Gaining Financial Control with Detailed Reports

Small businesses form the backbone of New Zealand's economy, and understanding Goods and Services Tax (GST) is essential for their financial management and compliance. This guide covers the key GST considerations specifically tailored for small business owners, sole traders, and microbusinesses in New Zealand.

GST Basics for Small Businesses

Registration Threshold and Requirements

Understanding when to register for GST is the first step:

• Registration is mandatory if your turnover exceeds (or is expected to exceed) NZ$60,000 in any 12-month period
• Turnover includes all taxable supplies made in the course of your business
• Voluntary registration is possible below this threshold
• Registration requires completing the IR360 form or registering online through myIR
• Once registered, you generally need to remain registered for at least 12 months

Many small businesses start unregistered but need to monitor their turnover to know when registration becomes mandatory.

Pros and Cons of Voluntary Registration

For businesses below the threshold, consider these factors when deciding whether to register voluntarily:

• Advantages:
  • Ability to claim GST on business purchases and expenses
  • More professional appearance for B2B customers
  • Easier transition when you exceed the threshold
  • Potential cash flow advantage during start-up or investment periods
• Disadvantages:
  • Additional compliance obligations and paperwork
  • Potentially higher prices for non-GST registered customers
  • Regular filing deadlines and potential penalties
  • More complex accounting requirements

The decision should consider your specific business circumstances, customer base, and plans for growth.

Choosing Your Filing Frequency

Small businesses can choose different filing frequencies:

• Monthly: Suitable for businesses claiming regular GST refunds
• Two-monthly: The standard option that balances compliance costs and cash flow
• Six-monthly: Available for businesses with annual turnover under $500,000, reducing compliance burden

Most small businesses opt for either two-monthly or six-monthly filing to minimize administrative work.

GST Accounting Options for Small Businesses

Accounting Basis Options

Small businesses can choose from three accounting methods for GST:

• Invoice basis:
  • Account for GST when invoices are issued or received
  • Must pay GST on sales when invoiced, even if not yet paid
  • Can claim GST on purchases when invoiced, even if not yet paid
  • The default method but can create cash flow challenges
• Payments (cash) basis:
  • Account for GST when payments are made or received
  • Only pay GST on sales when customers pay you
  • Only claim GST on purchases when you pay suppliers
  • Available for businesses with turnover under $2 million
  • Often better for small businesses with cash flow concerns
• Hybrid basis:
  • Account for GST on sales on the invoice basis
  • Account for GST on purchases on the payments basis
  • Less commonly used by small businesses

The payments basis is often the most suitable for small businesses as it aligns GST payments with cash flow.

The Payments Basis Advantage

The payments basis offers several benefits for small businesses:

• Eliminates paying GST on unpaid invoices
• Simplifies record-keeping (follow your bank statements)
• Provides a more accurate picture of cash position
• Reduces the risk of cash flow problems from late-paying customers
• Often integrates better with simple bookkeeping systems

This method is available to most small businesses and worth considering for its practical benefits.

Flat Rate Scheme Option

For certain small businesses with annual turnover under $500,000:

• The ratio method allows calculation of GST based on a percentage of sales
• This can simplify GST calculations and record-keeping
• The ratio is based on your historical GST return pattern
• This method applies to provisional tax rather than GST directly
• While not a true flat rate scheme like in some countries, it does offer simplification

This option can reduce compliance complexity for eligible businesses.

Practical GST Management for Small Businesses

Setting Up Basic Systems

Implementing simple but effective GST systems from the start:

• Set up a separate business bank account to track business transactions
• Choose appropriate accounting software with GST functionality
• Create invoice templates that meet tax invoice requirements
• Establish a system for storing tax invoices and receipts
• Set up reminders for GST filing deadlines
• Consider setting aside GST collected in a separate account

Even simple systems can effectively support GST compliance if consistently maintained.

Affordable Accounting Software Options

Cost-effective software solutions for small businesses:

• Xero: Popular cloud-based option with GST return preparation
• Moniaro Books: NZ-focused with strong GST features, next-gen AI-powered transaction categorisation, smart GST suggestions, and automated bank feed reconciliation
• MYOB Essentials: Straightforward option with good GST support
• QuickBooks Online: International option with NZ GST capabilities
• Wave: Free option suitable for very small businesses
• Reckon One: Modular pricing suitable for growing businesses

Many of these options offer special pricing for startups or very small businesses.

Record-Keeping Essentials

Minimum record-keeping requirements for small business GST:

• Keep copies of all tax invoices issued to customers
• Keep tax invoices received from suppliers (for purchases over $50)
• Maintain bank statements showing all business transactions
• Record all cash transactions through your accounting system
• Document the business use percentage for mixed-use assets
• Retain all GST return calculations and supporting documents
• Keep records for at least 7 years

Good record-keeping makes GST return preparation straightforward and supports your position if questioned.

