Future of GST: What Changes Are Expected and How They May Affect You

Self-employed contractors and freelancers face unique GST considerations in New Zealand. Whether you're a tradesperson, consultant, creative professional, or gig worker, understanding your GST obligations is essential for compliance and business success.

GST Registration Requirements

The $60,000 Threshold

As with other businesses, contractors and freelancers must register for GST if their taxable supplies exceed (or are expected to exceed) NZ$60,000 in any 12-month period. For self-employed individuals, this includes:

• All fees and income from your contracting or freelancing work
• Regular and one-off contracts
• Products sold in addition to services
• Other taxable business activities you undertake

When calculating whether you've crossed this threshold, you need to consider your total taxable supplies, not just your profit or the amount you withdraw from the business.

Voluntary Registration

Even if your income is below the $60,000 threshold, you may choose to register voluntarily. This could be beneficial if:

• You have significant business expenses with GST that you could claim back
• Your clients are primarily GST-registered businesses
• You want to appear more established to potential clients

However, voluntary registration also means you'll need to charge GST on your services and comply with all GST requirements, which increases your administrative workload.

Special Cases: Multiple Sources of Income

Many contractors and freelancers have multiple income streams. Consider:

• If you have both employment and self-employment income, only your self-employment income counts toward the $60,000 threshold
• If you operate multiple separate businesses, their combined turnover typically determines whether you need to register
• Income from investments or rental properties often has different GST treatment

Charging GST on Your Services

Setting Your Rates

Once GST-registered, you need to charge 15% GST on your services to New Zealand clients. This means:

• Adding 15% to your pre-GST rates, or
• Absorbing the GST component within your current rates (effectively reducing your income by 3/23)

Most contractors choose to add GST to their rates rather than absorbing it. When quoting for work, be clear about whether your rates are GST-exclusive or GST-inclusive.

Tax Invoices

As a GST-registered contractor, you must provide tax invoices for all supplies over $50. Your invoices need to include:

• The words "Tax Invoice" prominently displayed
• Your name, address, and GST number
• The client's name and address
• Date of issue
• Description of the services provided
• Amount excluding GST, the GST amount, and the total including GST

For supplies under $50, you can issue a simplified tax invoice that doesn't require the client's details.

Dealing with Overseas Clients

Services provided to overseas clients are generally zero-rated for GST (taxed at 0%) if:

• The client is outside New Zealand when the services are performed
• The services are not directly in connection with land or moveable personal property in New Zealand

This means you don't charge GST on these services, but you can still claim GST on related expenses. Keep evidence of your client's overseas status to support zero-rating.

Claiming GST on Business Expenses

What You Can Claim

As a GST-registered contractor, you can claim GST on business expenses, including:

• Tools, equipment, and supplies
• Professional services (accounting, legal, etc.)
• Vehicle expenses (with appropriate apportionment for private use)
• Home office expenses (with appropriate apportionment)
• Marketing and advertising costs
• Business travel and accommodation
• Training and professional development related to your current business

To claim GST, you need valid tax invoices for purchases over $50.

Home Office Expenses

Many freelancers and contractors work from home. For GST purposes:

• Calculate the business use percentage of your home (based on the area used exclusively or primarily for business)
• Claim the corresponding percentage of GST on household expenses like rent/mortgage interest, electricity, internet, etc.
• Keep records of your calculations and any changes in how you use your home

Remember that mortgage principal payments are not GST-deductible, and if you own your home, there may be future GST implications if you sell the property.

Vehicle Expenses

For vehicles used for both business and private purposes:

• Keep a logbook for at least a three-month representative period to establish your business use percentage
• Claim that percentage of GST on vehicle expenses (fuel, maintenance, insurance, etc.)
• For vehicles purchased primarily for business, you can claim GST on the purchase price based on the business use percentage
• Update your business use percentage if your usage patterns change significantly

GST Returns and Payments

Filing Frequency

As a contractor or freelancer, you can file GST returns on a:

• Monthly basis (if annual turnover exceeds $24 million, or by choice)
• Two-monthly basis (most common)
• Six-monthly basis (if annual turnover is less than $500,000)

The six-monthly option can reduce compliance costs for smaller operators, but it means larger, less frequent GST payments.

Accounting Basis

There are three accounting bases available:

• Invoice basis: Account for GST when invoices are issued or received
• Payments basis: Account for GST when payments are made or received (often simpler for small contractors)
• Hybrid basis: A combination of the above for different types of transactions

The payments basis is usually most practical for freelancers and contractors, as it aligns GST payments with cash flow and doesn't require you to pay GST on invoices that haven't been paid yet.

