Goods and Services Tax (GST) compliance is a crucial aspect of running a business in New Zealand. While it may seem straightforward, mistakes in GST registration, record-keeping, tax filing, and calculations can lead to serious financial consequences, including penalties, interest charges, and even audits by Inland Revenue (IRD).
Understanding and avoiding common GST mistakes can help businesses maintain compliance, reduce financial risks, and optimise their tax position. This guide explores the most frequent GST errors and offers practical solutions to ensure your business remains compliant with the Goods and Services Tax Act 1985 and other relevant tax regulations.
1. Failing to Register for GST on Time
The Mistake:
Businesses are required to register for GST when their total turnover (sales) exceeds $60,000 in any rolling 12-month period or is expected to exceed this threshold in the next 12 months. However, some businesses either:
- Delay GST registration and unknowingly exceed the threshold, leading to unpaid GST liabilities.
- Fail to monitor their revenue closely, resulting in non-compliance.
If you do not register for GST when required, you may have to pay GST on past sales, often out of pocket, as you may not be able to recover it from customers. IRD can also impose penalties and interest for late registration.
How to Avoid It:
- Regularly track your revenue to ensure you register as soon as required.
- If you expect to exceed $60,000 in the next 12 months, register early to avoid any compliance issues.
- Consider voluntary registration if your business primarily supplies GST-registered entities. This allows you to claim GST on business expenses even before reaching the threshold.
- Keep in mind that once registered, you must charge GST on all taxable supplies and file GST returns regularly.
2. Incorrectly Claiming GST on Purchases
The Mistake:
Many businesses incorrectly claim GST on purchases that are not eligible, which can result in overclaimed refunds or incorrect tax payments. Common errors include:
- Claiming GST on expenses that are partially deductible, such as entertainment expenses (e.g., business meals are only 50% deductible).
- Claiming GST on purchases from non-GST-registered suppliers. If a supplier is not registered for GST, their invoices should not include GST, and you cannot claim an input tax credit.
- Claiming GST on private or personal expenses, such as personal vehicle costs that are not business-related.
- Incorrectly apportioning GST on assets used for both personal and business purposes, such as vehicles or home office expenses.
How to Avoid It:
- Always verify whether a supplier is GST-registered before claiming GST. You can check their GST status using the IRD website or supplier invoices.
- Ensure that tax invoices meet IRD requirements, including: The supplier’s name and GST number. The date of supply. A breakdown of GST and the total amount.
- Keep detailed records to support GST claims, including receipts and invoices.
- Use accounting software to automate GST calculations and ensure compliance.
3. Not Charging GST on All Taxable Supplies
The Mistake:
Some businesses fail to charge GST correctly on all taxable sales, particularly when dealing with a mix of taxable, zero-rated, and exempt supplies.
- Zero-rated supplies (0% GST) include exports, certain financial services, and the sale of land in specific circumstances.
- Exempt supplies (no GST applied) include residential rent and certain financial transactions, such as interest income.
A common mistake is treating zero-rated supplies as exempt supplies or failing to charge GST when required. This can result in under-reported GST liabilities, leading to IRD reassessments.
How to Avoid It:
- Understand the different GST treatments for taxable, zero-rated, and exempt supplies.
- If selling internationally, ensure your export sales meet IRD requirements for zero-rating.
- Regularly review sales invoices to confirm the correct GST application.
4. Poor Record-Keeping
The Mistake:
Many businesses fail to maintain proper GST records, making it difficult to substantiate claims in case of an IRD audit. Missing invoices, incorrect calculations, and unorganised records can lead to errors in GST returns.
How to Avoid It:
- Keep all GST-related invoices, receipts, and supporting documents for at least seven years as required by IRD.
- Use cloud-based accounting software to track GST transactions and ensure compliance.
- Ensure GST invoices meet IRD’s format requirements, including: The supplier’s GST number. A description of the goods or services. The GST amount and total price.
5. Late GST Filing and Payments
The Mistake:
Failing to file GST returns or make payments on time can result in late penalties and interest charges from IRD.
How to Avoid It:
- Know your GST filing frequency: Monthly, two-monthly, or six-monthly filing options are available. GST returns and payments are due on the 28th of the following month after the taxable period ends (except for December, which is due on 15 January).
- Set up automated reminders or schedule payments to avoid missed deadlines.
- If struggling with cash flow, consider instalment arrangements with IRD.
6. Choosing the Wrong GST Accounting Basis
The Mistake:
Using the wrong GST accounting method can lead to incorrect reporting and cash flow issues.
How to Avoid It:
- Select the appropriate GST accounting basis: Payments Basis – Suitable for businesses with turnover under $2 million. GST is accounted for when payments are made or received. Invoice Basis – GST is accounted for when invoices are issued, regardless of payment. Hybrid Basis – A mix of both (less commonly used).
GST compliance is essential for avoiding penalties, interest charges, and audits. By understanding these common mistakes such as incorrect claims, late filings, poor record-keeping, and improper GST treatment, businesses can ensure compliance and maintain financial stability.
The content in this blog is intended to provide general insights and should not be regarded as professional advice. Each business situation is unique, and we recommend consulting with a professional for specific guidance. At Black Arrow Business Studio, we specialise in accounting and consulting services designed to support your business’s growth and success. Feel free to contact us for expert advice and customised solutions.
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