Goods and Services Tax (GST)

GST was introduced in NZ in October 1986 at a rate of 10%, it was increased in July 1989 to 12.5% and more recently in October 2010 to 15%.
GST is an indirect and regressive tax, meaning people who can least afford luxury items pay for this in purchasing everyday necessary things. Higher income earners may not spend all their money on purchasing necessities and save their money on overseas trips.

Ultimately, the lower your income the more of your income goes to GST, as in Section 8 GST Act 1985.

Registration

Section 51, indicates that anyone carrying on taxable activity and have taxable supplies in NZ exceeding $60,000 in any 12 month period must be registered for GST. If your turnover is less than $60,000 and you would like to register for GST, this is classed as voluntary registration.

Taxable periods

If you are registered for GST then the default option for the GST period is 2 monthly cycle. As mentioned above, if your turnover is greater than $60,000 then you have a 2 monthly cycle. If turnover is not greater than $500,000 then there is the option to change to 6 monthly cycle. If turnover is greater than $24 million, then you can change to 1 monthly cycle.

What is a taxable activity?

A Taxable activity is defined in Section 6 (a) of the GST Act as “any activity which is carried on continuously or regularly by any person whether or not for profit, and is involved or intended to involve the supply of goods and services to any other person for consideration.

Taxable and Non-taxable supplies

Standard, zero-rated and exempt supplies

Note *financial services include interest, bank fees

          ** Sale of rental property – rented for at least 5 years prior to sale

          ***Going concern – are businesses which are still operating when it was sold.

GST calculation: Current GST rate is 15%, so if a taxable supply is of $100, then the total bill will be 100 multiply by 1.15 = $115

Gross Sales using GST amount: If you know the GST amount, and want to know the value of the taxable supply including GST, then the formula is:

• GST amount / 15 * 115.

In the example above it would be $15 /15 * 115 = $115

Deemed supplies:

These are deemed to be taxable supplies:

1. Cessation of business s 5 (3) 
2. Door to door sales s 5 (4)
3. Lay by sales s 5 (5)
4. Insurance payments received s 5 (13)
5. Fringe benefits s 21 I (1)
6. Entertainment expenses s 21 I (4)

Key difference between zero-rated, exempt and non-taxable activity

• Zero-rated – 0% GST is charged on the supply or sale of goods and services, however GST can be claimed back from IRD on goods and services purchased and used in the business.
• Exempt and Non-taxable activity – No GST is charged on the supply or sale of goods and services. No GST can be claimed back from IRD on goods and services purchased for use in the business.

Accounting for GST

Now that you are familiar with what GST is and who needs to register for GST. What are taxable activities and what is difference between standard, zero and exempt supplies. We can now start to look at the accounting for GST.

Time of Supply

Time of supply refers to section 9 which states that the supply of goods and services shall be deemed to take place at the earlier of the time on the invoice issued by supplier or recipient or the time any payment is received by the supplier, in respect of that supply.

There are exceptions to time of supply for the following:

What should be on a tax invoice?

Section 24 specifies that there are certain requirements that have to be met to qualify as a tax invoice.
1) The words “tax invoice” should be displayed in a prominent position,
2) name and GST number of the supplier
3) date invoice issued
4) description of the goods and or services supplied
5) Contain the amount excluding GST, GST content and the total amount of a statement that GST is included in the final price.

If the goods are less than $50 then a tax invoice is not required but it is suggested that other records be kept such as vouchers or receipts to verify purchases.
If the supplies are between $50 and $1000 then the above information on what should be on the tax invoice is sufficient. But if the supplies are over $1000 then the name and address must also be provided on the tax invoice.

What basis should GST be accounted for? There are 3 types:

1) Invoice basis – Section 19 (1) this is the default method and is like accrual accounting. Items are recorded at the date of the transaction rather than when payment is received.
2) Payment basis – Section 19 A. This is based on when money is received and when paid. Available for entities with taxable supplies of less than $2 million in any 12 month period.
3) Hybrid basis – Mixture of above.

Example: If the supply of goods and services exceeds $225,000 and involves a deferred settlement (after 365 days), then the supplier is forced to use invoice basis as in section 19D.

What is the due date for GST returns and payments: Section 16

In most cases, filing of returns and payments are due on the 28th of the following month after the GST period has ended.
Example:
A return for the period ending 31 July 2012 is due for filing on or before 28 August 2012.

Provisional tax payments

Since 2008/09, taxpayers who are paying GST are required to pay provisional tax at the same time. There is a special form 103B which includes the provisional tax portion.
Taxpayers who file GST on a 6 monthly cycle, are only required to file two instalments of provisional tax per year. If on a 2 monthly cycle standard option, taxpayers will include a payment of provisional tax on each second GST return. If on the GST ratio option, then the payments of provisional tax need to be included on each of their 6 GST returns per year.