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TO REGISTER OR DEREGISTER?
GST IS THE QUESTION

by Craig Weston,
last updated 07/04/2014

June 2010 - Craig Weston and Estelle Logan look at some of the issues surrounding changes in the GST regime

In the March 2010 issue of Franchise New Zealand magazine, chartered accountant Craig Weston looked at the possible impacts on franchising of the increase in the rate of GST to 15%. There’s since been some discussion of whether franchisees should register for GST at all if their business turnover is under the $60,000 threshold at which it is compulsory.

According to Estelle Logan of V.I.P. Home Services, since the rise in the GST rate was announced in the Budget, some franchisors (particularly in the mobile sector) are actually encouraging some of their franchisees to de-register. The threshold for registration used to be $40,000, but it was raised to $60,000 in March 2009 with the intention of reducing compliance costs for small businesses. However, it may actually have increased complexity within some franchise systems which have low income or part-time franchisees.

‘Raising the threshold to $60,000 means that registering is no longer a fait accompli for every franchisee,’ says Estelle, who is also chairman of the Franchise Association of New Zealand. ‘For a one-man-band type of franchise, it is conceivable that you may not achieve the $60,000 threshold in your first year of trading – but does that mean you shouldn’t register? I believe you should register, otherwise once you do reach that level what are you going to do – either put your prices up across the board or pay that 15% GST out of your existing revenue? Neither of those is a great idea.’

And she raises another major issue. ‘What if you have a business that is growing and getting close to the $60,000 threshold but you aren’t registered or don’t want to register? Do you stop growing the business – or do you just stop declaring the income? Both of those options have some fairly major repercussions.

Focus on Growth

Estelle says that she herself strongly encourages all franchisees to register for GST. ‘If you are establishing a business, as opposed to just buying yourself a job, you should be thinking about how you can grow your franchise rather than how to avoid being registered. If you have any business customers they will expect you to be registered and provide them with a GST invoice and, of course, unless you are registered yourself then you can’t actually deduct GST from your own purchases.’

‘As a franchisor, telling existing franchisees to de-register sends out some very strange messages. It says either that you aren’t going to be able to build your business up to $60,000 turnover, which is pretty depressing, or it’s encouraging people not to declare all their income.’ (see panel)

And she points out that having some franchisees registered and some not registered can cause considerable confusion within a franchise system. ‘In V.I.P. we operate a sell-back system whereby franchisees can “sell” surplus work between them. If one franchisee is registered and the other isn’t, that can get difficult.’ Estelle says that since the threshold was raised, only two V.I.P. franchisees have chosen to de-register and they have both been part-timers who are comfortable with their level of income for the hours they’re prepared to put in.’

Mostly Beneficial

According to chartered accountant Craig Weston of Inspired Business Solutions, there are some downsides and some benefits to being registered for GST. ‘The downside is that it does put the onus on you to keep good records (although you should do that anyway) and to return GST on a regular basis. This will add a level of cost – or at least time – to being in business. However, there are also a number of benefits to registering for GST and it is worthwhile exploring these in some detail.

‘As Estelle says, if you want your business to earn more than $60,000, registration would be a no-brainer. The thing to remember is that, as far as your profitability is concerned, GST should not be an added cost – it should be neutral. GST is (or should be) merely added on top of your selling prices, so all you are doing is acting as a collection agent for the Government. You can deduct the GST that you pay for your business supplies and any assets purchased from the GST you collect.’

Better Management

Craig believes that one good reason for registering for GST is that you will impose on yourself the discipline of more regular accounting. ‘If you register for GST on a two-monthly basis, and you have a reasonable accounting system, you will be able to track the performance of your business more regularly than you would otherwise with just your annual tax accounts.  The sooner you pick up on trends in your business, the quicker you can respond and the better off you will be. For example, if you don’t need to send any money off to IRD for your latest GST period, the chances are you are either not selling enough, or you are spending a bit more than you should be, either on supplies or on assets. In either case, you need to know about it as soon as possible.’

Another discipline that Craig suggests is setting up a separate bank account in which to hold the GST money. ‘There is nothing worse than forgetting that some of the money in your bank actually belongs to the Government and allocating it elsewhere – that’s how you get pinged for late payment of taxes. Whereas if you have a separate account, you will never have to worry and you’ll even get the benefit of some interest on the money you collected on the Government’s behalf.

‘If you are a contractor or provide personal services in your business, it may also be a good idea to transfer the GST and a portion of your total sales revenue into that separate bank account to cover your income tax liability. An option is to register with IRD to pay GST and income tax at the same time. That way, you can better manage your cash flow, and stay onside with IRD.’

If you don’t already have some kind of software for book-keeping, Craig recommends considering Xero or Banklink. Both offer low-cost solutions linked to your business bank account, which allow you to account for your sales and expenses fairly easily. Xero may not yet be suitable for those who seriously need to account for stock (eg. importers/distributors), but it is adding new functionality all the time. Banklink has recently aligned itself with MYOB, one of the most popular accounting software packages and MYOB itself is also adding new functionality, such as business intelligence. ‘What this means is that with the click of a button, you can get standard ratio analysis that gives you more insight into how your business is tracking. If you already use MYOB and haven’t upgraded your software in ages, then it may be worth looking at that, or at Xero which also has some great reporting features.’

