Common GST Mistakes and How to Avoid Them

Common GST Mistakes and How to Avoid Them

Filing Goods and Services Tax (GST) returns in New Zealand can be straightforward, but some common mistakes may lead to penalties or audit risks. Here's a guide to the most frequent GST errors businesses make and tips for avoiding them.

Incorrect GST Filing Basis

Problem: Using the wrong GST accounting basis, such as invoice basis instead of payments basis, can lead to discrepancies in your GST returns.

When you register for GST, you choose one of three accounting methods:

• Payments basis: You account for GST when you make or receive payments.
• Invoice basis: You account for GST when you issue or receive invoices, regardless of when payment occurs.
• Hybrid basis: A combination where you account for GST on sales on an invoice basis and on purchases on a payments basis.

Using the wrong basis can cause significant errors in your GST returns. For example, if you're registered on an invoice basis but only report GST when payments are made or received, you might underreport your GST obligations.

Solution: Check your registration details in myIR to confirm your accounting basis and ensure your records match this method. Consult Inland Revenue or a tax professional if unsure.

If you find you've been using the wrong basis, you may need to:

• Adjust your accounting systems to align with your registered basis
• Review past returns to identify any discrepancies
• Consider filing amended returns if significant errors are found
• Alternatively, you might apply to change your accounting basis if another method would better suit your business

Over-Claiming GST on Private Expenses

Problem: Claiming GST on personal expenses or the private portion of business items may lead to overstated deductions.

This is particularly common for:

• Vehicle expenses where the vehicle is used for both business and personal purposes
• Home office expenses
• Mobile phones and electronic devices used for both business and personal reasons
• Travel expenses that include personal elements
• Meals and entertainment that aren't entirely business-related

Solution: Separate business and private expenses. If an item is partly for personal use, claim only the business portion of GST.

To implement this solution effectively:

• Keep detailed logs for mixed-use assets like vehicles (recording business vs. personal kilometres)
• Establish clear methodologies for calculating business-use percentages
• Review these percentages regularly and adjust as needed
• Consider having separate accounts or credit cards for business and personal expenses
• Document your calculations for partial GST claims

Remember that Inland Revenue may request evidence of how you determined the business portion during an audit, so maintaining good records is essential.

Misclassifying Zero-Rated and Exempt Supplies

Problem: Mixing up zero-rated supplies (like exports) with exempt supplies (e.g., financial services) can lead to incorrect GST calculations.

The difference between these categories is significant:

• Zero-rated supplies: GST applies at 0%, you don't charge GST, but you can claim input tax credits on related expenses.
• Exempt supplies: Outside the GST system entirely, you don't charge GST, and you generally cannot claim input tax credits on related expenses.

Common zero-rated supplies include:

• Exports of goods and services
• Sale of going concerns (businesses sold as operating entities)
• Certain supplies to registered non-residents

Common exempt supplies include:

• Financial services (interest, insurance, etc.)
• Residential rental accommodation
• Certain educational services
• Donated goods and services by non-profit bodies

Solution: Understand the difference between zero-rated and exempt supplies. When in doubt, check the Inland Revenue GST guidelines or consult a tax expert.

Practical steps include:

• Developing a classification system in your accounting software
• Creating a reference guide specific to your business's common transactions
• Training staff involved in invoicing or GST filing on these distinctions
• Reviewing classifications periodically, especially for unusual or new transaction types

Errors in Input Tax Claims

Problem: Incorrectly claiming GST on non-claimable expenses, such as entertainment or overseas purchases, can lead to over-claimed GST.

Common errors include claiming GST on:

• Purchases from non-GST registered businesses
• Overseas purchases where GST wasn't charged
• Expenses related to exempt supplies
• Entertainment expenses that are only 50% deductible
• Expenses without valid tax invoices
• Fines and penalties (which are never eligible for GST claims)

Solution: Only claim GST on eligible business expenses. For partially claimable items, like entertainment, apply the correct percentage (usually 50%).

To improve accuracy:

• Check that suppliers are GST-registered before claiming input tax
• Ensure you have valid tax invoices for all claims over $50
• Use accounting software that helps identify non-claimable or partially claimable expenses
• Create a checklist of common expenses and their GST status for reference
• Conduct periodic reviews of GST claims to catch any systematic errors

Ignoring GST Adjustments for Business Assets

Problem: Failing to adjust GST for assets used both privately and for business can lead to inaccurate reporting.

