Accounting methods
Accrual accounting for GST
Accrual accounting for GST means you report GST on sales when you issue the invoice, and claim credits on purchases when you receive the invoice, regardless of when payment happens.
Accrual accounting for GST, also called the non-cash or invoice basis, reports GST in the period in which the sale or purchase is invoiced, not when payment is made. If you issue an invoice in March, you include the GST in the March quarter BAS even if the customer pays in May. For purchases, the credit generally belongs in the period in which you receive the invoice, as long as you hold a valid tax invoice.
Larger businesses must use accrual because they are above the turnover limit for cash accounting. Smaller businesses can often choose either. Some prefer accrual because it matches the way their accounting software records sales and purchases, which keeps their financial reports and BAS closely aligned. Businesses with large purchases bought on terms also benefit, since they can claim credits sooner.
The big downside is cash flow risk. You owe GST to the ATO on sales you have invoiced even when your customers have not yet paid you. A business with slow payers may have to fund the GST out of other money. If a customer never pays, you may be able to claim a bad debt adjustment, but only when the conditions are met, and you will need to follow the required steps.
Accrual accounting requires good invoice management. You need to record each invoice in the correct period, issue credit notes or adjustment notes when needed, and track which tax invoices you have received from suppliers. A purchase invoice that arrives late may need to be claimed in a later period, so check that your procedures capture invoices promptly. Many businesses use software to manage this.
The method is chosen for GST separately from income tax, though they often match. If you change from cash to accrual, there is a transition process to avoid double counting. Take advice before changing. If you are unsure which method you are on, check your accounting software settings and your ATO registration details, and make sure they agree with the way your BAS is prepared.
Keep records of invoices and credit notes for five years. This is general information only, so confirm which method applies to you with the ATO or a registered tax professional.
Worked example
Nadia invoices a client $16,500 including GST in February. On an accrual basis, she reports GST of $1,500 (16,500 divided by 11) in the quarter that includes February, even though the client pays in April. In the same quarter, she receives a supplier tax invoice for $5,500, so she claims a $500 credit, and the net GST for these two items is $1,000.
Practical tips
- Set aside the GST on every invoice you issue, since you owe it even if the customer pays late.
- Enter supplier invoices promptly so credits are claimed in the right period.
- Take advice before changing methods to avoid counting transactions twice.