Tax accounting errors are not the end of the world. Typically, an accounting error when filing for Goods and Services Tax (GST) can simply be corrected with an addendum to the next return, and IRD penalties for minor GST errors are usually modest. Those penalties can add up quickly, however, if the underlying issues aren’t addressed.
Below, the team at BDO Whangarei have outlined some of the most common errors that NZ businesses make when filing GST returns.
1. Registering for GST at the wrong time
New Zealand businesses are required to register for GST when they reach $60,000 of revenue or more in a year. Registering before your business crosses this threshold could result in potentially thousands of dollars in unnecessary taxes, but you may choose to do so anyway if you sell to or deal with other GST registered entities.
If you sell primarily to the public, however, registering for GST can feel like a bit of a Goldilocks affair; too early and you overpay, too late and you risk a penalty from IRD. Track your revenue closely and speak to your business advisor to get it just right.
2. Simple accounting errors
Missing invoices and incorrect figures are a persistent nuisance for NZ businesses, because a simple accounting mistake can occur anytime and on any invoice. Even a modest error in your GST returns could result in a penalty from IRD steeper than you would have paid to have your GST filed by a professional tax accountant.
3. Claiming GST on unregistered transactions, such as overseas suppliers
You cannot claim GST on goods or services you purchased from overseas suppliers. This is a mistake most made on purchases from international businesses like Google or Facebook. Even though this is a common error, typically a basic oversight, you can still be saddled with frustrating penalties, so be mindful to check that GST has been charged on your invoices.
4. Buying assets or equipment that may be used for personal means
You may use business funds to acquire goods or services for personal use, but these may not be claimed for GST. Not all business owners are exactly sure where to draw this line—where professional use ends, and personal use begins—so be sure to speak with your accountant if you need clarification.
5. Including invoices and expenses in the wrong GST return
Sales invoices need to be identified and marked as late if they are filed in a subsequent GST period, to avoid a shortfall penalty from IRD. Again, speak to your accountant if you have questions about dating or labelling invoices, and ensure that all invoicing has been entered and dated in your accounting software every month.
6. Treating lease and hire invoices the same as standard purchases
Invoices for standard purchases are treated differently than those for leases and hires. If you are taking ownership of an asset via Hire Purchase (HP), you can claim GST when you assume ownership upfront for the period over which time you will hire, but not when making the HP payments.
Leasing, on the other hand, is different. GST can be claimed on a lease for each scheduled payment, but be careful. IRD does not treat all lease conditions the same, so GST sometimes applies to only part of the lease payment.
7. Transactions with second-hand goods
You can often claim GST when purchasing second-hand items, even if you aren’t dealing with a GST registered vendor. When selling second-hand items or purchasing from associated parties, you must keep detailed records of supplier information, purchase dates, product descriptions, quantities, and purchase prices to prove you haven’t given yourself an unfair advantage. Your accountant can help ensure these transactions are appropriately documented.
8. Mislabelling asset purchases/ Non GST Expenses
Business assets need to be labelled for IRD. Business assets that will occasionally be used for personal use can be claimed only to the extent that they are used in a business capacity. Items that are exempt from GST such as bank fees, donations, interest, or life insurance cannot be claimed at all.
9. Not charging GST
Your business needs to compete, and that includes offering competitive prices. However, you must remember to include GST in your pricing or risk eliminating your profit margin. If you are a small business with low revenue, check with your accountant to see if you can de-register. Otherwise, IRD will expect you to continue collecting and paying GST.
10. Double-claiming GST on purchases and repayments
When financing major business purchases, remember that you can claim GST on the purchase, but not the repayments. This will ensure that your asset finance projects are reported correctly.
GST consulting and advice for your business
BDO’s experienced business advisors boast years of experience with GST and the impact it can have on your business. Let us help you with a review of your GST systems and ongoing GST consultancy and Contact BDO today!