GST for Freelancers: What You Need to Know

If you're a freelancer in New Zealand, understanding GST is essential, especially as your business grows. This guide covers what you need to know about GST registration, collecting GST, and filing returns.

When Do Freelancers Need to Register for GST?

If your income from freelance work exceeds NZD 60,000 per year, you're required to register for GST. Once registered, you must charge GST on your services and pay it to the government.

This $60,000 threshold applies to your turnover over any 12-month period├ö├ç├Ânot just the financial year. If you expect to exceed this amount in the coming 12 months, you should register in advance. It's important to monitor your income closely as you approach this threshold.

Failing to register when required can result in penalties, and you may need to pay GST on past sales even if you didn't collect it from your clients. This means you could end up paying the GST out of your own pocket for the period you should have been registered.

Voluntary Registration: Is It Worth It?

Even if your income is below $60,000, you can choose to register for GST voluntarily. This decision depends on several factors:

Advantages of Voluntary Registration:

• Claim Back GST on Expenses: You can reclaim the GST you pay on business purchases, reducing your overall costs.
• Professional Image: Having a GST number on your invoices can make your business appear more established to larger clients.
• Preparing for Growth: If you expect your income to increase above the threshold soon, registering early can make the transition smoother.

Disadvantages to Consider:

• Administrative Work: You'll need to file regular GST returns, which adds to your paperwork.
• Cash Flow Management: You'll need to set aside the GST you collect to pay to Inland Revenue.
• Pricing Considerations: If your clients aren't GST-registered, adding GST will make your services more expensive for them.

Consider consulting with an accountant to determine whether voluntary registration makes financial sense for your specific situation.

Charging GST on Your Services

When you're registered, you'll add 15% GST to the fees you charge clients. For example, if you charge $1,000 for a project, the total will be $1,150 with GST. This helps keep your business GST compliant.

Your invoices must clearly show:

• The words "Tax Invoice"
• Your name and GST number
• The client's name and address
• The date of the invoice
• A description of the services provided
• The amount, excluding GST
• The GST amount
• The total amount, including GST

Many accounting software packages can generate compliant invoices automatically once you enter your GST details.

Different Types of Clients and GST

How you handle GST can vary depending on who your clients are:

New Zealand Business Clients (GST-Registered)

These clients can claim back the GST you charge them, so adding GST to your invoice doesn't increase their real cost. Make sure to include your GST number on all invoices so they can claim their input tax credits.

New Zealand Individual Clients (Not GST-Registered)

These clients can't claim back GST, so adding 15% genuinely increases their cost. Consider this when setting your prices to remain competitive, especially if you've recently registered for GST.

Overseas Clients

Services provided to overseas clients are generally considered "zero-rated" for GST purposes. This means you charge 0% GST but still include these sales in your GST return. You can still claim GST on related expenses, which can be beneficial for your business.

Filing GST Returns

As a registered freelancer, you need to file GST returns, usually every two or six months. This involves reporting your income and paying the collected GST to the Inland Revenue.

When you register for GST, you'll be assigned a filing frequency:

• Six-monthly: Available if your annual turnover is less than $500,000
• Two-monthly: The standard option for most businesses
• Monthly: Required for businesses with turnover over $24 million, but you can choose this option if you prefer

You'll also need to choose an accounting basis for your GST:

• Payments basis: You account for GST when you actually pay bills or receive money. This is often simpler for freelancers.
• Invoice basis: You account for GST when you issue or receive invoices, regardless of when payment happens.
• Hybrid basis: A combination of the above two methods.

For most freelancers, the payments basis is simplest, as it matches your cash flow and means you only pay GST to Inland Revenue after you've received it from clients.

Record-Keeping for GST

Good record-keeping is essential for GST compliance. You'll need to:

• Keep copies of all tax invoices for purchases and sales
• Maintain records of zero-rated supplies (like exports)
• Track your income and expenses by GST period
• Keep these records for at least 7 years

Using accounting software designed for New Zealand businesses can make this much easier, as many programs automatically track GST on transactions and can generate GST return information when needed.

Common GST Mistakes Freelancers Make

Avoid these common pitfalls:

• Missing the registration threshold: Track your rolling 12-month turnover carefully.
• Claiming GST on everything: Some expenses, like overseas purchases or residential rent, don't include claimable GST.
• Forgetting to adjust for personal use: If you use business purchases personally (like a laptop or vehicle), you need to adjust your GST claims accordingly.
• Poor record-keeping: Staying organised throughout the year prevents headaches at filing time.
• Late filing: Missing deadlines can result in penalties and interest charges.

GST and Your Income Tax

It's important to understand that GST and income tax are separate obligations. When calculating your taxable income for income tax purposes, you should exclude GST from both your income and expenses.

For example, if you invoice $1,150 including GST, only $1,000 counts as your income for income tax purposes. Similarly, if you purchase a $115 business expense including GST, only $100 is deductible for income tax.

This separation helps avoid double-counting and ensures you're paying the correct amount of each tax.

Getting Help with GST

If you're unsure about any aspect of GST, several resources are available:

• Inland Revenue: The IRD website has detailed guides on GST for small businesses and freelancers.
• Accounting Software: Programs like Xero, Moniaro Books, MYOB, and QuickBooks have resources to help with GST compliance.
• Bookkeepers and Accountants: Professional advice can be invaluable, especially when you're first setting up your GST processes.

Many freelancers find that hiring a bookkeeper or accountant is well worth the cost, as they can ensure you're compliant while potentially identifying tax savings you might have missed.

Conclusion

Understanding GST requirements as a freelancer helps you manage your business finances and stay compliant. With good record-keeping, GST can be straightforward, and it ensures you meet legal obligations.

While GST adds another layer to your business administration, with the right systems in place, it doesn't need to be overly complicated. Many freelancers find that once they establish good habits and possibly invest in appropriate software, managing GST becomes a routine part of their business operations.

Remember that GST compliance is not optional once you reach the threshold, so it's better to understand the requirements early and prepare accordingly. This proactive approach will help you avoid penalties and ensure your business operates smoothly as it grows.