Mastering Claiming GST: A Complete Guide

Wondering how to claim GST on your business expenses? This article will explain the process, including registration, what expenses you can claim, and how to get your GST refunds. Read on to understand how to manage your GST claims effectively when claiming GST.

Key Takeaways

• Understanding GST registration is crucial as it allows businesses to charge GST, reclaim paid GST on expenses, and ensures compliance, particularly for businesses expecting to earn over $60,000 annually.
• Accurate record-keeping is vital for claiming GST on business expenses, as it supports eligibility and ensures compliance, while common mistakes can lead to penalties.
• Utilizing accounting software can streamline the GST claiming process, enhance accuracy, and simplify record-keeping, making it easier for businesses to manage their GST obligations.

Understanding GST and Its Importance

Goods and Services Tax (GST) is applicable to most products and goods or services. It adds a 15% tax to their price. Being GST registered allows businesses to charge GST on their sales, acting as intermediaries for the government. This registration is not just a bureaucratic requirement; it opens doors to significant financial benefits. For instance, GST registered businesses can claim back the GST paid gst on their business expenses, enhancing cash flow and reducing costs. This means that while businesses are collecting GST from their customers, they can also reclaim what they’ve paid on their purchases, thereby balancing the financial scales. Additionally, businesses can benefit from gst payments and gst credits.

The importance of GST registration extends beyond just financial benefits. Key points include:

• It is mandatory for a gst registered business that expects to earn over $60,000 annually from their taxable activities.
• Businesses below this threshold can opt for voluntary registration.
• Voluntary registration can be particularly advantageous if businesses incur substantial expenses.

This dual role of collecting and reclaiming GST ensures that businesses remain compliant while optimizing their financial operations.

When and Why to Register for GST

Registering for GST is a crucial step for any sole trader business. If your business’s taxable turnover is expected to exceed $60,000 within a year, registration is mandatory. This requirement is relevant for all types of businesses, including:

• Sole traders
• Partnerships
• Companies Failure to register when required can result in significant penalties, making it essential to monitor your income closely and register timely.

Even if your business does not meet the $60,000 threshold, voluntary registration can still be beneficial. For businesses with considerable expenses, registering for GST allows you to claim back the GST paid on these expenses, thereby improving cash flow. This can be particularly useful for startups or businesses with high initial costs, enabling them to recover some of their expenditures and reinvest in their growth.

What Can Be Claimed

One of the significant advantages of being GST registered is the ability to claim back the GST paid on business expenses. This includes goods and services used for taxable activities. However, not all expenses are fully claimable. For example, entertainment expenses are only partially claimable, requiring careful calculation to determine the correct portion.

It’s also important to note that certain expenses, such as life insurance, income tax, and fines, are not eligible for GST claims. Moreover, GST cannot be claimed on second-hand goods purchased from non-GST registered individuals. Keeping accurate records of all business expenses is essential to ensure that only eligible expenses are claimed.

Accuracy in filing GST returns is crucial for avoiding penalties and ensuring compliance. Businesses must maintain detailed records and receipts for all transactions to support their GST claims. This meticulous record-keeping not only helps in filing accurate returns but also provides evidence in case of an audit.

Learn more: GST for New Zealand Businesses: A Comprehensive Guide

The GST Refund Process

Obtaining a GST refund is a straightforward process but requires careful adherence to the rules. A GST refund is essentially a tax refund for GST that has been overpaid during a period. To obtain this refund, businesses must submit a GST return to Inland Revenue, detailing how to claim gst back for the GST collected and paid.

Eligibility for a GST refund is determined by comparing the GST paid on business expenses to the GST collected from sales. If the GST paid exceeds the GST collected, the business is eligible for a refund. Typically, GST refunds are processed within 15 working days after submission of the GST return, provided all information is accurate and a New Zealand bank account is used for the refund.

Calculating Your GST Refund

Calculating your GST refund involves a simple yet precise formula: subtract the GST paid on business expenses from the GST collected on sales. This calculation hinges on keeping accurate records of all transactions, as every GST payment and collection must be meticulously tracked.

The core of this calculation is understanding the concepts of input tax and output tax. Input tax is the GST paid on business purchases, while output tax is the GST collected from sales. By subtracting the input tax from the output tax, you determine whether you owe GST or are entitled to a refund on taxes.

It’s also crucial to note that zero-rated supplies, which have a GST rate of 0%, do not contribute to GST collected or claimed back.

Claiming GST on Imports and International Transactions

Claiming GST on imported goods and international transactions requires careful documentation and adherence to specific rules:

• GST on imported goods is typically charged at a rate of 15% by New Zealand Customs.
• The GST is based on the total value of the goods, including any duties and shipping costs.
• To support your GST claim on these imports, you need to keep an import entry document as proof of GST paid.

When purchasing goods from overseas, it’s crucial to check whether the supplier has charged GST on the purchased goods. Typically, overseas suppliers who are not taxable in New Zealand will not charge GST. Ensuring that GST is correctly applied and documented is essential for claiming it back and maintaining compliance with Inland Revenue regulations.

