Accounting methods
GST instalment
A GST instalment is a quarterly payment option for eligible small businesses, who pay an ATO-calculated amount each quarter and then report their actual GST once a year.
A GST instalment is a way for eligible small businesses to spread their GST payments across the year. Rather than calculating GST on each quarterly BAS, you pay an amount set by the ATO, usually based on the GST in your previous annual return, and then lodge an annual GST return after the year ends. It simplifies reporting by removing the need to work out GST every quarter.
This option is generally available to small businesses below a turnover threshold set by the ATO, and who meet other conditions. It is not suitable for everyone. Because the amount is an estimate, it can be quite different from your actual GST, particularly if your business is growing or if the year is unusual. Check the eligibility requirements on the ATO website before deciding.
Each quarter, the ATO sends an instalment notice showing the amount to pay, and you pay it by the due date, normally the same date as the quarterly BAS. At year end, you complete the annual GST return, working out your actual GST on sales and credits for the whole year. If you paid less than you owed, you pay the difference. If you paid more, you can claim a refund.
The benefits are predictability and reduced paperwork. You know what you will pay each quarter, and you do not need to compile a full GST report four times per year. However, you still need to keep records, charge GST correctly, and issue tax invoices. Your obligations to the customers and the law do not change, only the way you report to the ATO.
You can ask the ATO to vary the instalment amount if your circumstances change, such as a big increase or a drop in sales. If you expect to be owed a refund, it may be better to report GST in full each quarter instead. Think about cash flow: a large year-end payment can be hard if you have not set money aside.
A common mistake is to treat the instalment as the final GST, and then be surprised at the year-end reconciliation. Keep records for five years. This is general information only, so confirm your eligibility with the ATO or a registered tax professional.
Worked example
Dev's small business is notified of a GST instalment of $900 per quarter, so he pays $3,600 over the year. At year end, his annual return shows GST on sales of $5,500 and credits of $1,300, giving net GST of $4,200. He has paid $3,600, so he owes a further $600. He had set aside $200 a month and has the cash ready.
Practical tips
- Set aside money each month toward the year-end reconciliation, because actual GST may exceed the instalments.
- Ask the ATO to vary the amount if sales change significantly during the year.
- Keep full GST records throughout the year since you must report your actual GST at the end.