Tax liability accompanies online trading

As a nation that loves outdoors, we spend a lot of time shopping.

A survey of the marketplace shows that close to half the population regularly buy products online accounting for 5.1% of all retail sales in New Zealand.

This percentage is set to double in a couple of years, bringing the country close to the average in developed economies.

It is often tempting to buy products online from vendors here and afar. Due to geographical isolation, long supply lines and small market, New Zealanders do not get the variety and the low prices that consumers in other markets take for granted.

Some advantages

Online shopping offers instant price comparison, wide choice, and the convenience of shopping, while being productive at work or at the middle of the night. However, it may not be the complete panacea that retail warriors believe it to be.

From a tax perspective, there is a common misconception that goods under $400 can be imported without paying any taxes. This is correct in certain instances as there is a ‘de minimis’ threshold of $60 for GST as more would be spent on administration and enforcement than recovered in tax revenue.

However, certain categories of imports such as clothing, footwear and jewellery attract customs duty. The combined GST and customs duty may add up to breach the de minimis threshold, thereby attracting a tax liability. GST is calculated on the delivered cost of the product and hence shipping charges should also be considered.

Hobby vs business

Closer to home, online auctions can magically transform one person’s trash into another’s treasure and deliver us happiness in a courier box. For a majority of us, online trading is a hobby or a way to refresh the living room while making a bit of cash on the side.

However, depending on the perceived intention (to make a profit) and frequency of activity (regularly), your actions may be seen as being business in nature and you may become recipient of the dreaded letter from Inland Revenue Department (IRD) about paying GST and income tax.

The frequency or regularity of trading is the most important indicator of the intention on online trading.

Tax obligations

Similarly, those selling for more than six days in a year or disposing of second-hand goods worth more than $2000 a year may have their intentions examined.

For example, if you sell a pair of shoes online to someone with similar taste, you do not pay tax, since the item was bought for personal use and not for profit.

On the other hand, if you go through thrift shops on the weekend and sell a variety of items on Trademe, you have an obligation to pay tax on the profit.

If you order items from shops or websites to sell online, the profits accruing are also liable for tax. From the IRD tax point of view, you are no different from a local online or physical shop with similar tax obligations.

As New Zealand starts on the path to international tax harmonisation, we can expect IRD to start paying more attention to the online auction sector.

Whether you have a four-figure feedback score on Trademe or just a little, it would pay to stay informed of your tax obligations when you sell those treasures scattered around the garage.

Harsha Goonewardana is an Accountant at Daniel Hunt and Associates based in Auckland. Read related analysis by PricewaterhouseCoopers in this Section.

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