Owning a business for more than 10 years is no easy feat, with a person more likely to live to 100 than to be in operation for a decade.
Video / Master Card / Corey Fleming
Over a third of the country’s sole traders are choosing to earn below the median income to avoid passing costs to customers while avoiding the GST threshold, according to a new business survey from accounting service provider Hnry.
The latest Sole Trader Pulse survey found that 36% of New Zealandsole traders purposely earn under $60,000 per year to avoid the threshold requiring them to register for GST.
Hnry co-founder and chief executive James Fuller said the current settings are holding the business community back.
“These recent Pulse findings show the current GST settings limit earning potential, business growth and ambition at a time we need this most. It’s been around 15 years since it was last reviewed, and based on previous reviews and changes, we are due for it to be looked at,” Fuller said.
James Fuller, co-founder and chief executive of Hnry.
The current earnings threshold that requires businesses to register for selling products with GST is $60,000, and the figure has not been adjusted for inflation or wage growth since 2009.
According to the survey, 56% of respondents support increasing the threshold to $75,000.
“If the GST threshold were to be increased, it would not only boost productivity, it would immediately empower sole traders to grow, and provide targeted relief that’s desperately needed,” Fuller added.
For those choosing to earn above the threshold who sell their product or service to the public, it means either increasing their prices by 15% or absorbing the increase. Trading between GST-registered businesses offsets the costs.
Of sole traders surveyed, 43% said they had either definitely or probably lost businesses due to having to increase prices.
Personal trainer Carl Rein told Hnry that he has to choose clients carefully to make sure he doesn’t pass the threshold.
“Increasing my rates by that much would impact my earnings because people have less to spend on wellness, particularly in Wellington,” Rein said.
“Once you hit $60,000, you have to earn a lot more quickly to avoid a pay cut unless you think your clients can afford a 15% increase. At the moment, it’s just not worth it, so I have to manage my workload to stay under, which causes uncertainty towards the end of the year.”
Movement on the issue is unlikely
GST specialist partner at Deloitte Allan Bullot thinks any change to the GST threshold is “very unlikely”.
“If you were using the same sort of indexing as generated CPI, it’d now be up around $87,000,” Bullot said.
“There are some people around that go, ‘hey, it hasn’t been indexed. Maybe we should lift it up to $100,000?’ I have a certain degree of sympathy for that in terms of logic and processing and keeping people in or out of the net.”
Australia’s version of the system currently sits at A$75,000 (NZ$81,000), with the United Kingdom’s even higher at £90,000 (NZ$191k).
Allan Bullot - GST specialist partner at Deloitte - thinks any change to the registration threshold is extremely unlikely.
Photo / Michael Craig
“The counterargument that’s around is from a conceptual perspective, everybody should be in the GST net. We only have a threshold because of compliance costs, so we don’t want to force people to collect costs tax when it’s going to cost more to collect than we’re actually going to earn,” Bullot added.
“There’s actually been some pushback of, well, maybe we should look at it and we should lower it.”
On Fuller’s suggestion that increasing the threshold would boost productivity, Bullot said it would only lead to more questions, particularly of where you draw the line.
“Anytime you have a boundary line in tax, you’re going to create distortions. You want to try and minimise where those distortions occur,” Bullot said.
Bullot said it was “extremely unlikely” that any changes to the registration threshold will occur, and that people should be careful what they wish for.
“I question whether Inland Revenue is really wanting to devote the resources to it at this stage.”
Minister wants to strike a balance
Minister for Revenue Simon Watts said that the government recently received a petition on the issue, but decided not to proceed with it due to potential complexities for other small to medium-sized businesses.
“Reducing compliance costs for businesses is a priority for me as Revenue Minister and I am always looking for opportunities to achieve this,” Watts said.
Minister for Revenue Simon Watts said the rationale for GST registration was to strike a balance. Photo / RNZ / Samuel Rillstone
“Those sole traders have ultimately made that decision to earn less to stay under the GST threshold. On the other hand, many GST-registered taxpayers have registered voluntarily even when their earnings are below the GST threshold. As of September 2023, approximately 225,000 out of 665,000 GST-registered taxpayers were under the threshold but still chose to register.”
He said that the rationale for the GST registration threshold for businesses was to strike a balance with the wider GST system as a whole.
Tom Raynel is a multimedia business journalist for the Herald, covering small business and retail.
