Once you’re full time, self employed, your next big milestone will likely be registering to pay GST. This is compulsory if your business not just earns $60,000 a year, but as soon as you think you’re LIKELY to earn $60,000 in a year. So for example, $60,000 works out to about $5,000 a month, and if you made an average of $5,000 a month over 3 months, you could safely assume it might be time to start thinking about registering for GST.

When you are GST registered, you need to give 15% of everything you earn to the IRD. It’s actually not considered ‘yours’ at any point – it is a tax that you are collecting on behalf of the government. When calculating the total you need to pay, you are allowed to DEDUCT the amount of GST you paid to other businesses during the same period. This means, if you earned $10,000, the GST on this is $1,500. But if you go through all your invoices from things you’ve bought during the same period, and that GST that you’ve paid to other businesses comes to $1,200, you only have to pay the DIFFERENCE – $300 – to the IRD.

If you are in a growth or start up phase, you might find that you’re spending more than you’re earning – for example maybe you made $10,000 and of course the GST on this is still $1,500 but actually you paid $2,500 in GST across all the invoices you paid while setting up – you would get the difference of $1,000 paid back to you, but only if you are GST registered. For this reason, some people choose to register for GST well before they are earning $60,000 – they will see more benefit from claiming back all their set up costs. If you think this might apply to you, check with your accountant whether they think you should be registering for GST early.

Registering for GST is super easy. You need your IRD number and your Business Industry Classification or BIC Code. A BIC Code is just a way of classifying your business by what you do most of the time an they’re super easy to find at https://www.businessdescription.co.nz. As an example, if you type ‘nail’ into the search bar it immediately brings up ‘Manicure Service’, for which the BIC Code is S951135.

You will need to have decided whether you want to complete your GST Return – basically a simple online report that goes to the IRD – either monthly, two monthly or six monthly. The more frequently you complete your GST Return, the more paperwork you have to do so of course under the rules of batching you would be better off doing then six monthly. You can only do this until your turnover goes over $500,000 a year but for most salons this shouldn’t be an issue. The downside of filing every six months is that you have to have the willpower to save your tax money for six months without touching it. If you are making $100,000 a year, your six-monthly GST could in theory be up to $7,500 so that’s a lot of money to have just sitting in an account untouched. You need to know you have the willpower on a quiet week or when a big bill comes up to pretend that money doesn’t exist. If you don’t think you can do that, file more regularly.

Lastly, you will need to know which accounting basis you want. This is just a way of choosing which payments you are paying GST on during which period and honestly it doesn’t really apply for salons. You’re choosing between a Payments basis, where you pay GST only once you receive money; an Invoice basis, where you pay as soon as an invoice is issued, whether it’s paid for or not, or a Hybrid basis which is a bit more complicated. It’s best for me to advise that you check with your accountant which they recommend selecting but really, a salon doesn’t issue invoices and then wait for them to be paid on the 20th of the month – your clients should be paying you before they leave the salon. For this reason it’s very likely that you will choose Payments basis.

Once you have all of this information, go to http://www.ird.govt.nz/online-services/service-name/services-g/online-gst-registration.html and register online. Once registered, you complete your returns on myIR, which is the IRD’s online service. It’s at http://www.ird.govt.nz/online-services/myir-secure-online-services.html.

When completing a return, you will need your IRD number. If you’re a sole trader, this is the same as your personal IRD number but if you’re a partnership or a limited liability company, you will have a company IRD number. You will also need to know your total sales and income, your total spending, and the amount of GST you’ve charged to your customers – in theory this should be 15% of that first sales and income number. The best thing I can advise you is to use the reporting feature of your Accounting Software. We use Xero and you literally just run a GST Report, and it spits out all the information you need to complete your return, complete with numbered boxes that match the numbered boxes on the actual return form so it could be easier. You just take the number in Box 1 on Xero and type it into Box 1 on MyIR. If, after transferring all the numbers over, the big number at the bottom – the amount we have to pay – matches what Xero told us, we submit and we’re done. If it doesn’t match, we’re now pretty good at working out why, but in the early days we would call out accountant, they would look at our Xero account on their end and teach us what went wrong and again away we went.

Be aware when completing your GST form that you’ll see a term called Zero Rated Supplies. It’s extremely unlikely that as a salon this will apply to what you do so don’t worry about it unless your Accounting Software automatically pops up a number in that box. You also don’t pay GST on a number of things such as interest, bank fees and wages as these are neither goods nor services. You also don’t pay GST on residential rent, tax payments, on purchases from non-GST-registered companies and randomly, on gold with a fineness of not less than 99.5% – you know, just in case you trade gold on the side. Hire purchase payments work a bit differently as do goods imported through customs so work through those with your accountant the first time you enter them into your accounting software.

Don’t worry too much about any of these dos and don’ts – remember how we talked about how every day you’re going to go into your accounting software and assign a code to every transaction from the day before? And that the software company will teach you how to do that. Well those codes are what tells the software how to treat each transaction when it comes to all kinds of tax, including GST. So if you’ve coded all those transactions each morning before starting clients, when it comes to GST time, you hit the GST report button and behind the scenes your software knows from the codes you entered that the rent isn’t included in the GST and those wages aren’t included in the GST and that part of your GST already got paid when you imported that extraction unit for your desk through customs.

Honestly, if I haven’t already convinced you to get an accountant and use accounting software, go do it! I could spend hours teaching you ins and outs of GST but when you use accounting software and hire an accountant, your records will meet legal requirements (and be kept for 7 years, another legal requirement), you don’t need to understand depreciation, apportion methods, anything scary. The time you save trying to do it on your own will easily outweigh the cost of the software and aside from all that saved time, it’s the mistakes you prevent yourself from making that really make the difference. A small mistake could mean you pay $20 more tax than you really needed to but a big mistake could constitute tax evasion and warrant a huge fine.

Once you do register, you need to put your prices up 15% to cover GST, since it’s not an expense you should be covering – it’s something that doesn’t and will never belong to you – you are collecting it on behalf of the government. To put that into perspective, a 15% increase of a $50 service is an extra $7.50 for every service, it’s quite a lot. In the Pricing for Profit module we will talk about how to manage price increases and ensure they don’t upset your clients.

Lastly, I’ve mentioned before that I highly recommend attending the free seminars run by Inland Revenue. Go to http://www.ird.govt.nz/contact-us/seminars/free-tax-seminars-workshops.html and choose the office closest to you. They currently offer an Intro to Business seminar and a GST Seminar. Both are half day workshops and are usually offered on the same day as each other. Like anything, the quality of education depends on the educator but I’ve only had good experiences with these workshops and learnt more than I could have ever hoped to when I attended them the first time. They’re free, so you’ve got nothing to lose.