GST for beginners

Over the years, I’ve worked with hundreds of new franchise business owners to help them evaluate opportunities and establish and manage new ventures. For those who haven’t been self-employed before, one topic that always causes concern is GST – Goods & Services Tax. What is it, when do you charge it and what do you have to do with it? 

People are right to be concerned because, if you get it wrong, GST can impact your business’s cash flow and (potentially) profitability. It’s an area where taking advice from friends and families, no matter how well meaning, can cause real problems. Accordingly, it pays to seek out a franchise-experienced chartered accountant to help you at the very start. Remember, good advice pays, not costs. 

basic facts

GST was introduced in New Zealand on 1 October 1986 as a shift from direct tax, like PAYE and company tax, to an indirect consumption-based tax – the start of the ‘user pays’ era under Roger Douglas. It started off at 10 percent and is now 15 percent. Based on 2013/2014 data, GST makes up about 32% of the total tax take, so it’s here to stay. In some countries, GST is called VAT (Value Added Tax). 

what is GST?

Goods and Services Tax (GST) is a tax on most goods and services in New Zealand, most imported goods, and certain imported services. Very few things aren’t taxed under GST: the most notable exceptions are letting or renting a private dwelling, and financial services such as interest. 

When you are buying a business, you need to know whether any price quoted is inclusive or exclusive of GST. If it’s a new franchise, GST will generally be payable; if it’s an existing business, it may be zero rated for GST as it meets the criteria of a ‘going concern’. So do your homework and avoid surprises. 

how does it work?

If you operate a GST-registered business, you are required to charge 15 percent GST on your sales and income. You pass this on to the IRD, but before you do so you are entitled to deduct the GST that you’ve paid on your own purchases and expenses on which GST can be claimed (which may not always be the case). You calculate the diference in your GST return. If your income is higher than your expenses (which it may not be every time you complete your return, depending on how your business operates) you will have to make a GST payment to the IRD. If not, you claim a GST refund from them. 

to GST or not to GST, that is the question One of the first things you’ll need to find out is whether you need to be GST-registered at all. If your business has turnover (sales) of $60,000 per year or is likely to earn $60,000 over the year, then you must register. If it doesn’t, you can choose whether you register or not. This is the sort of question that can arise with an owner/operator franchise such as cleaning. 

There are all sorts of reasons for registering voluntarily, such as cashflow management or having clients who prefer to deal with GST-registered suppliers, but seek the advice of your accountant before deciding. 

GST registration

At the time you register, you will also need to make critical decisions about how your GST will be calculated (on invoice, on payment or a hybrid of the two methods) and how often you will need to file GST returns (monthly, 2-monthly or 6-monthly). To do this, you and your accountant will need to analyse the dynamics and the cashflow cycle of your business.  

For example, you might handle GST differently according to whether you were a service-based franchise, a food & beverage franchise or a building franchise. Do you offer credit? Are you a cash business? Do you pay for your own supplies on credit or on receipt? This is an area where your accountant should also be able to offer assistance. 

set up a system

Basically, GST is a tax that businesses collect on behalf of the government and pass on to the IRD. This means that, as a GST-registered franchisee, you are responsible for having a system to capture GST both collected and paid so you can complete the GST returns accurately. Computers and online systems such as Xero can make this easy, but take advice from your accountant who can recommend a suitable system and set it up the right way to ensure the GST reports can be relied on. 

The important thing to know – and to continue to remember – is that GST is money that you are collecting ‘on trust’ and it is not yours to spend! By having a good accounting system in place, you can watch your cashflow management and ensure you’re not dipping into the GST account to fund your business. 

pricing matters

There are some common conventions regarding pricing. Business-to-business goods and service transactions are often quoted exclusive of GST (eg. $1,000 +GST) whereas business-to-consumer transactions are usually GST-inclusive (eg. a washing machine marked $1000 will be priced inclusive of GST, so the actual price is $869.57 + $130.43 GST). Make sure you price items and quote for services clearly and appropriately. 

final comments

As a franchisee, you’re likely to be involved with GST matters from the very start. Your professional advisors will charge GST even before you’ve signed the franchise agreement, the franchise fee will attract GST, and so will most of your other start-up costs. Remember, though, that you’ll be able to claim all that GST back on your first GST return. 

The above is designed to give you a brief outline of how GST works and some of the things you need to look out for. You can find more information on the IRD website, but the most important thing of all is to consult a franchise-experienced accountant before you register. Get it wrong, and it will cost you time and money – get it right, and it need never be a problem.    

This advice is of a general nature only and expert advice should be sought to get the right advice for your specific situation.

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We welcome links from other websites to this article. Please note that this article is copyright © Eden Exchange NZ Holdings Limited, Franchise New Zealand magazine and Franchise New Zealand On Line. While it may be downloaded for personal use, no part may be reproduced on any other website, in electronic or printed form or in any other form whatsoever.