Every business in Australia must account for goods and services tax or GST. There are two methods of doing this: on a cash basis and a non-cash basis, known as accruals. The method you choose will impact when you need to report GST, making it crucial to know the difference between the two to ensure compliance.
Typically, businesses with an aggregated turnover of less than $10 million, including your turnover and the turnover of your closely associated partners or entities, or those who use cash accounting for income tax can deploy either method. The majority of larger corporations are required to use the non-cash method.
Using the Cash Method to Account For GST
If you are qualified to use the cash method to account for GST, that means you’ll use your business activity statement, which must include the period in which you pay or receive payment for your purchases and sales.
To use the cash accounting method, you’ll need to fit into the following categories:
- A small business entity (an individual, partnership, trust, or company) with an aggregated turnover of less than $10 million)
- You use cash to account for income tax
- A government school
- An endorsed charitable institution or trustee of an approved charitable fund
- A gift-deductible entity
It’s best to consult with a Gold Coast accounting firm to determine if your enterprise can use the cash accounting method. Additionally, if none of the above applies to your situation, you can also request to use a cash basis to account for GST.
There are a few advantages to this method. It’s easier to manage your cash flow since the money that goes in and out of your business aligns with your activity statement liabilities much better. This method is also better suited for smaller entities that primarily deal with cash transactions.
Concessions and Purchases
There are concessions for small business entities and non-profit organisations. You must account for the GST applicable on the sales you’ve made and the payment you’ve received for them in the reporting period. However, if you receive only a part of the payment for a sale during this period, then you will account for the GST in the portion you received.
Similarly, you must account for GST credits on the purchases you’ve made in the reporting period in which you gave payment. You also need to have a tax invoice before claiming a GST credit except for purchases that are $82.50 or less. You don’t have to claim GST credits in the reporting period that you make your purchases in, but you are not required to, as you have four years to claim them. If you pay for only a portion of the cost of a business purchase in a reporting period, you can claim only the GST credit for the amount you’ve paid.
Using the Non-Cash Basis to Account for GST
On the other hand, if you’re a larger business, you’ll need to use the non-cash basis to account for GST. You must account for GST on the business activity statement that includes the period you either received payment or have issued the tax invoice before receiving payment for a sale. It also applies to the period in which you received the invoice from your supplier before paying for the purchase. It’s an excellent way for ascertaining your actual financial position, showing you how much you owe and what you are owed. It will also assist you in dealing with various contracts and large amounts of money.
Sales and Purchases
You are required to account for the GST payable on the sales that take place in the reporting period where you issue a tax invoice or receive full or partial payment, whichever occurs first. If you receive a payment and haven’t given the tax invoice yet, you need to cover the GST amount in the reporting period in which the payment happened, even though it may not be the period you sent out the invoice.
Additionally, you need to issue a tax invoice for a purchase before claiming GST credits. It’s best to claim GST credits in the reporting period where you either received the tax invoice from your supplier or made a payment, whichever comes first. Still, you’re not obliged to claim your GST credits, and you have four years to do so.
Businesses must select the right method to account for GST. Hiring a business accountant on the Gold Coast will help you determine this and ensure your finances are on the right track, keeping you far away from being in the red.
New Wave Accounting is a team of accountants on the Gold Coast providing end-to-end accounting and bookkeeping services. We are well-versed in many industries and are experienced in creating tailored solutions for each of our clients. Contact us today to find out how we can help you!