Tax Invoices and GST Documentation

Requirements for Tax Invoices You Issue

When issuing invoices to your customers:

• For supplies under $50: No tax invoice required, but basic records should be kept
• For supplies between $50 and $1,000:
  • The words "Tax Invoice"
  • Your name (or trade name) and GST number
  • Date of issue
  • Description of the goods or services
  • The total amount, including a statement about whether GST is included
• For supplies over $1,000, all the above plus:
  • The customer's name and address
  • Quantity or volume of goods or services
  • Either the GST amount separately shown or a statement that GST is included

Most accounting software can generate compliant tax invoices automatically.

Claiming GST on Business Purchases

To claim GST on your business expenses:

• Ensure you have a valid tax invoice for purchases over $50
• For purchases under $50, simpler documentation is acceptable
• The expense must be for business purposes
• Keep all documentation securely filed and accessible
• Ensure the supplier is GST registered (check for their GST number)
• For mixed-use expenses, only claim the business portion

Systematically collecting and storing valid tax invoices is essential for legitimate GST claims.

Simplified Documentation for Small Expenses

For smaller purchases under $50:

• Less detailed documentation is acceptable
• Basic till receipts are usually sufficient
• Must still show the supplier, date, description, and amount
• Should provide evidence the item was for business use
• Can be stored digitally (photos or scans) for convenience

This simplification helps reduce compliance burden for day-to-day small expenses.

GST Return Preparation and Filing

Step-by-Step Return Preparation

A methodical approach to preparing GST returns:

• Gather all sales records for the period (invoices, till receipts, etc.)
• Collect all purchase invoices and expense receipts
• Categorize transactions according to GST treatment
• Calculate total sales (including GST) and GST collected
• Calculate total purchases (including GST) and GST paid
• Identify any adjustments needed (bad debts, private use, etc.)
• Complete the GST return form with these figures
• Review for accuracy before filing

Following a consistent process reduces errors and makes returns quicker to prepare.

Common Small Business GST Errors

Be aware of these frequent mistakes:

• Claiming GST on exempt expenses (e.g., bank fees, interest, residential rent)
• Failing to account for private use of business assets
• Missing GST on cash sales or online platform sales
• Claiming GST without proper tax invoices
• Incorrect treatment of mixed-use expenses
• Errors in time of supply application
• Claiming GST on overseas purchases incorrectly

Checking specifically for these common errors can improve compliance.

Filing and Payment Options

Different ways to file and pay GST:

• File online through myIR (recommended)
• File through compatible accounting software
• File through a tax agent
• Payment options include:
  • Direct debit
  • Online banking
  • Credit/debit card (fees apply)
  • In-person at Westpac branches

Online filing and payment is generally the most efficient approach for small businesses.

GST for Specific Small Business Types

Sole Traders and Freelancers

Individual operators should consider:

• Clear separation of business and personal expenses
• Record-keeping for business use of personal assets (vehicles, home office)
• The payments basis advantage for irregular income
• GST implications when taking goods for personal use
• Potential advantages of voluntary registration below the threshold

Maintaining a clear boundary between business and personal finances is particularly important.

Small Retailers and E-Commerce

Retail businesses should focus on:

• Systems to capture all sales, including cash and online transactions
• Point-of-sale systems that correctly handle GST
• GST treatment of discounts, returns, and gift cards
• Inventory taken for personal use or staff consumption
• GST on shipping and delivery charges
• International sales and their GST treatment

Comprehensive sales recording is essential for accurate GST reporting.

Trades and Service Businesses

Tradespeople and service providers should consider:

• GST on materials purchased for specific jobs
• Vehicle and tool expenses (business portion)
• The payments basis advantage when clients pay after job completion
• GST treatment of deposits and progress payments
• Record-keeping for mixed-use tools and equipment
• Mobile solutions for creating tax invoices on-site

Job-specific tracking of materials and expenses helps ensure GST is correctly managed.

Managing GST on Common Small Business Expenses

Home Office Expenses

For businesses operated from home:

• GST can be claimed on the business portion of:
  • Utilities (power, gas, water, internet)
  • Home maintenance related to the business area
  • Home office furniture and equipment
  • Heating and cleaning costs
• The business portion is typically calculated based on the area used for business
• Mortgage interest and rates have specific GST treatment
• Keep clear records of calculations and business use

A systematic approach to home office expense allocation supports GST claims.