Another good reason for registering is that if your customers include other businesses, they tend to prefer dealing with GST-registered suppliers so that they can administratively claim the GST back on your invoices. ‘It may also have the benefit of making your business look a bit more serious – non-GST registered businesses may be perceived as less professional.’

Price Changes

Craig also raises an interesting point for those who are already in business and thinking of registering for GST. ‘Do make sure that you check your prices. If you are currently selling something for $10, and then you register for GST but don’t increase your prices, you will be out of pocket by the GST portion.’

So will the forthcoming increase in the GST rate from 12.5 percent to 15 percent damage the businesses of GST-registered franchisees forced to put their rates up? ‘I think it’s short-sighted to believe that it will decrease sales,’ says Estelle. ‘The actual dollars involved are not huge – only $2 on an $80 dollar invoice – and if you are doing a good professional job and are treating your franchise as a real business then you are not going to suffer. On the other hand, if you try to absorb the increase and not charge any more, all those $2 add up.’

In fact, Craig Weston says that now is a good time to review your pricing. ‘If you effectively drop your prices by absorbing the extra GST, you need to increase the volume of your sales just to stay at the same level of profitability. But increasing your sales volume will probably increase your variable costs (see page 32). This means that it may be necessary to increase your prices rather than absorbing the GST change, especially if your sales volume is likely to be less sensitive to price increases.  The key thing here is to base your decisions on actual facts and data from your business, your franchisor and your customers, not just on gut feel. After all, business owners are perhaps more sensitive about their own prices than are their customers.

‘In summary, unless your business is small and you plan to keep it that way, there are some very good reasons for registering or not de-registering. Registration does increase compliance costs but it requires you to keep better track of your books and your cash flow. As a result, you’ll have a better idea of how your business is tracking and you can stay on top of your tax obligations. If you take your franchise seriously as a business – and expect others to – then being GST-registered is the better option.’

Cash On The Side

One area that Estelle Logan is particularly concerned about is that de-registering might encourage franchisees to do ‘cash-only’ jobs to keep their income below the $60,000 threshold. ‘That means not declaring all their income and that, quite simply, is illegal. If the IRD ever catches them out they will be in real trouble, and quite rightly so.

 

I have interviewed potential franchisees who have asked, “How much cash should we be taking out of the business?” or “How much do your franchisees take?” Our answer is always the same – none. Not declaring income is stupid and we would never encourage them to do it. Not only does it put them at risk but there are other implications, too. If they’re not banking all their income, how do they borrow to buy a house? And when the time comes to sell their business, they’re going to get a lower price and less capital gain because they haven’t declared all their income.

 

‘We can’t control what our franchisees do, of course, but I believe every franchisor should be encouraging their franchisees to abide by the law, run their business ethically and show franchisees how to make a good and legal return.’

 This article first appeared in Franchise New Zealand magazine Volume 19 Issue 2

Discuss

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3
comments
Greg @ October 13th, 2014, 11:28 AM

Hi there I have thirty acres and want to get out of being get registerd could I transfer the property into my sons name apparently I have to pay 20 percent of what the property is worth

Reply
 

Simon Lord @ October 13th, 2014, 12:40 PM

Thank you for your question, Greg. It's not really relevant to the franchise focus of this site or possible for anyone to give you general advice on such a specific issue so I suggest you contact your accountant.

Ian Cartner @ September 8th, 2014, 06:35 PM

I have owned a lifestyle block for over 30years (10.acres). I did not pay GST when I purchased as it was not available but registered when I used it for rearing dear fawns at a time when they were very expensive. I am now ready to sell but find I have to sell to another registered buyer and the deer have long gone. I find I have to pay 15% on everything apart from my house and curtilage.
What is the purpose of this ?
This was to be my retirement fund

Reply
 

Simon Lord @ September 8th, 2014, 06:49 PM

Thank you for your comment, Ian. It's not really relevant to the franchise focus of this site but I suggest you contact your accountnant. Presumably you got the benefit of being GST-registered at the time?

Craig @ March 31st, 2014, 09:11 PM

How long after volunteerly registering for can you de-register. Senario - register to claim back the GST in buying the franchise but then is not benificial to keep going as earns less than 60K

Reply
 

Philip Morrison, Franchise Accountants @ April 7th, 2014, 05:15 PM

If you are voluntarily GST registered and claim GST at the beginning on assets like a franchise fee, then if you deregister because you are under $60K threshold then it is likely you may have to pay the GST back you claimed. The amount will depend on market value of the assets.

Note: This is general information only and should not be relied upon with out taking further advice. Each situation needs to be evaluated on its own merits and professional advice be sought

 

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