Should I choose cash or accruals for GST registration?
There are two methods of accounting for GST, a cash basis and a non-cash basis (accruals). The method you use will affect when you must report GST.
Businesses with an aggregated turnover of less than $10 million, or who use cash accounting for income tax, can use either method. Most larger businesses must use the non-cash method.
Accounting for GST on a Cash Basis
Accounting for GST on a cash basis means you declare GST for sales and purchases for which you have received payment for or made payment on during the period covered by the Business Activity Statement.
Unpaid sales invoices and unpaid bills are not accounted for in reporting even if the invoice date falls within the BAS period.
There are advantages for using the cash accounting method for reporting GST. It means the cash flow of the business is better aligned to your GST liabilities, making it’s easier to meet your obligations to the ATO. It is also more suited to smaller businesses that handle cash transactions.
You can use the cash accounting method if any of the following applies:
- you are a small business entity – that is, an individual, partnership, trust or company with an aggregated turnover of less than $10 million
- you are not carrying on a business, but your enterprise’s GST turnover is $2 million or less
- you account for income tax on a cash basis
- you run a kind of enterprise it is agreed can account for GST on a cash basis regardless of your GST turnover such as a government school or an endorsed charity or a gift-deductible entity
Accounting for GST on Accruals Basis
With the accrual method, GST is payable on all sales invoiced during the period, whether payment has been received or not. The advantage is you are also able to claim the GST on all your unpaid purchases that you have received invoices for in the period.
This type of reporting may suit businesses where the majority of sales made as cash sales. This would mean they have received the payment for the sale on the day the invoice was raised but can still claim the GST on purchases they have been invoiced for but are yet to be pay for.
Accruals reporting will give businesses a more accurate picture of the credit and debt relating to GST liabilities and therefore a better insight into the financial state of the business. Accrual reporting can also be beneficial for to analysing market trends relating to revenue and expenses as it accounts for all sales and purchases not just those that have been paid for.
The obvious drawback to accrual accounting is that the GST on sales that have not been paid for must still be paid to the ATO regardless of the fact that the cash has not been received by the business. For small businesses with less cash flow, this can cause a cash flow crisis if customers are slow to pay. Having the latest software which prompts customers to pay their invoices on time and sends regular reminders if an invoice is overdue can help manage this issue.