Juggling GST to put cash in your pocket

Law Briefs

CCH New Zealand

It doesn't take a rocket scientist to work out that cash flow is vital when you are in business. That's why it makes sense to hold on to your money as long as possible (within the law) before handing it over to the Inland Revenue Department.

So what can businesses do to make the GST rules work for them, rather than against them?

Is it best to file GST returns reasonably often, or only twice a year?

Generally speaking, businesses registered for GST have three choices.

They can file returns once a month, once every two months or once every six months.

The application form for GST registration requires you to choose one of these options. The IRD automatically registers you for two-monthly filing unless you specifically request otherwise.

Six-monthly filing can be a very attractive option for small businesses. The administrative cost and trouble of doing the books is obviously reduced by doing it only twice a year.

More significantly, there is a substantial cash-flow advantage in receiving GST throughout the six-month period but having to pay that GST to the IRD only at the end of the six months.

Six-monthly filing is not allowed if your annual turnover (excluding GST) is more than $250,000.

But not every business will benefit from six-monthly filing.

Businesses which regularly find themselves in a net GST credit with the IRD are better off filing their returns monthly.

Exporters are a good example. While export sales are zero-rated for GST, exporters can still claim back the GST on business supplies they buy. So it makes sense for such businesses to get their GST refunds from the IRD as soon as possible. The administrative costs of filing monthly are outweighed by the cash-flow benefits.

What is the difference between being registered on an invoice basis and being registered on a cash basis? Which is preferable from a cash-flow perspective?

The application form for GST registration gives you three options for accounting for GST:

* Payments (or "cash") basis.

* Invoice basis.

* Hybrid basis.

The payments basis is the most straightforward of the three options, and is the one many small businesses choose to use. It means you have to pay GST on goods or services you sell when you receive payment for them. You can also claim back the GST on goods and services when you pay for them.

Any business that sells mainly on credit should use the payments basis to maximise its cash flow.

Example: A hardware supplies wholesaler has a customer base of retailers. It gives most of them 30 days to pay their invoice. Some pay after 30 days, but a significant number delay payment until long after the 30 days has passed.

For June and July, the wholesaler billed $40,000 in sales, but received payment for only $20,000. By accounting for GST on a payments basis, the wholesaler is saved from having to pay GST on money not yet received.

Businesses with turnovers of more than $1 million a year cannot use the payments basis.

Accounting for GST on an invoice basis is a little more complicated. You have to pay GST on goods and supplies when you receive any payment or when you issue an invoice, whichever is the earlier.

You claim back GST on the same basis - when you make any payment or when an invoice is issued to you, whichever is the earlier.

Any business that buys mainly on credit should use the payments basis to maximise its cash flow.

Example: a small supermarket buys most of its goods on credit from one or two large suppliers. During June and July, it supermarket buys $40,000 worth of stock on credit.

Even though the supermarket does not have to pay for that stock for another 30 days, it is able to claim back the GST on the $40,000 when it files its return. The supermarket will therefore have the use of that money until it has to pay for the stock.

Other businesses which would benefit from being registered on an invoice basis are those planning to buy a significant capital item with a long time lapse between payment of deposit and payment of the balance.

Example: a panelbeating company decides to buy some commercial land and buildings from which to run its business. It pays the GST-registered owner a deposit of $20,000 in June, and takes possession soon after. The settlement date is not until December, when the $180,000 balance of the purchase price is due.

If the company files its returns every month (or every two months), and accounts for GST on an invoice basis, it can claim back the GST on the full $200,000 purchase price in its June (or June/July) return.

How often you file, and whether you account on a payments or invoice basis, is not cast in stone. You can apply to the IRD at any time to have these classifications changed, provided you don't exceed the turnover thresholds.

The hybrid accounting method is a mixture of the two other systems. Businesses have to pay GST on an invoice basis, and can claim GST on a payments basis. This system invariably results in cash-flow disadvantages for businesses.

There are definite financial advantages to choosing a GST system that fits in with the financial ebbs and flows of your business. If in doubt, talk to your financial adviser to make sure that the GST system is working for you.

* This article is taken from Business Matters, a bi-monthly publication for small to medium-sized businesses.

* Auckland-based CCHNZ is a tax management and law publisher.