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It is an exciting challenge to start a business on your own. Becoming a sole trader is an excellent way to receive the benefits of working for a business while having total control. However, if your sole trader business becomes very profitable, you may need to register for GST. This article will outline:

  • what a sole trader is;
  • what GST is;
  • how GST works when you are a sole trader; and
  • how to register for GST when you are a sole trader. 

What is a Sole Trader?

As a sole trader, you work solo. You do not share your business with anyone, so you have total control of your business and its profits. Some specific businesses that operate successfully as sole traders include:

  • tradespeople – plumbers, electricians, painters
  • creative industries – hairdressers, models, journalists, hairdressers; and
  • other solo employment – working as a consultant, private accountant or nanny.   

Even though you are working alone, you still receive benefits outlined in New Zealand law, like paid parental leave, KiwiSaver and ACC if you are correctly registered. However, you also have specific legal requirements that you need to meet as a sole trader, including paying income tax and GST as required.

What is GST?

A goods and services tax (GST) is added to the price of products and services. Typically, it is 15% of the product price. However, most sellers add GST to the price of advertised goods, so most people do not know that they are paying for it.

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How Does GST Work?

However, as a business owner, GST works a little bit differently. If you earn more than $60,000 in 12 months, you will need to register for GST. This does not have to be a tax year strictly but instead can be any period of 12 months. Furthermore, it does not matter whether your business operates as a sole trader, partnership, or company. You will be charged penalties if you do not register when you need to. If you register voluntarily and then fall under the $60,000 threshold, you will be able to receive a GST refund, which will return some money to you. Additionally, if your profits fall below $60,000 a year and you do not want to keep charging GST, you will need to let Inland Revenue (IRD) know. You will need to calculate the day you want to stop charging GST. 

If your business is registered for GST, you can claim back the GST that you pay on goods and services for your business. You can also charge a GST of 15% on goods and services that you sell. This will then be paid to the government. 

When you file your GST return, you should work out the difference between the amount of GST you paid and collected. You may receive money from IRD if you have paid more than you collected, but if you collect more than you pay, you may need to pay more to IRD. 

You will need to keep accurate records of all your GST receipts, invoices and returns. IRD can ask to see your GST records at any point. 

How Do I Register for GST as a Sole Trader?

To register for GST, you will need:

  • your IRD number;
  • your business industry classification code (BIC);
  • to know how often you want to provide returns – monthly, two-monthly or six-monthly; and
  • to know which accounting basis you want to use.

When you register for GST, you need to file regular returns. You can choose how often you want to file these. You can choose to file them monthly, two-monthly or six-monthly. Most businesses choose to file them two-monthly or six-monthly. If you don’t choose a period, IRD will put you on the default period of two months. 

Additionally, you will want to know what accounting basis you want to use. An accounting basis is a way to calculate and pay your GST. There are two primary accounting methods that people use for their GST:

  • a payment basis: when you account for GST in the period where you’ve made or received payment. Most sole traders use the payment basis, as it means that you will not have to make a GST payment before your customers have reimbursed you; or 
  • the invoicing basis: where you account for GST in the taxable period you have sent or received an invoice. 

Key Takeaways 

When you are working as a sole trader, it is essential to keep an eye out for any possible GST obligations. When your business turnover nears $60,000, make sure that you consider registering for GST to fulfil your obligations. Though it may seem bad to pay more tax, GST also allows you to offset some of the costs you have for your own business. 

If you need help with understanding GST as a small business, our experienced business lawyers can assist as part of our LegalVision membership. You will have unlimited access to lawyers to answer your questions and draft and review your documents for a low monthly fee. Call us today on 0800 005 570 or visit our membership page.

Frequently Asked Questions

Can I stop paying and charging GST if my business will not turn over $60,000?

No, you need to formally de-register for GST with IRD before you stop paying it. If you do not, you risk having to pay significant amounts when IRD notices a gap in payments. 

What happens if I forget to choose the time period to submit my returns?

You will be placed on the default time of two months, meaning you will have to submit returns every two months. 

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