Adjusting Claims for Mixed-Use Assets

For assets used for both business and personal purposes, GST claims must be adjusted based on the proportion of business use. This adjustment can be done using the apportionment method or the principal purpose method. The apportionment method involves calculating the actual business use percentage of the asset, while the principal purpose method is based on the primary use of the asset.

Adjustments must also be made if the original estimate of business use changes over time. For a common example, if a vehicle initially estimated to be used 70% for business is later found to be used 80%, the GST claim must be adjusted accordingly.

Keeping detailed records of business use percentages is crucial for keeping track of accurate GST claims and compliance.

Common Mistakes to Avoid

Avoiding common GST mistakes is essential for accurate and compliant GST claims. One frequent error is wrongly identifying expenses related to taxable activities. Only expenses directly related to business activities and that include GST are claimable. Ineligible expenses, such as personal or non-business-related costs, cannot be claimed.

Accurate record-keeping is the cornerstone of avoiding these mistakes. Without detailed records, businesses can easily miscalculate or incorrectly claim GST, leading to potential penalties. Ensuring that all expenses are correctly categorized and that GST is only claimed on eligible items is critical for maintaining compliance and avoiding common pitfalls.

Record Keeping for GST Claims

Maintaining accurate records is vital for substantiating GST claims and expenses. Once registered for GST, businesses must charge GST to their customers and keep detailed financial records. These records include tax invoices, receipts, and any correspondence related to business transactions, which must be retained for seven years.

Using accounting software can streamline the record-keeping process, making it easier to manage and retrieve documents when needed. Platforms like:

• Xero
• MYOB
• QuickBooks Online offer tools that integrate seamlessly with New Zealand’s tax systems, ensuring compliance and simplifying the GST claiming process.

Adopting these technologies not only aids in accurate record-keeping but also provides insights into financial health, helping businesses stay on top of their GST obligations.

Filing GST Returns

Filing GST returns correctly and on time is crucial for compliance. Businesses can choose their filing frequency based on their annual sales, with options being monthly, two-monthly, or six-monthly filing. For instance, businesses with a GST turnover of more than $24 million must file monthly, while those with less than NZD 500,000 annually can opt for six-monthly filings.

GST returns are due by the 28th of the month following the end of the taxable period, unless this date falls on a weekend or public holiday, in which case the return is due on the next working day. If a business collects more GST from sales than it pays on purchases, it must remit the difference to Inland Revenue through complete regular gst returns.

Ensuring timely and accurate filing helps avoid penalties and keeps the business in good standing with tax authorities.

Handling Bad Debts

Handling bad debts effectively can help businesses reclaim GST on amounts that have become irrecoverable. Businesses using the accrual basis for GST and the accounting basis can reclaim GST on bad debts if the following conditions are met:

• The bad debt was previously written off.
• The debt was recorded as income.
• The debt has been deemed irrecoverable.
• The write-off occurs before the financial year-end to claim the deduction for that tax year.

If a bad debt is eventually settled, the business must return the GST to the tax authorities and report it as income in the year it is received. Similarly, if a customer pays late on an invoice, a GST debit adjustment may be required to account for the GST on the amount received. Managing these adjustments accurately ensures compliance and proper financial reporting.

Using Software to Simplify GST Claims

Utilizing accounting software can significantly simplify the process of managing GST claims. Tools like Xero offer powerful features for small businesses, automating GST calculations and streamlining the claiming gst credits process. This not only reduces the potential for errors but also provides better oversight of financial activities.

Adopting accounting software ensures that businesses can manage their GST obligations efficiently and accurately. It simplifies record-keeping, automates calculations, and integrates with tax systems, making compliance easier and more manageable.

For businesses looking to optimize their financial management, leveraging these money service tools is a smart move.

Learn more: Is Xero Right for My Business?

Summary 

Mastering GST involves understanding its importance, knowing when and why to register, and keeping accurate records of eligible expenses. Businesses must also navigate the complexities of claiming GST on imports, adjusting for mixed-use assets, and avoiding common mistakes. Filing GST returns on time and handling bad debts are critical for maintaining compliance and optimizing cash flow.

By leveraging accounting software, businesses can streamline the GST claiming process, reduce errors, and gain better financial oversight. Armed with this knowledge, you can take control of your GST claims, ensuring compliance and maximizing financial benefits. Start implementing these practices today and transform your approach to managing GST.

Frequently Asked Questions

When must a business register for GST?

A business is required to register for GST if it anticipates that its taxable activity turnover will exceed $60,000 in a year. Compliance with this threshold ensures adherence to tax obligations.

Can I claim GST on all business expenses?

You cannot claim GST on all business expenses; certain expenses, such as entertainment, are only partially claimable, while fines and life insurance are not eligible for GST claims at all.

How do I calculate my GST refund?

To calculate your GST refund, subtract the GST paid on business expenses from the GST collected from sales. This will give you the amount eligible for a refund.

What are some common GST mistakes to avoid?

Avoiding common GST mistakes is crucial for compliance; ensure accurate identification of expenses related to taxable activities and maintain diligent record-keeping. This will help prevent potential penalties and ensure a smooth filing process.

How can accounting software help with GST claims?

Accounting software can significantly assist with GST claims by automating calculations and streamlining the claiming process, thereby ensuring compliance and minimizing errors. This efficiency simplifies managing GST obligations for users.