The GST Act requires adjustments in several scenarios:

• When an asset purchased for business is used privately
• When the business-use percentage changes over time
• When assets are disposed of or the business ceases
• When there are significant changes in how an asset is used

Solution: If an asset is used for both business and personal purposes, apportion the GST accordingly. Update records regularly to reflect any changes in usage.

Best practices include:

• Conducting an annual review of significant assets and their business-use percentages
• Maintaining logs or other documentation to support your business-use calculations
• Setting calendar reminders for when adjustments might be required
• Using a consistent methodology for calculating adjustments
• Documenting the basis for any adjustments made

For significant assets like property or expensive equipment, consider consulting a tax professional to ensure adjustments are calculated correctly.

Missing Filing Deadlines

Problem: Missing the GST filing deadline leads to penalties and interest charges from Inland Revenue.

Late filing penalties can add up quickly:

• For monthly or two-monthly filers: $250 per late return
• For six-monthly filers: $50 per late return

Additionally, late payment penalties and interest may apply to any unpaid GST:

• An initial 1% penalty the day after the due date
• A further 4% penalty if still unpaid after 7 days
• Ongoing interest charges until the amount is paid

Solution: Set reminders for each filing period (monthly, two-monthly, or six-monthly). Setting up direct debit or early submission can help avoid missed deadlines.

Effective strategies include:

• Adding GST due dates to your business calendar with reminders 1-2 weeks in advance
• Assigning clear responsibility for GST filing if you have staff
• Preparing returns early, even if you plan to pay closer to the due date
• Setting up direct debit arrangements with Inland Revenue
• Creating a GST filing checklist to ensure all steps are completed
• Building in buffer time for unexpected issues

If you anticipate being unable to meet a deadline, contact Inland Revenue before the due date. They may be able to work with you to minimize penalties.

Failing to Correct Errors in Previous Returns

Problem: Errors in previous GST returns, if uncorrected, may carry over and lead to larger discrepancies or potential audits.

Common scenarios where errors might occur include:

• Discovering invoices after a return has been filed
• Identifying calculation errors in past returns
• Finding that GST was incorrectly applied to certain transactions
• Realizing that adjustments should have been made but weren't

Solution: For minor errors, correct them in the next GST return. For major issues, contact Inland Revenue directly to discuss necessary amendments.

Guidelines for corrections:

• Errors under $1,000 can typically be corrected in your next GST return
• Larger errors should be addressed by filing an amended return or contacting Inland Revenue
• Document the nature of the error and how it was corrected
• Consider whether the error indicates a systemic issue that needs addressing
• If you've made the same error across multiple returns, seek professional advice on the best approach for correction

Being proactive about correcting errors demonstrates good faith and may help minimize penalties if the errors would have resulted in underpaid GST.

Inadequate Record-Keeping

Problem: Poor record-keeping makes it difficult to accurately complete GST returns and can create problems during an Inland Revenue audit.

Inadequate records might include:

• Missing or incomplete tax invoices
• Lack of documentation for business-use calculations
• Insufficient records of zero-rated or exempt supplies
• Poor tracking of GST on imports or exports
• Failure to keep records for the required 7-year period

Solution: Implement a robust record-keeping system that captures all necessary information for GST compliance.

Effective record-keeping includes:

• Maintaining organized files (physical or digital) of all tax invoices
• Using accounting software that properly tracks GST
• Regularly backing up electronic records
• Documenting the basis for GST treatments and adjustments
• Retaining all GST-related records for at least 7 years
• Creating clear procedures for handling GST documentation

Good record-keeping not only ensures compliance but also makes the GST filing process much simpler and less time-consuming.

Incorrectly Handling Special Transactions

Problem: Some transactions have special GST rules that, if misunderstood, can lead to incorrect GST treatment.

Transactions with special GST considerations include:

• Second-hand goods: Special input tax credit rules apply when purchasing from non-registered individuals
• Land transactions: Complex rules depending on the nature of the property and the status of the buyer and seller
• Insurance settlements: Special rules for GST treatment of insurance payouts
• Barter transactions: Need to account for GST even though no money changes hands
• Related party transactions: May need to use market value rather than actual price for GST purposes

Solution: Research the specific GST requirements for unusual or complex transactions. When in doubt, seek professional advice.

