When managing your business’s GST obligations in New Zealand, it’s not just about charging and paying GST on your sales and purchases. Some goods and services fall into categories where GST either does not apply at all or is applied at a rate of zero per cent. These are known respectively as zero-rated and exempt supplies.
While the difference may seem subtle, it carries significant implications for how you handle GST returns, claim input tax credits, and structure your business transactions. Misunderstanding these two categories can lead to errors, missed claims, or unintended non-compliance.
This article explains what zero-rated and exempt supplies are, how they differ, and what they mean for your business in practical terms.
Zero-Rated Supplies: Taxable, but at a 0% Rate
Zero-rated supplies are goods and services that fall within the scope of the GST regime, but are taxed at a rate of 0%. This means you still include them in your GST returns and treat them as taxable supplies, but you do not charge your customers any GST on the sale. The crucial advantage is that you can still claim input tax credits on the expenses you incur in making those supplies, just as you would for standard-rated sales.
This treatment supports businesses engaged in international trade or certain qualifying transactions by ensuring GST does not become a cost to the business, even if no GST is collected on the sale itself.
Common Examples of Zero-Rated Supplies:
- Exported goods sent out of New Zealand to an offshore destination
- Certain international services, such as consultancy, marketing, or IT services provided to non-residents who are outside New Zealand at the time of service
- The sale of a business as a going concern, provided both buyer and seller are GST-registered and all legislative conditions are satisfied
- Land sales between GST-registered parties, in specific circumstances, especially where the land is to be used for making taxable supplies
- International transport and related services, including freight and passenger transport outside New Zealand
Why Zero-Rating Matters:
Zero-rated supplies allow you to retain full access to input tax deductions, despite not charging GST on your income. This distinction is vital for businesses operating across borders, as it ensures GST does not become a cost embedded in your operations. It also maintains neutrality between domestic and international markets, which is essential for export competitiveness.
Exempt Supplies: Outside the GST Net
In contrast, exempt supplies are transactions that fall completely outside the GST regime. You do not charge any GST on these sales, but more importantly, you are not entitled to claim back any GST incurred on costs associated with making those supplies. Effectively, the GST you pay on related inputs becomes a real, non-recoverable cost to your business.
Exempt supplies are typically found in industries or transaction types where it is administratively burdensome or conceptually inconsistent to apply GST. These exemptions exist for policy reasons, for example, to avoid taxing essential housing or to simplify compliance in the financial services sector.
Common Examples of Exempt Supplies:
- Residential rental income from long-term leases (this excludes short-term accommodation, such as holiday homes or Airbnb, which is generally taxable)
- Sales of residential property where the vendor is not GST-registered or the property was not part of a taxable activity
- Financial services, such as interest income from loans, bank fees, and the issuing of credit or debt securities
- Certain non-profit activities, including genuine donations made without a direct material benefit in return
Why Exemption Matters:
Because exempt supplies prevent you from claiming GST on related costs, they can reduce your ability to recover expenses, a factor that must be carefully considered in pricing and budgeting. For example, if you operate both taxable and exempt activities (such as a property development firm that also holds residential rentals), you may need to apportion input tax credits, which introduces additional complexity into your GST reporting and accounting processes.
Practical Business Implications
- GST return accuracy
Be sure to include zero-rated sales in the correct boxes. Failing to do so can cause errors and potential IRD audits.
- Input tax claims
You can fully reclaim GST on costs related to zero-rated supplies, but not on exempt ones. For mixed operations, you may need to apportion claims based on turnover.
- Business structuring
The GST status of a supply can impact pricing and profitability. For instance, long-term residential rental is exempt, so GST paid on renovations cannot be reclaimed. Conversely, exporting services can attract full input recovery via zero-rating. Structuring transactions like selling a business as a going concern can provide tax advantages.
The distinction between zero-rated and exempt supplies under the New Zealand GST framework is more than just technical jargon; it directly affects your business’s tax obligations, profitability, and reporting obligations. Misclassifying supplies or failing to understand the implications of each category can result in avoidable costs or compliance risks.
At Black Arrow Business Studio, we work closely with small and medium businesses across New Zealand to simplify GST compliance, optimise tax outcomes, and provide clarity in areas that are often misunderstood. Our advisory team offers practical support for GST return preparation, transaction structuring, and IRD audit readiness.
If you are unsure whether your supplies are zero-rated, exempt, or fully taxable or if you need help managing the GST implications of a specific deal, reach out to us today. We are here to help you navigate the complexity with clarity and confidence.
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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