A Quick Reminder: How GST works in your business
Please note, my examples below have payment basis in mind. There are two options for your GST basis – payment basis (pay GST when payment has been received) or invoice basis (pay GST on the date of the invoice). Speak to your accountant or bookkeeper to find out which basis you need to be on. More information here.
When you are charging GST on the products or services you sell, you need to think about your business as just a vehicle. Picture this, your business is a freight train, which stops and collects GST (sale), holds the GST for a while (in your separate bank account) and then drops off the GST (returns it to the IRD) periodically.
You don’t need to return all of the GST you collect on your sales, if you have also paid GST on your purchases – you only have to return the difference.
For example – for the month of June you were paid by your customers (sales) $1000.00 including GST, you would have collected $130.43 of GST.
In June you also paid $400 (including GST) in business purchases – this means you would have paid $52.17 worth of GST.
The amount you will need to return to IRD is $130.43 - $52.17 = $78.26.
How to manage GST in your business
So thinking of your business, as a GST freight train - you need to manage the GST carefully to ensure that you have kept the GST aside (and not spent it!). GST, while in your "freight train," is part of your cashflow, and without careful budgeting, it's easy to accidentally spend it. Then, when your GST bill arrives, there may be no money left to pay it—definitely not a nice feeling!
What you should do is set up a separate savings account—this is where you will store the GST while it's in transit on your "freight train."
How much, and when to transfer to the bank account is the question. We usually suggest one of the following methods to our clients
1. Set up an automatic payment to the GST bank account of the average amount of GST you collect each week. Use previous GST returns from a suitable period to calculate the average.
This method is suitable for more established businesses, with predictable sales and expenses and also enough cashflow to top up the GST account when needed.
2. Review your GST return (live on Xero) and manually transfer the amount of GST owing.
This is the method I use in my business, as it's suitable for businesses who reconcile their Xero regularly, and have the discipline to make the transfer. It's also best for newer businesses or those in a growth phase. I review my GST return (live) monthly and top up my GST bank account as needed.
3. Each time a sale is made – transfer the GST amount over manually. This is suitable for businesses who make irregular, large ticket sales.
How we help our clients with their GST
For our clients, depending on their needs we will send a regular update of where their GST balance is - we can also see your GST bank account on Xero, and so can ensure there is enough money in there.
We complete and file your GST return within days of the period ending. This means our clients have as much notice as possible about their upcoming GST bill. We then send two reminders, with all the details to make they payment. When you make a tax payment, you need to know the tax type, the period and your IRD number - we include all that information in the email for you, so everything you need is right there.
Being GST registered, is even more reason to get a bookkeeper, as your financial compliance needs to be up to scratch – you want to make sure you are claiming all the GST you possibly can, but you also want to make sure you are not overclaiming – avoiding a large bill at the end of the financial year, which you will have to pay back.
Xero populates the GST return for you, and while that does make it easier for us all, it’s not necessarily correct – Xero relies on correct input. So, if you forget to add GST to your invoices, incorrectly treat entertainment expenses (which are only 50% claimable), overclaim GST on an asset with personal use (like your vehicle), or claim GST on transactions that don’t include GST (like subscriptions or overseas software companies)—your GST return will be incorrect.
If you have any questions regarding your GST or would like to chat about our monthly services, please book a call with us.
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