Dumb GST question?

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mb82

223 posts

Master Geek

#207626 5-Jan-2017 19:33

Feel like an idiot asking this but..

If I buy something for $10 and sell it for $15...

Let's say for arguments sake income tax is 20%

Not GST registered: $15 sale price - $10 cost price = $5 gross profit = $5 x 0.8 = $4 net profit

GST registered: $15 sale price - $10 cost price = $5 gross profit

15% of $10 cost price = $1.50 gst paid

15% added to sale price = 1.15 x $15 = $17.25 = $2.25 gst collected

$2.25 gst collected - $1.50 gst paid = $0.75 gst owed to IRD

So gross profit =$5 less $0.75 GST expenses = $4.25

$4.25 x 0.8 = $3.40 net profit

Am I missing something?

clinty

1180 posts

Uber Geek

Lifetime subscriber

#1699026 5-Jan-2017 20:16

Yep,

The gross profit with the GST included amounts is

GP=$17.25-11.50 = $5.75 and then you subtract the GST difference of $.75

making the same net profit as before

Clint

Edit : corrected my maths :)

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mattwnz

20096 posts

Uber Geek

#1699035 5-Jan-2017 20:27

IANAFA. However I think they were meaning that if they were to be GST registered, they would sell for the same price, so their net profit for not being registered would be more, not not being registered. In other words, a company that was GST registered would have to increase their selling price to cover the GST payment, in order to make the same net profit.

From my understanding, small businesses who don't sell enough to become GST registered, can sell goods cheaper than those who are, to make the same net profit. It is similar to overseas companies selling to NZ who don't charge GST, so they have a financial advantage over local companies. Although for overseas services, many overseas companies do now add on GST, and they have increased their fee as a result.

Disclaimer: I'm not an accountant or lawyer, so would recommend seeking pro advice.

kiwigander

231 posts

Master Geek

#1699065 5-Jan-2017 20:52

The only dumb question is the one you don't ask.

What you're missing is that all the GST you've paid for everything else (other than buying the item you're going to sell) involved in selling the item becomes a credit against the GST you collect when you sell that item. That's the GST on your office rent, power, water, computer system, etc, etc.

Disclaimer: I'm neither an accountant nor a lawyer.

Edit: first version was ambiguous

deadlyllama

1259 posts

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#1699094 5-Jan-2017 21:30

I think about GST inclusive prices as being a different type of number, like types/classes in programming. I'm not an accountant, but I do run a small GST registered business.

$10 GST incl = $8.70 + GST (10 divided by 1.15)

$15 incl GST = $13.04 + GST

Profit: $13.04 - $8.70 = $4.34

Profit less 20% tax: $4.34 * 0.8 = $3.47

GST to claim from purchase: $10-$8.70 = $1.30

GST to pay from sale: $15-$13.04 = $1.96

Net GST owed to IRD: $1.96 - $1.30 = $0.66 which happens to be 5-(5/1.15) i.e. the GST component of the difference between the GST inclusive sale and purchase prices.

richms

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#1699105 5-Jan-2017 21:59

And if you buy lots of things with GST on them in the course of your business and are paid from overseas where you do not have to charge GST, you can expect plenty of audits since you are always getting a credit on GST while being profitable.

Richard rich.ms

Geektastic

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#1699126 5-Jan-2017 22:23

richms:
And if you buy lots of things with GST on them in the course of your business and are paid from overseas where you do not have to charge GST, you can expect plenty of audits since you are always getting a credit on GST while being profitable.

Bet they hate that!

sen8or

1778 posts

Uber Geek

#1699182 6-Jan-2017 08:43

richms:

And if you buy lots of things with GST on them in the course of your business and are paid from overseas where you do not have to charge GST, you can expect plenty of audits since you are always getting a credit on GST while being profitable.

I could be mistaken, but if your business is not liable for GST on its sales, I don't believe you can claim GST on purchases.

I remember years ago when I was working for a finance company, we had to adjust our GST on expenses as only a small portion of our income was GSTable, so we could only claim a small portion of the GST input. Perhaps any tax accountants could best answer?

webwat

2036 posts

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#1699314 6-Jan-2017 12:40

You forgot that net profit is BEFORE income tax. There are lots of other things that could affect income tax such as rebates or donations, and the income tax is calculated on net profit anyway. Profit after tax goes to your retained earnings but not sure what its called.

Haven't checked your GST calculations but look right. You still pay the same income tax on your GST exclusive income as with the non-gst option.

EDIT: some people will want to buy something without the GST, which is ok if its occasional stuff not related your trade/business such as selling your car. Other people will want discounts on stuff you trade as a business thinking that you can avoid GST if they pay cash, so you either absorb the discount or cheat. I think its not worth cheating.

Time to find a new industry!

cadman

1014 posts

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#1699556 6-Jan-2017 20:08

mb82:

Am I missing something?

No - you have it right, although your math is a little out - profit in the GST registered calculation is $4.35 ((15 - 10) / 1.15). It's ~13% more (1 - (1 / 1.15)) = 0.1304...

You do have a greater gross profit if you're not GST registered when buying and selling at the same price points as a GST registered entity.