Vehicle Expenses

For vehicles used in the business:

• GST can be claimed on the business portion of:
  • Fuel and oil
  • Repairs and maintenance
  • WOF and registration
  • Insurance
  • The vehicle purchase (if used for business)
• Business use percentage should be supported by a logbook or similar record
• Simplified options may be available for low business use
• Adjustments may be needed if business use changes significantly

Vehicle expenses are often significant, making correct GST treatment important.

Entertainment and Meeting Expenses

For business entertainment and meetings:

• GST can generally be claimed on business entertainment expenses
• The income tax treatment may differ from the GST treatment
• Keep clear records of the business purpose
• Document who attended and their business connection
• For mixed business/private entertainment, apportion appropriately

The business connection and purpose should be clearly documented for all entertainment expenses.

GST Cash Flow Management

Setting Aside GST

Effective approaches to manage GST cash flow:

• Set up a separate bank account for GST
• Transfer the GST component of sales to this account as received
• Use this account to pay GST liabilities when due
• Factor in GST refunds when calculating transfers
• Regularly reconcile the GST account balance to expected GST position

This discipline helps ensure GST funds are available when needed rather than being used for operations.

Aligning GST with Business Cycles

Strategic approaches to GST timing:

• Choose a filing frequency that aligns with your business cycle
• Consider the timing of major purchases relative to GST returns
• Plan for seasonal variations in GST obligations
• Build GST payment timing into cash flow forecasts
• Consider the implications of different accounting bases on cash flow

Thoughtful alignment can reduce cash flow pressure from GST obligations.

Managing GST During Growth Phases

During business expansion:

• Anticipate increased GST obligations from growing sales
• Plan for GST on capital expenditures
• Consider filing frequency changes to manage cash flow
• Ensure systems scale appropriately with business growth
• Build GST implications into growth planning

Proactive GST management is particularly important during rapid growth phases.

Getting Help with GST

DIY Resources for Small Businesses

Free and low-cost resources include:

• Inland Revenue's website and small business GST guides
• Business.govt.nz resources and tools
• Accounting software tutorials and help centers
• Industry association guidance
• Online forums and communities for small business owners
• Webinars and workshops from Inland Revenue and others

These resources can help build your understanding of GST fundamentals.

When to Seek Professional Help

Consider professional assistance in these situations:

• Initial GST registration and system setup
• When facing unusual or complex transactions
• If you're behind on GST filings or have compliance issues
• When your business structure changes
• For major asset purchases or sales
• If you're unsure about specific GST treatments
• For periodic GST health checks

Professional advice can be cost-effective when it prevents errors or optimizes GST positions.

Affordable Professional Support Options

Cost-effective professional help for small businesses:

• Bookkeepers for routine GST preparation (often more affordable than accountants)
• Accounting packages with basic advisory services included
• Small business accounting specialists
• One-off consultations for specific issues
• Shared services through business hubs or collectives
• Mentoring through business support organizations

Many professionals offer specific small business packages designed to be affordable.

GST Compliance for Growing Small Businesses

Scaling Your GST Systems

As your business grows:

• Reassess your accounting software needs
• Implement more structured GST processes
• Consider more frequent GST reconciliations
• Develop written GST procedures
• Train staff on GST requirements
• Build in review processes before filing

Proactively scaling GST systems prevents compliance issues during growth.

Transitioning from Unregistered to Registered

When crossing the registration threshold:

• Update all pricing and marketing materials
• Modify invoice templates to include GST
• Communicate changes to regular customers
• Claim GST on trading stock on hand at registration
• Update contracts and terms of business
• Consider the impact on pricing strategy

A smooth transition maintains professional customer relationships while ensuring compliance.

Preparing for Inland Revenue Contact

Be ready for potential GST questions or reviews:

• Maintain organized, accessible GST records
• Document unusual transactions or GST treatments
• Keep calculations and working papers for GST returns
• Respond promptly to Inland Revenue inquiries
• Consider professional representation for formal reviews
• Use any review as an opportunity to improve systems

Good preparation reduces stress and demonstrates a commitment to compliance.

Conclusion

GST compliance for small businesses doesn't need to be overwhelming. By implementing simple but effective systems from the start, choosing the right accounting options for your situation, and maintaining consistent record-keeping practices, you can manage GST efficiently while focusing on growing your business.

Remember that GST is ultimately a pass-through tax├ö├ç├Âyou collect it from customers and pass it on to Inland Revenue. With proper management, it should have minimal impact on your business profitability while ensuring you meet your legal obligations.

As your business grows, your GST systems can evolve accordingly. Starting with good practices early makes this evolution smoother and reduces the risk of compliance issues. When in doubt, don't hesitate to seek advice├ö├ç├Âa small investment in professional guidance can prevent costly errors and give you confidence in your GST approach.