Taxable, Exempt, and Zero-rated Supplies

Taxable-exempt-&-zero-rated-supplies

In our ongoing discussion about the complex aspects of GST tax, we continue to emphasize that GST is not always as straightforward as simply applying 15% to supplies or expenses. One particularly intricate area within GST pertains to claiming input tax credits when assets are used for making both taxable and exempt supplies.

Navigating the intricacies of GST tax, especially when dealing with zero-rated or exempt supplies, can be overwhelming for New Zealand taxpayers. It is essential to understand these distinctions to ensure proper compliance and accurate tax calculations.

GST Supplies Quick Overview

Broadly speaking, there are three primary categories of supplies under the New Zealand GST system:

  • Taxable supplies: Include goods and services subject to the standard GST rate (currently 15%), which businesses must charge on their sales and remit to the government.
  • Exempt supplies: these are transactions that attract no GST charges, and, as a result, businesses cannot recover input tax credits associated with such supplies.
  • Zero-rated supplies: these transactions are taxed at a 0% GST rate. While no GST is charged on the sale, businesses can still claim input tax credits related to these supplies.

Understanding Taxable Supplies

Taxable supplies are goods and services that are subject to GST at the standard rate of 15%. Businesses registered for GST are required to charge GST on their taxable supplies and can also claim GST credits on their business expenses.

Examples of Taxable Supplies

Some common examples of taxable supplies include:

  • Sale of physical goods, such as clothing, electronics, and furniture
  • Provision of services, such as consulting, transportation, and maintenance
  • Sale or lease of property
  • Telecommunication services
  • Imported goods and services

In general, if your business is GST-registered and the goods or services you provide fall under the category of taxable supplies, you must charge GST to your customers and file the necessary GST returns.

Charging and Claiming GST for Taxable Supplies

As a GST-registered business, it’s essential to charge and record GST on all taxable supplies made accurately. The process typically includes:

  • Invoice creation: Stating the GST-exclusive price, GST amount, and total (GST-inclusive) price.
  • GST collection: Charging the 15% GST rate to the customer.
  • GST record-keeping: Maintaining accurate records of all transactions, including the GST collected.
  • GST return filing: Submitting regular GST returns with the Inland Revenue Department.

Read more about:

New Zealand GST Calculator

How to Register for GST

Exempt Supplies

Exempt supplies are goods or services not subject to New Zealand’s GST. Businesses that provide exempt supplies are not required to charge GST on their transactions.

Examples of exempt supplies include:

  • Financial services (e.g., loans, account fees, debit/credit card fees)
  • Renting residential properties
  • Sale of fine metals (e.g., gold bullion)
  • Certain education and childcare services

Implications for Businesses Providing Exempt Supplies

Although businesses providing exempt supplies do not charge GST on their transactions, they may face several limitations:

  • No GST claims on expenses: Should a fully exempt business incur GST on their expenses (e.g., office supplies, utilities), they cannot claim input tax credits on those expenses.
  • Pro-rating: A business supplying both taxable and exempt supplies must determine a pro-rata percentage to claim input tax credits on shared expenses (e.g., rent, marketing).
  • GST registration: A business providing solely exempt supplies cannot register for GST and must not charge GST on their transactions.

Zero-rated Supplies

Zero-rated supplies are a unique category of goods and services that, despite being taxable, attract a GST rate of 0%. Essentially, no GST is levied on these transactions. However, as a GST-registered business, if you provide zero-rated supplies, you can still claim GST credits on the input tax incurred while procuring goods and services for your business activities.

Criteria for Zero-rated Supplies

The following types of supplies are generally classified as zero-rated:

  • Exported goods and services: Goods and services provided to customers outside New Zealand
  • Financial services: Specific financial services such as dealing in currency or securities
  • Sale of a going concern: Providing an entire business or a part thereof as a going concern
  • Certain medical equipment and pharmaceuticals include prescription medications or specialized medical equipment for disabled individuals.

It is essential to know the specific criteria for zero-rating a supply, as certain conditions or exceptions might apply. A thorough understanding of the GST legislation is vital to ensure accurate treatment of zero-rated supplies.

The Impact of GST Tax on Small Businesses

Businesses dealing with various types of supplies need to keep accurate accounting records and clearly distinguish between taxable, exempt, and zero-rated transactions. This is crucial for:

  • Calculating and charging the correct amount of GST on goods and services;
  • Filing accurate GST returns;
  • Claiming input tax credits on eligible purchases.

Individuals should also understand the difference between these supply categories, as this knowledge informs their purchasing decisions and helps them identify any inaccuracies in the GST charged by businesses.

FAQ

The taxable period in the GST returns process differs based on annual turnover. It can be one, two, or six months long, and it’s crucial to comply with these periods to avoid penalties.

Exempt supplies are certain goods and services that are not subject to GST and for which the business can’t claim any input tax credit. The specific types of exempt supplies can vary depending on the country’s tax laws.

While both zero-rated and exempt supplies do not include GST in their price, the main difference lies in the claiming of input tax credits. Businesses can claim input tax credits for zero-rated supplies but not for exempt supplies.

Distinguishing between taxable, exempt, and zero-rated supplies is important for calculating and charging the correct amount of GST, filing accurate GST returns, and determining eligible purchases for input tax credits.

Zero-rated supplies are goods and services sold or provided that are taxed at a rate of 0%. Despite the zero tax, these supplies are a part of taxable supplies, which allows businesses to claim input tax credits on them.

Conclusion

Understanding the intricacies of the Goods and Services Tax (GST) is a crucial aspect of conducting business, particularly for small businesses and individuals. The ability to accurately classify supplies as taxable, exempt, or zero-rated ensures precise GST calculations and compliance with tax legislation. It empowers businesses to claim eligible credits, thereby fostering financial efficiency. For consumers, a clear comprehension of GST nuances aids in making informed purchasing decisions and identifying discrepancies in charges. Knowledge of GST is, therefore, an indispensable tool for navigating the New Zealand commercial landscape.

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