Accounting methods
Cash accounting for GST
Cash accounting for GST means you report GST on sales when you receive payment and claim credits on purchases when you pay, rather than when invoices are issued.
Cash accounting for GST, sometimes called the cash basis, is a method of working out when GST is reported. Under it, you include GST on a sale in the BAS for the period in which you receive the payment, and you claim a credit on a purchase in the BAS for the period in which you pay for it. Invoices issued or received do not matter until money moves.
This method is available to many small businesses, subject to eligibility rules set by the ATO. There is a turnover limit, and some entities and situations are excluded. You generally choose the method when you register or later by notifying the ATO or by simply starting to account on that basis through your BAS, but it is wise to confirm your eligibility before relying on it.
The main benefit is cash flow. You do not pay GST to the ATO on an invoice until the customer pays you, so slow-paying customers do not leave you out of pocket for the GST. If a customer never pays, you never report the GST on that sale. This makes the method attractive to businesses with long payment terms, or those that invoice in advance of receiving funds.
The trade-off is that credits are delayed until you pay suppliers. If you buy on credit terms, you will not claim the credit until you actually pay. For businesses that pay quickly, this makes little difference. For businesses with large purchases bought on terms, it can delay refunds. You also need to keep careful records of payment dates, as these decide the period for each transaction.
Cash accounting for GST is separate from how you account for income tax. A business can use cash for GST and accrual for income tax, or the reverse, though simplicity usually favours keeping them aligned where the rules allow. Check how your accounting software is set to work, because its GST reports should match your chosen method. If they do not, your BAS will be wrong.
Switching between methods has consequences, as transactions in transition need to be accounted for once only. Take advice before changing. Records must be kept for five years. This is general information only, so confirm your eligibility with the ATO or a registered tax professional.
Worked example
Alex issues a $11,000 invoice including GST in March, but the customer pays in May. On a cash basis, Alex reports the $1,000 GST (11,000 divided by 11) in the quarter in which the payment is received, which is the April to June quarter, not the January to March quarter when the invoice was issued. If the customer never pays, no GST is reported.
Practical tips
- Confirm you are eligible for the cash method before using it, and make sure your software reports on a cash basis.
- Record payment dates carefully because they decide which BAS period each transaction falls into.
- Take advice before switching between cash and accrual so transactions are not counted twice or missed.