Recently, a client paid me an extraordinary $8,500 to fix a simple GST mistake that could have been easily avoided.
Here’s how you can avoid making the same mistake when registering for GST with the IRD.
The 3 Registration Questions IRD Asks You (and How to Get These Right)
When you register for GST, the IRD asks you 3 key questions.
If you get these wrong, you can get your setup wrong and this can create major cashflow and tax problems later.
Here’s a simple guide to help you get this right.
1. Don’t Choose the Wrong Accounting Basis
There are three GST accounting basis options you can choose when registering. These are:
- Payments basis
- Invoice basis; or
- Hybrid basis
For most small businesses starting out, the Payments basis usually works best because you only pay GST after receiving payment from customers.
Why this works best?
Because choosing other than the Payments basis can distort your cashflow.
You end up paying GST on invoices that customers haven’t even paid you yet.
That becomes stressful very quickly when:
- customers pay late
- cashflow is tight
- large invoices remain unpaid
Once your annual turnover exceeds $2 million, you generally need to move to either the Invoice or Hybrid basis.
Tip: Ask your accountant to confirm which GST basis you should be using and whether it suits your business size and industry.
2. Selecting the Wrong GST Filing Frequency
The second key question IRD asks is
‘How often will you file your GST return?’
Again, you get 3 choices:
- Monthly
- Two-monthly; or
- Six-monthly
Many business owners automatically choose six-monthly because it sounds easier as you only need to file twice an year.
But in practice, it often creates bigger problems later.
Why is this a problem?
Because GST slowly builds up in your bank account and many new business owners accidentally spend this money that actually belongs to the IRD.
Then when the GST bill arrives, the cash isn’t there.
For most small businesses, I generally recommend two-monthly filing, because it strikes a good balance between between:
- admin
- discipline; and
- cashflow management
Monthly filing can sometimes work well if:
- you want to stay ultra-current
- you prefer tighter financial control; or
- you regularly receive GST refunds
Tip: If your annual revenue exceeds $500,000, you generally cannot file six-monthly. Even if you can, think carefully before selecting it.
3. Misaligned GST Filing Periods
This is a small detail many business owners overlook. And it can create unnecessary extra headaches and accounting costs later.
If you file GST six-monthly, your filing periods should ideally align with:
- March; and
- September
If you randomly choose other periods during registration, your GST periods may not line up properly with the standard NZ financial year-end.
Why is this a problem?
Because this creates:
- extra reconciliation work
- timing differences
- confusion at year-end
- additional accounting costs
Tip: When registering or changing filing frequency, ask the IRD to align your GST periods with March and September for smoother year-end reporting.
The Takeaway for NZ Business Owners
Registering for GST with the IRD is relatively easy.
But choosing the correct setup options is where many new business owners get caught out, because they often get it wrong.
A small amount of planning upfront can save thousands later.
Its usually best to have a chat with an accountant to ensure you’re selecting the right answers to the key questions, and to ensure that you’re on the right track.
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