When it comes to accounting for GST (goods and services tax), there are two options: cash basis and non cash basis (accruals).
The choice of method impacts the timing of GST reporting. If your business’s aggregated turnover (including closely associated entities) is below $10 million, or if you use cash accounting for income tax, you have the flexibility to use either method.
However, larger businesses are generally required to use the non-cash method.
It’s worth noting that even if a business uses cash accounting or simplified accounting methods, they can still opt for Simpler BAS reporting as long as their GST turnover remains under $10 million.
In this article
- Cash Basis Accounting for GST
- Accounting for GST on a Non-Cash Basis
- Simplified GST Accounting Methods for Food Retailers
- Switching Accounting Methods for GST: Process and Adjustments
- Accounting for GST – Supporting Information for Private Ruling Requests
Cash Basis Accounting for GST
With cash accounting, you record GST on your business activity statement when you actually receive payments for sales or make payments for purchases. This means that you report GST based on the cash flow of your business during the specific period covered by the activity statement.
The cash accounting method offers several advantages:
- It provides a better alignment between the money coming in and going out of your business with your activity statement liabilities, making it simpler to manage your cash flow.
- It is particularly suitable for smaller businesses that primarily deal with cash transactions.
Eligibility and Criteria for Using Cash Accounting Method for GST
The cash accounting method for GST can be utilized under the following circumstances:
- If you qualify as a small business entity, which means you are an individual, partnership, trust, or company with an aggregated turnover of less than $10 million.
- If you are not actively conducting a business, but your enterprise’s GST turnover remains at $2 million or less.
- If you currently account for income tax on a cash basis.
- In specific cases, even if your GST turnover exceeds the mentioned thresholds, you might still be eligible for cash accounting if your enterprise falls into any of the following categories:
- Government school
- Endorsed charitable institution or trustee of an endorsed charitable fund
- Gift-deductible entity (except those operating a fund, authority, or institution capable of receiving tax deductible gifts or contributions).
If you don’t fall into any of the above categories but still prefer to use the cash accounting method for GST, you have the option to request permission for this approach.
For your sales, you need to account for the GST payable in the specific reporting period when you receive the payment for those sales. If you receive only a partial payment for a sale during a reporting period, you will only account for the corresponding GST on the received portion of the payment.
For your purchases, you account for the GST credits in the reporting period when you make the payment for those purchases. However, it’s essential to have a valid tax invoice to claim a GST credit, unless the purchases cost $82.50 or less.
While it is beneficial to claim your GST credits in the reporting period corresponding to the purchases they are related to, you are not obligated to do so. You have a window of four years to claim these credits.
In case you make a partial payment for a business purchase during a reporting period, you can claim the GST credit only for the portion of the cost that you paid.
Accounting for GST on a Non-Cash Basis
The non-cash accounting method is typically required for larger businesses, while small businesses have the flexibility to choose between the cash method and the non-cash method.
Opting for the non-cash method means that you account for GST on your business activity statement in the reporting period when either of the following occurs:
- You receive any payment or issue a tax invoice before receiving payment for a sale.
- You receive the invoice from your supplier before making the payment or when you actually make the payment for a purchase.
This method is more suitable for businesses that don’t receive immediate payments and provides several advantages:
- It allows you to track your actual financial position accurately by monitoring what you are owed and what you owe.
- It proves beneficial when dealing with multiple contracts and handling substantial sums of money.
However, it’s essential to note that non-cash accounting can be more intricate compared to cash accounting, and you may require assistance from a registered tax or BAS agent to ensure accurate implementation.
For your sales, you need to account for the GST payable in the reporting period when you either issue a tax invoice or receive full or partial payment, whichever comes first.
In practical terms, if you receive payment from a customer before you have issued the tax invoice for the transaction, you are still required to report the GST amount in the reporting period during which the payment was received.
This applies even if the reporting period for the payment does not align with the period in which you eventually issue the invoice.
To claim a GST credit on your purchases, you must have a valid tax invoice.
While it is beneficial to claim your GST credits in the reporting period when you either receive the tax invoice from your supplier or make some payment (whichever comes first), it is not mandatory. You have a time frame of four years to claim these credits.
Simplified GST Accounting Methods for Food Retailers
For small food retailers like bakeries, milk bars, and convenience stores, they often deal with both taxable and GST free sales.
If these retailers lack sufficient point-of-sale equipment to accurately track taxable and GST free sales, they have the option to use the GST Simplified Accounting Methods (SAM) specifically designed for food retailers.
This simplified approach utilizes predetermined business norms percentages tailored to different types of food retailers. It simplifies the process of reporting sales and purchases for GST purposes, making it more manageable for such businesses.
Switching Accounting Methods for GST: Process and Adjustments
Changing accounting methods is possible if you meet the eligibility criteria. To initiate the process, you can either directly contact the appropriate authority or have your accountant do so on your behalf.
When switching from the cash method to the non-cash method, the change can only take effect at the beginning of a tax period.
In the first tax period following the change, there are certain adjustments that need to be made. Specifically, you must account for sales or purchases that were not previously recorded or claimed.
During this initial tax period of using the non-cash method, you are required to:
- Report the GST on any sales for which you had already issued invoices before the date of the change but had not yet received the payment.
- Account for the remaining balance of GST on any sales that had been partially accounted for before the change.
Additionally, you have the opportunity to claim any unclaimed GST credits for which you possess a valid tax invoice during that first tax period under the new accounting method.
Accounting for GST – Supporting Information for Private Ruling Requests
To seek a private ruling regarding GST accounting, specific documents and information are typically required to process your request promptly.
To initiate the process, you must fill out the appropriate private ruling application form, based on whether you are a tax professional or not, and furnish the following supporting information.
- Your total GST turnover for the previous 12 months, including the ongoing month.
- An estimate of your expected GST turnover for the next 12 months, which should also include the current month.
- Indicate whether you currently use the receipts method for income tax purposes.
- Specify if you are an endorsed charitable institution, an endorsed trustee of a charitable fund, a gift deductible entity, or a government school.
If you have already submitted any of the information mentioned below in the past, there is no need to provide it again.
Request for Cash Basis GST Accounting
If you wish to use the cash basis for GST accounting, you must seek permission under the following circumstances:
- Your business has an aggregated turnover equal to or exceeding $10 million, OR
- You are not operating a business, but your enterprise’s ‘GST turnover’ exceeds $2 million, AND
- You do not use the cash basis for income tax accounting, OR
- You are not a government school, endorsed charitable institution, trustee of an endorsed charitable fund, or a gift-deductible entity (unless it operates a tax-deductible gift or contribution receiving fund, authority, or institution).
In such a scenario, you must provide the following information along with your request:
- Details about the size and nature of your business.
- Information about the accounting system you currently employ.
Thus, obtaining a private ruling for GST accounting can be streamlined by providing the necessary supporting information and adhering to the specific criteria for cash basis accounting.
This article is for general information only. It does not make recommendations nor does it provide advice to address your personal circumstances. To make an informed decision, always contact a registered tax professional.