from the end of the tax year to which they relate.

GST for Specific Technology Business Models

Software Development Companies

Businesses developing and selling software should consider:

• The distinction between custom development (service) and product sales
• Whether software is delivered physically, electronically, or as a service
• The location of customers and deployment of the software
• Licensing models and their GST implications
• Whether support and maintenance are bundled or separate

Managed Service Providers

MSPs providing ongoing technology services should consider:

• The periodic nature of services for time of supply purposes
• Whether hardware is included as part of the service
• Customer location for each service provided
• Service level agreements and their GST implications
• Whether different components should be treated separately for GST

Digital Content Creators

Creators of digital content (e-books, courses, music, videos) should consider:

• The distinction between one-time sales and subscription models
• Distribution platform GST handling (direct vs. third-party platforms)
• Customer location verification methods
• Bundled physical and digital content
• Pricing strategies that account for GST

Common GST Challenges for Technology Businesses

International Customer Base

Managing GST with customers around the world:

• Implementing systems to correctly identify customer location
• Understanding when services qualify for zero-rating
• Managing GST compliance in multiple jurisdictions
• Pricing strategies that account for different GST treatments
• Documenting zero-rated supplies effectively

Rapid Business Model Evolution

Adapting GST compliance as technology business models change:

• Reviewing GST implications when introducing new products or services
• Adapting to changing delivery methods (e.g., from on-premises to cloud)
• Managing GST during transition periods
• Considering GST implications in product design and pricing
• Maintaining compliance during rapid growth or international expansion

Complex Billing and Revenue Models

Handling GST with sophisticated revenue streams:

• Usage-based billing and its GST timing implications
• Freemium models with conversion to paid services
• Multi-tier subscription offerings
• Bundled products and services with different GST treatments
• Revenue recognition alignment with GST obligations

GST Planning for Technology Businesses

GST Cash Flow Management

Optimizing GST impact on cash flow:

• Choose the most advantageous filing frequency (monthly, two-monthly, or six-monthly)
• Select the accounting basis that best suits the business model (invoice, payments, or hybrid)
• Consider GST implications when setting payment terms
• Align major purchases with GST return periods
• Factor GST obligations into cash flow forecasts

Pricing Strategies

Incorporating GST considerations into pricing:

• Decide whether to display GST-inclusive or exclusive prices (consumer vs. business markets)
• Consider GST implications for competitive pricing internationally
• Factor in GST when setting subscription tiers
• Align pricing structures with GST compliance requirements
• Consider regional pricing strategies that account for GST differences

Professional Assistance

Given the complexity of technology sector GST:

• Consider engaging an accountant with technology sector expertise
• Seek advice when entering new markets or changing business models
• Review GST compliance systems periodically
• Consider obtaining rulings for uncertain or complex situations
• The cost of professional advice is generally GST-deductible and can prevent costly errors

Conclusion

GST compliance for technology businesses involves navigating complex rules around digital products, cross-border services, and evolving business models. The key challenges often relate to determining customer location, qualifying for zero-rating on exports, and managing compliance across multiple jurisdictions.

By implementing robust systems to identify customer location and applying the correct GST treatment to each transaction, technology businesses can ensure compliance while optimizing their GST position. Automation and good record-keeping practices are particularly valuable in this sector given the high transaction volumes and global customer base typical of many technology businesses.

As technology continues to evolve, GST rules will likely continue to adapt. Staying informed about changes and seeking professional advice when needed helps technology businesses navigate this complex area of tax compliance effectively.