GST Exempt vs GST Zero Rated in New Zealand

In the complex world of New Zealand taxation, understanding the nuances of GST (Goods and Services Tax) can save your business from costly mistakes and compliance issues. Two terms that often cause confusion among business owners are ‘No GST’ and ‘Zero-rated GST’ transactions. While they might sound similar, they have distinct implications for your business accounting and tax obligations.

What Are ‘No GST’ Transactions?

‘No GST’ transactions (technically known as GST exempt transactions) are completely outside the scope of the GST system. In these cases, no GST is charged on the goods or services provided, and they don’t appear in your GST returns.

Common Examples of GST Exempt Transactions:

• Residential property sales – When you sell a residential property, it’s typically exempt from GST
• Financial services – Most banking services, interest payments, and insurance premiums
• Residential rent – Rental income from residential properties
• Donated goods and services – Items or services that are given away without payment
• Fine metals – Gold, silver, and platinum of specified purity
• Personal transactions – anything that is personal is ‘drawings’ and has no GST.
• Wages.

When dealing with GST exempt supplies, businesses cannot claim back the GST on related expenses. This is an important distinction that affects your input tax credits.

What Are ‘Zero-rated GST’ Transactions?

Zero-rated GST transactions are still within the GST system but are taxed at a rate of 0%. This means that while no GST is ultimately paid by the customer, these transactions are still recorded in your GST returns.

Common Examples of Zero-rated GST Transactions:

• Exports – Goods exported from New Zealand
• International services – Services provided to overseas customers
• Business sales as a going concern – When you sell your entire business
• Land transactions between GST-registered entities – Subject to specific conditions

The Key Differences Explained – GST Exempt vs GST Zero Rated

The primary difference lies in how these transactions are treated in your accounting system and GST returns:

1. GST Treatment: ‘No GST’ transactions are exempt from GST, while ‘Zero-rated GST’ transactions have GST applied at 0%.
2. GST Returns: Zero-rated transactions must be included in your GST returns, while exempt transactions do not appear.
3. Input Tax Credits: For zero-rated supplies, you can claim back the GST on related expenses. For exempt supplies, you generally cannot.

The Practical Impact on Your Business

If you primarily deal with zero-rated supplies (such as exports), you’ll likely receive regular GST refunds from the IRD. This is because you can claim back the GST on your business expenses while charging 0% GST on your sales.

For example, if you’re an exporter:

• You pay GST on your business expenses in New Zealand
• You charge 0% GST on your export sales
• When filing your GST return, you claim back the GST you paid, resulting in a refund

Accounting Software Considerations

Most accounting software platforms like Xero have specific settings for both exempt and zero-rated transactions. It’s important to categorize these correctly to ensure accurate GST reporting and compliance.

When creating invoices in your accounting software:

• For exempt supplies, select the “No GST” or “GST Exempt” option
• For zero-rated supplies, select the “Zero-rated” or “0% GST” option

Common Mistakes to Avoid

1. Misclassification: Incorrectly classifying a zero-rated transaction as exempt (or vice versa)
2. Forgetting to report: Not including zero-rated transactions in GST returns. These transactions still get included in the return even though GST is not paid on them.
3. Incorrect input tax claims: Trying to claim input tax credits for expenses related to exempt supplies

Learn more about other GST mistakes: Mastering GST: 10 Common Mistakes NZ Businesses Make

When to Seek Professional Advice

If you’re unsure about how to treat certain transactions for GST purposes, it’s always best to consult with a professional accountant. The GST rules can be complex, especially for businesses that deal with a mix of standard-rated, zero-rated, and exempt supplies.

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

Conclusion – GST Exempt vs GST Zero Rated

Understanding the difference between ‘No GST’ and ‘Zero-rated GST’ transactions is crucial for accurate accounting and tax compliance in New Zealand. While both result in no GST being paid by the customer, they have different implications for your GST returns and ability to claim input tax credits.

At Business Like NZ Ltd, we’re here to help you navigate these complexities and ensure your business remains compliant with all GST requirements. If you have questions about GST or any other tax matters, don’t hesitate to contact us for expert guidance tailored to your specific business needs.

Remember, proper GST management isn’t just about compliance—it can also improve your cash flow and financial management, giving you more clarity about your business’s financial position.