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The mistake that ran for 10 years
One of our clients ran a GST-registered consultancy and also owned several residential rental properties. On the advice of friends, they claimed GST on the rental expenses. Because long-term residential rent is exempt, no GST was charged on the rental income, which meant the claims should never have been made.
After about 10 years, they realised something was wrong and rang IRD, whose advice was to amend the returns already filed. The client then came to us, and we prepared a detailed voluntary disclosure to set the record straight. Luckily for them, it was a very good outcome, and a happy client. But some businesses aren’t so fortunate and end up paying a big fine.
When GST registration is required – straight-up advice
On the face of it, GST is simple. You charge it on sales and claim it on expenses. In practice, the rules are more complicated than they look, and the clients who come to us after a mistake have usually found that out the expensive way.
You need to register when you carry on a taxable activity and your turnover for the last 12 months was more than $60,000, or you expect it to exceed $60,000 over the next 12 months. You must also register if you are already including GST in your prices, even when turnover is under the threshold.
A taxable activity is any activity carried on regularly that involves supplying goods or services for a price. Working for a salary, private transactions and hobbies do not count. Long-term residential rent carries no GST, while commercial rent does. Short-stay accommodation is a taxable activity and is treated differently, with special marketplace rules for platforms such as Airbnb and Bookabach®.
The registration nobody saw coming
A trust client held long-term residential investments and so was not GST registered. It then bought and operated a luxury property on Airbnb, unaware of the GST requirements. By the time we found out, the registration threshold had already been breached.
We advised the trust on the requirement and arranged the registration, and the client was able to claim a substantial refund of the GST on the purchase price. The point is not that this one ended well. It is that the new activity changed the trust’s GST position, and nobody checked.
The most common mistakes, and what they cost
Across these cases and many others, the same four mistakes appear.
- Businesses fail to register when they should.
- Fail to keep complete records.
- Don’t calculate GST correctly.
- Miss the due dates for returns and payments.
The cost is rarely just the tax. One client paid GST to IRD on exempt transactions, so the payments were never needed. We found the problem while completing the year-end financial statements. The amounts were substantial, and we completed a voluntary disclosure to claim them back. In the meantime, the payments put real pressure on cash flow, and the client paid accounting fees to correct the records and pursue the refund. Errors in the other direction bring penalties and interest on short payments, and sometimes difficulty finding the cash to pay GST that was due.
Substantial or consistent refund claims are often checked
GST returns claiming substantial refunds are often reviewed before the refund is released. IRD sends a standard letter explaining that the refund is being withheld while the return is checked, and listing what it wants to see: usually a detailed explanation of the taxable activity, working papers showing the GST calculations, bank statements, copies of invoices and legal statements for property transactions.
One client claimed a refund in every return, and IRD wrote to ask how and why. It was a simple return, but IRD still required a detailed account of the business being carried on.
Another client prepared their own returns and made several errors in the claims and calculations. When we completed their year-end accounts, we pointed out the mistakes and the steps needed to fix them. They chose not to act. IRD later looked at them over an unrelated issue, which led to questions about the GST errors, and corrections were needed for several periods. It was a costly process that early action would have avoided.
What your obligations look like
Once registered, you must charge GST at 15% on sales, give customers the right tax invoices, keep complete records of sales and expenses, and file returns and make payments by their due dates.
Two choices made at registration then shape how this works, and both can be changed later. The first is your accounting basis. The ‘payments basis’ is available only if turnover in any 12-month period is $2 million or less, and accounts for GST when money is received or paid. The ‘invoice basis’ is open to anyone and accounts for GST when an invoice is issued or received, or when payment is received for sales if that comes first. A hybrid basis, rarely used by small businesses, uses the invoice basis for sales and the payments basis for expenses.
The second is filing frequency. Two-monthly is the standard option for turnover up to $24 million, six-monthly is available only where turnover is under $500,000, and monthly filing is open to anyone but compulsory above $24 million.
How to avoid GST problems
Keep your records complete and your filings on time. Review your registration status whenever your activities change. Treat unusual transactions, such as a property purchase or a new type of income, as a prompt to check the GST treatment before the return is filed. And when advice is given to fix an error, act on it.
Unsure about your GST position?
If you would like us to check your GST registration, returns or records, or you have found an error you are not sure how to correct, get in touch with our team.
This article is general in nature and is not a substitute for specific advice tailored to your circumstances. Tax rates and thresholds referenced are current at the time of writing and are subject to change.
