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Ruling

Subject: Changing accounting method

Question

Do you have to change your method of accounting to a non-cash basis effective 1 July 2011 in line with the ruling given to the other four entities?

Answer

Yes, you have to change your method of accounting to a non-cash basis effective 1 July 2011 in line with the ruling given to the other four entities.

Relevant facts and circumstances

· You are the trustee of a super fund.

· You are registered for goods and services tax (GST).

· You are connected with three other companies and a partnership.

· The three companies have a common director and who is also a partner in the partnership as well as a member of the superfund.

· The aggregate annual turnover of the connected business entities exceeded $2 on 1 July 2011.

· The Australian Taxation Office (ATO) issued a private ruling to the three companies and the partnership informing that they can change the accounting method to non-cash basis effective 1 July 2011.

· Although the super fund is connected with the other four entities, it was inadvertently left out in the correspondence between them and the ATO and therefore not included in the ATO private ruling.

Relevant legislative provisions

Section 29-50 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)

Reasons for decision

Subsection 29-40(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), states:

You may choose to account on a cash basis, with effect from the first day of the tax period that you choose, if:

you are a *small business entity (other than because of subsection 328-110(4) of the *ITTA 1997) for the *income year in which you make your choice; or

(ab) you do not carry on a *business and your *GST turnover does not exceed the *cash accounting threshold; or

for income tax purposes, you account for income using the receipts method; or

each of the *enterprises that you *carry on is an enterprise of a kind that the Commissioner determines, in writing, to be a kind of enterprise in respect of which a choice to *account on a cash basis may be made under this section.

(* denotes a term defined in section 195-1 of the GST Act)

The term "small business entity" is defined in section 328-110 of the Income Tax Assessment Act 1997 as follows:

You are a small business entity for an income year (the current year) if:

you carry on a *business in the current year; and

one or both of the following applies:

you carried on a business in the income year (the previous year) before the current year and your *aggregated turnover for the previous year was less than $2 million;

your aggregated turnover for the current year is likely to be less than $2 million.

'Aggregate turnover' is your annual turnover plus the annual turnover of any business entities you are connected with or are your affiliate.

An entity is connected with you if:

· you control or are controlled by that entity, or

· both you and that entity are controlled by a third entity.

An affiliate is an individual or company that, in relation to their affairs, acts or could reasonably be expected to act in accordance with your directions or wishes, or in concert with you.

Paragraph 29-50(1)(a) of the GST Act states:

You cease to *account on a cash basis if, in a case to which paragraph 29-40(1)(a) applied - you are not a *small business entity of the kind referred to in that paragraph for an *income year and you do not have permission to *account on a cash basis.

Your aggregated turnover of the connected business entities for the current financial year exceeds $2 million. Based on the above provisions you are not a small business entity and you do not have permission to account on a cash basis. Therefore, you must account on a non-cash basis.

Paragraph 29-50(2)(a) of the GST Act states that the date of effect of your cessation is the first day of the next tax period to commence after the start of the income year referred to in paragraph 29-50(1)(a) of the GST Act.

The first day of the tax period when you have to cease accounting on cash basis is, therefore, 1 July 2011. From this date, you must account for GST on a non-cash basis.

Attributing GST and input tax credits

If you change your GST accounting basis, there will be GST on some supplies and input tax credits on some acquisitions that would be attributed twice, not fully attributed or not attributed at all.

Division 159 of the GST Act provides information on which tax periods to attribute any supplies and acquisitions that are affected by the change in your accounting basis, and how to treat bad debts if your accounting basis changes. Division 159 of the GST Act also provides examples. For further information refer to Goods and Services Tax Ruling: accounting on a cash basis (GSTR 2000/13), and the examples in Division 159 of the GST Act which are available at our website www.ato.gov.au.

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