Best practices include:

• Developing specific procedures for handling common special transactions in your business
• Consulting with a tax professional before completing major or unusual transactions
• Documenting the basis for the GST treatment applied
• Staying updated on changes to special transaction rules
• Using specific codes in your accounting system to identify transactions with special GST treatment

Misunderstanding GST Registration Requirements

Problem: Failing to register for GST when required or registering unnecessarily can create compliance issues and financial implications.

Common misconceptions include:

• Not realizing that the $60,000 threshold applies to any consecutive 12-month period, not just the financial year
• Failing to register when reasonably expecting to exceed the threshold
• Not understanding the implications of voluntary registration
• Confusion about when registration takes effect

Solution: Understand the registration thresholds and requirements. Monitor your turnover regularly to ensure timely registration if needed.

Practical tips include:

• Tracking rolling 12-month turnover if you're close to the threshold
• Setting up alerts when approaching the $60,000 mark
• Assessing the pros and cons of voluntary registration if below the threshold
• Understanding the backdating rules if you exceed the threshold
• Considering the cash flow implications of GST registration

If you realize you should have registered earlier, contact Inland Revenue promptly to discuss your situation and minimize potential penalties.

Not Separating GST in Cash Flow Management

Problem: Treating GST collected as business income can lead to cash flow problems when it's time to pay Inland Revenue.

This issue is particularly common among:

• New businesses unfamiliar with GST obligations
• Businesses with irregular income patterns
• Businesses experiencing growth or tight cash flow
• Businesses with six-monthly filing who need to manage GST over a longer period

Solution: Set aside GST collected in a separate account, or at least mentally allocate it as money owed to Inland Revenue rather than business income.

Effective GST cash flow management includes:

• Opening a separate bank account for GST funds
• Transferring the GST portion of each payment received to this account
• Regularly reconciling the GST account to ensure sufficient funds for payment
• Including GST obligations in cash flow forecasting
• For seasonal businesses, setting aside extra during high-income periods

This approach not only ensures you have funds available when GST is due but also provides a clearer picture of your true business income.

Preventative Measures and Best Practices

To avoid these common GST mistakes, consider implementing these preventative measures:

Regular Systems Check

Periodically review your GST processes to ensure they remain accurate and up-to-date:

• Confirm your GST registration details are correct
• Verify that your accounting system correctly handles GST
• Check that staff understand GST requirements relevant to their roles
• Review how special transactions are processed

Staff Training

Ensure that everyone involved in transactions or financial processes understands GST basics:

• Provide training on GST principles relevant to your business
• Create clear procedures for handling GST-related tasks
• Ensure staff know when to seek assistance with GST questions

Use Technology Effectively

Leverage accounting software and other tools to minimize GST errors:

• Set up your accounting software to correctly track different GST categories
• Use automated reminders for GST filing deadlines
• Consider GST-specific add-ons or features that can help with compliance
• Regularly update your software to incorporate GST rate or rule changes

Professional Support

Consider engaging professional help, especially for complex situations:

• Consult with an accountant familiar with your industry's GST specifics
• Consider having a professional review your GST systems periodically
• Seek advice before undertaking unusual or high-value transactions

Stay Informed

Keep up with changes to GST rules and requirements:

• Subscribe to Inland Revenue updates
• Follow reputable tax news sources
• Join industry associations that provide GST guidance
• Regularly check the Inland Revenue website for changes

Conclusion

GST compliance doesn't have to be complicated. By understanding these common mistakes and implementing preventative measures, you can avoid penalties, reduce stress, and ensure your business meets its GST obligations efficiently.

Remember that GST is essentially a tax you collect on behalf of the governmentÔÇögetting it right is part of good business practice and helps maintain positive standing with Inland Revenue.

If you do make a mistake, addressing it promptly and transparently is always the best approach. Inland Revenue generally responds more favorably to voluntary disclosures than to issues discovered during audits.

By establishing good GST habits now, you'll save time, reduce stress, and avoid unnecessary costs in the long run.