Managing Cash Flow for GST

To avoid cash flow issues when GST payments are due:

• Set aside the GST component of each payment you receive
• Consider using a separate bank account for GST funds
• Factor GST payment deadlines into your financial planning
• Remember that IRD charges interest and penalties for late payments

Special Situations for Contractors

Working Through an Agency

If you work through a recruitment or contracting agency:

• The agency may charge GST on their margin or commission
• You charge GST on your services to the agency (if you're registered)
• Ensure clarity about who invoices the end client and how GST is handled

Reimbursable Expenses

When a client reimburses you for expenses:

• If you incur the expense as principal (you bought it and are reselling it to the client), charge GST on the reimbursement
• If you act as the client's agent (you bought it on their behalf), GST treatment depends on whether the client is GST-registered
• Document the arrangement clearly in your contracts and invoices

Contracts with GST-Exclusive Rates

Some contractors find that after registering for GST, they have contracts specifying GST-exclusive rates. In this case:

• You can charge GST in addition to the agreed rate
• Ensure this is clearly communicated and documented
• Consider amending contracts to explicitly address GST treatment

Contracts with GST-Inclusive Rates

If your contract specifies GST-inclusive rates and you become GST-registered:

• Your effective pre-GST income decreases (as you now need to pay GST)
• Discuss this with clients and consider renegotiating rates if possible
• Factor this into future contract negotiations

Tools and Software for GST Management

Accounting Software

Cloud-based accounting software can simplify GST compliance for contractors and freelancers:

• Automatically calculates GST on invoices
• Tracks GST on expenses
• Prepares GST return information
• Integrates with bank accounts to capture transactions

Popular options for New Zealand contractors include Xero, Moniaro Books, MYOB, and QuickBooks, which are designed to handle New Zealand's GST requirements.

Mobile Apps

Consider using mobile apps to streamline GST-related tasks:

• Receipt scanning apps to capture and categorize expense receipts
• Mileage tracking apps to record business travel for GST claims
• Invoicing apps that create GST-compliant invoices on the go

Professional Assistance

Many contractors find it valuable to engage:

• An accountant for initial GST setup and periodic reviews
• A bookkeeper for regular GST record keeping
• Tax advisors for complex GST situations

The cost of this professional help is generally GST-deductible and can save you time and reduce compliance risks.

GST Record Keeping for Contractors

Essential Records

Maintain comprehensive GST records, including:

• All tax invoices issued to clients
• Tax invoices received from suppliers
• Bank statements showing payments received and made
• Logbooks for vehicle use
• Home office calculations
• Workpapers for GST returns

Retention Period

GST records must be kept for at least 7 years from the end of the tax year to which they relate. This applies even if you cease operating or deregister from GST.

Digital Record Keeping

Electronic records are acceptable provided they:

• Can be readily accessed
• Are convertible into a readable format
• Accurately reproduce the original information
• Can be provided to Inland Revenue if requested

Regular backups of digital records are essential.

GST and Income Tax Interaction

GST and Provisional Tax

For contractors, there's an important interaction between GST and provisional tax:

• Income for income tax purposes is GST-exclusive
• Expenses for income tax purposes are also GST-exclusive (where you've claimed the GST)
• Your accounting software should handle this distinction automatically

Using the Ratio Option

Some contractors use the ratio option for provisional tax, which is based on a percentage of GST taxable supplies. This can:

• Align provisional tax payments more closely with business performance
• Reduce the risk of underpayment or overpayment
• Simplify tax planning

Separate Financial Reporting

It's important to keep clear separation between:

• GST reporting (which deals with GST on income and expenses)
• Income tax reporting (which deals with taxable income after deductible expenses)
• Personal finances (which are separate from business GST matters)

Common GST Mistakes for Contractors

Registration Timing

A common error is not registering for GST at the right time:

• You must register once you expect to exceed the $60,000 threshold within 12 months
• Retrospective registration may be required if you cross the threshold unexpectedly
• Late registration can result in penalties and interest

Misclassifying Personal and Business Expenses

Be careful to distinguish between:

• Legitimate business expenses on which GST can be claimed
• Personal expenses which are not GST-deductible
• Mixed-use expenses requiring apportionment

Incorrect Treatment of Specific Transactions

Some transactions have special GST rules that contractors often misapply:

• Entertainment expenses (some of which have limited GST deductibility)
• Overseas services (which may be subject to the reverse charge mechanism)
• Second-hand goods (where GST can sometimes be claimed without a tax invoice)
• Insurance settlements (which have specific GST treatment)

GST Deregistration

When to Deregister

You might consider deregistering from GST if:

• Your turnover falls below $60,000 and is expected to stay there
• You're closing your contracting or freelancing business
• You're transitioning to employment

Deregistration Process

To deregister:

• Complete the GST deregistration form (IR315)
• Provide an explanation for deregistration
• Submit a final GST return

Deregistration Adjustments

When deregistering, you may need to:

• Account for GST on business assets retained for personal use
• Make final adjustments for any outstanding GST matters
• Ensure all records are complete and archived for the required 7-year period

Conclusion

GST compliance is an important aspect of running a successful contracting or freelancing business in New Zealand. By understanding your registration requirements, maintaining good records, and implementing efficient systems for GST management, you can ensure compliance while minimizing administrative burden.

Remember that GST is ultimately a pass-through tax├ö├ç├Âyou collect it from clients and pass it on to Inland Revenue. With proper planning and organization, GST doesn't need to be a significant cost or complication in your business operations.

If you're unsure about specific aspects of GST for your contracting or freelancing work, consider consulting with an accountant or tax advisor who specializes in working with self-employed professionals.