The Goods and Services Tax (GST) is the way the accounting process is established for businesses in New Zealand. In simple terms, GST can be defined as a tax that is included in the prices of goods or services one buys. While GST is intended to be simple, many businesses make unintentional errors that result in financial penalties and compliance concerns. Understanding these avoidable mistakes and applying preventative tactics is critical for your company’s financial health and legal position.
1. Delaying GST Registration
One of the most common blunders is deferring or delaying your company’s GST registration. Businesses in New Zealand that have an annual turnover of more than NZD 60,000 are required to register for GST. Failure to register at the earliest might result in penalties and backdated GST payments. To avoid this, keep track of your money regularly. Online accounting software can provide real-time insights into your earnings, allowing you to file for GST as soon as you reach the threshold.
2. Incorrect GST Claims for Expenses
Not all business expenses qualify for GST claims. Like the definition says, GST is to be charged only on the Goods or Services sold by the company, hence, no other expenses can be included under it. Businesses sometimes mistakenly claim GST on non-deductible items such as personal charges, certain entertainment fees, and financial services.
For example, GST should not be charged on expenses for personal use or exempt supply. To avoid this mistake, keep thorough records of all expenses and check with a tax professional to assess GST eligibility before filing claims.
3. Ignoring Adjustments for Personal Use
When business assets or services are used for personal use, the GST must be adjusted proportionately. Claiming full GST on things partially used for personal reasons may result in mistakes. For example, if a car is utilised for both business and personal travel, you should only claim GST based on the business usage. Having a system to track usage and alter GST claims to reflect real company use is critical for compliance.
4. Inconsistency in GST Reconciliation
GST account reconciliation is done on a regular basis to ensure that your records match the actual transactions. Inconsistent or infrequent reconciliation can lead to undiscovered disparities, which may result in audits or penalties. Establish a monthly or quarterly reconciliation schedule for your GST accounts with your tax accounting firm so that it is streamlined for all. An accounting software can help automate this procedure, decreasing the possibility of errors and ensuring that your GST reports are correct.
5. Choosing an Incorrect Accounting Basis
Businesses in New Zealand can account for GST on two different bases: payments (cash) and invoices (accrual). Choosing an incorrect approach might have an impact on cash flow and GST liabilities. For example, utilising the invoice basis means you pay GST when an invoice is issued rather than when payment is received, which might strain cash flow if clients delay payments. Here, you may want to check your company’s cash flow patterns and work with a financial professional to determine the best accounting basis. Regularly revisit this decision, especially if your business circumstances alter.
| ✅ GST Dos | ❌ GST Don’ts |
| Register for GST on Time – If your turnover exceeds NZD 60,000, register promptly to avoid penalties. | Delaying GST Registration – Late registration may lead to backdated GST payments and fines. |
| Maintain Proper Records – Keep invoices, receipts, and transaction logs for at least 7 years as per IRD requirements. | Ignoring Record-Keeping – Not maintaining proper records can result in compliance issues and financial penalties. |
| Choose the Right GST Accounting Basis – Decide between a cash basis (when payments are received) or an invoice basis (when invoices are issued) based on your business needs. | Using the Wrong GST Accounting Basis – Selecting an incorrect method may lead to cash flow mismanagement. |
| Reconcile Your GST Returns – Regularly match your bank transactions with GST filings to avoid discrepancies. | Filing Incorrect GST Returns – Errors in returns may lead to audits or penalties. |
| Claim GST Only on Business Expenses – If an expense is partly personal, claim only the business portion. | Claiming GST on Non-Deductible Expenses – GST cannot be claimed on personal expenses, certain entertainment costs, or exempt items. |
| Understand Zero-Rated & Exempt Supplies – Ensure correct classification of GST transactions. | Misclassifying GST Transactions – Confusion between zero-rated, exempt, and taxable goods/services can lead to miscalculations. |
| Submit GST Returns on Time – File your GST returns before the deadline to avoid penalties and interest. | Missing GST Deadlines – Late filings may attract fines and interest charges. |
| Consult a Tax Professional – Seek expert advice for better compliance and efficiency. | Relying Solely on DIY GST Management – Incorrect calculations can be costly; use accounting software or professionals. |
6. Mismanaging GST Return Filing Frequency
Businesses can file GST returns on a monthly, bimonthly, or six-monthly basis, depending on their revenue and preferences. Choosing a less frequent filing schedule may appear easy, but it can result in delayed GST refunds or bigger, more difficult-to-manage payments. You must understand your company’s cash flow and administrative capacity to choose the best filing frequency. Remember that filing more frequently can help you manage your cash flow and make appropriate adjustments.
7. Ignoring Changes in Business Structure
As businesses grow, their structures may shift from sole trader to partnership or company. Failure to update GST registration information to reflect these changes can cause compliance concerns. For example, switching from a sole trader to a limited company necessitates a new GST registration for the business. Always notify the Inland Revenue Department (IRD) of any structural changes and get an understanding of the GST consequences of such transitions.
8. Errors in Property Transactions
Property transactions in New Zealand are subject to special GST requirements, and misconceptions can result in substantial financial implications. For example, the sale of commercial property is often subject to GST, whereas residential property sales are exempt. Wrongly classifying the nature of the property or failing to follow the “zero-rating” provisions in some transactions might lead to costly blunders. When dealing with property, consult with a tax professional to ensure proper GST treatment and regulatory compliance.
9. Inadequate Recordkeeping
Poor record-keeping is the most basic flaw that can result in errors in filing your GST returns and difficulty during audits. Businesses in New Zealand are required by law to keep records for at least 7 years, which includes invoices, receipts, and GST returns. Always have a strong record-keeping system, whether digital or manual, to organise and store all financial documents consistently. Back up your digital records regularly and make sure that all transactions are accurately and quickly captured.
10. Misunderstanding Zero-Rated and Exempt Supplies
Confusing zero-rated supplies (taxable at 0% GST) with exempt supplies (not subject to GST) might result in inaccurate GST filings. For example, exporting commodities is zero-rated, allowing you to claim GST on connected expenses, whereas financial services are excluded, preventing you from claiming GST on related expenses. Understand the distinctions between zero-rated and exempt supplies. To guarantee that your goods and services are treated correctly under GST, consult the IRD rules or a tax professional.
11. Not Seeking Professional Advice
GST laws can be complex, and attempting to navigate them without professional tax advice might result in costly blunders. Regular appointments with accountants or tax experts can provide personalised advice specific to your business activities. They can assist you with navigating complex transactions, keeping up with legal changes, and ensuring that your GST operations are compliant and efficient.
Streamlining GST Returns for Business Success
Filing GST returns is not a one-time activity, as we can observe from this article and our business processes. Hence, having a streamlined approach can help you and your business focus on running it efficiently while all matters concerning GST are taken care of in the background.
Finally, while GST is an important component of New Zealand’s tax system, efficient management requires precise attention to detail. Businesses may ensure compliance, optimise financial performance, and focus on growth and success by becoming aware of and avoiding these typical pitfalls and proactively taking preventative measures. If you have any queries or doubts, you can get in touch with us to help simplify the process.
