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Setting up a business as a sole trader in New Zealand is straightforward, which is fantastic for those wanting to start their new business as soon as possible. However, there are still some mistakes commonly made by new sole traders. In addition, there are legal requirements for sole traders. As such, sole traders need to be across these to understand their obligations. This article sets out three common mistakes to avoid for a sole trader, including:

  • forgetting to register for GST; 
  • not meeting AML requirements; and 
  • not obtaining required licences or registrations.

Forgetting to Register for GST

A common mistake made by new sole traders is thinking that registering for GST does not apply to them. This misunderstanding is typical because they are not operating a company. A sole trader structure does indeed simplify your tax calculations to some degree. However, it is not true that sole traders are exempt from GST. 

If you think you earn more than $60,000 a year, you must register for GST as a sole trader. You also have the option of registering voluntarily for GST at any stage as a sole trader. However, this is not a requirement until the $60,000 earnings point.

Note that New Zealand’s GST is 15%. However, there are some advantages for sole traders who are GST registered. For instance, you can claim back the GST you pay on things you buy for your business. If you do this, you should collect and keep the receipts for whatever items you plan on claiming back at a later stage. Additionally, it can be helpful to discuss with an accountant how best to manage your finances at the end of the tax year. 

Not Meeting Your AML Requirements

If your business is managing money, there are obligations to meet Anti Money-Laundering (AML) requirements. Similar to rules around GST, some sole traders make the mistake of thinking they do not need to meet these requirements. However, just because you are not a company or other business structure does not mean your sole trader business is exempt. 

Whether AML requirements apply to your business depends on the tasks and responsibilities you have. Importantly, it does not depend on your business structure. In other words, you need to meet AML requirements if your business involves:

  • managing money or assets for clients;
  • providing trust or company services;
  • selling real estate;
  • offering conveyancing services; or
  • handling large amounts of cash.

Your AML requirements will include record-keeping obligations and the need for Know Your Customer (KYC) information from customers.

If you have any questions about the specific implications for your business, you should check with a specialist legal advisor.

Not Obtaining Required Licences or Registrations

You may need licences or registrations depending on the kinds of work your sole trader business is undertaking. This may also include qualifications for a particular trade, for instance, building or plumbing certificates. 

Remember that a sole trader structure is a way of organising and formalising your business’ affairs and management. It does not, however, cover other kinds of legal requirements you may have depending on the nature of your work.

Note that your business needs for specific licences or registrations will change as your business evolves. This is particularly the case if you begin to expand or offer more products and services. For instance, if you want to start offering food or alcohol to customers while they wait in your store, you will need a food licence to do this. Mistakes such as these can cost your sole trader business with heavy fines or even business closure. 

Key Takeaways

Being a sole trader is a great and flexible way to structure your new business in New Zealand. However, there are still a series of legal and regulatory requirements that come from doing business. For instance, if you earn more than $60,000 per year, you must be registered for GST and ensure you meet your obligations. Other examples include meeting AML requirements if you are handling large assets or lots of money. So, as a general rule, while a sole trader structure gives you flexibility concerning your business arrangement, you will still need certifications and licences for the work carried out by your business. This is true no matter your business structure. 

For more information about the sole trader structure and mistakes to avoid, contact LegalVision’s business lawyers on 0800 005 570 or complete the form on this page.

Frequently Asked Questions

Do sole traders need to register for GST?

Sole traders can choose to register for GST at any point but must do so if they think (or do) earn over $60,000 a year.

Are sole traders exempt from AML requirements?

No. Sole traders still have to comply with AML requirements like other entities. This is relevant for sole traders that manage money or assets for clients or sole traders that sell real estate or manage lots of cash at one time.

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