Edited version of private ruling

Authorisation Number: 1011679448028

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Ruling

Subject: GST and change of the accounting basis

Question 1

Can a small and medium enterprise client (SME) of yours with a turnover less than $2 million change their accounting basis that they nominated at registration? If the answer is yes, what are the requirements and the procedures to change their nominated accounting basis?

Answer

Yes, under certain circumstances, your client may be able to change their accounting basis that they nominated at the registration. The requirements and the procedures are given below.

Question 2

When does the change of accounting basis for a client become effective?

Answer

A client must choose the start of a tax period to commence a new accounting basis and use the new basis from that point onwards. Further, the Commissioner could nominate the effective date from which a client could account on the cash basis.

Question 3

How does the Commissioner know if your client has returned their business activity statements (BAS) on the cash or accruals accounting basis?

Answer

Once a client is registered for goods and services tax (GST) or changed their accounting basis, the selected accounting basis will be recorded or updated on the integrated system of the Australian Taxation Office. Therefore, the Commissioner will be aware of a client's basis of accounting.

Relevant facts and circumstances

You carry on an enterprise in connection with small and medium businesses.

Your packages are very sophisticated and they can generate business activity statements (BAS) for businesses operating under the cash or accruals accounting basis. You could accommodate any lodgment cycle such as monthly, quarterly or annual.

Some of your clients may want to change their accounting basis from cash to accruals and vice versa. You want to know how to incorporate such changes into your packages.

As per our records, you are registered for GST.

Reasons for the decisions

Decision 1

The attribution provisions in Subdivision 29-A of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provide attribution rules for ordinary (accrual basis) clients and cash basis clients. By default, all clients registered for GST are initially subject to the accrual basis of accounting, unless they elect to account on the cash basis as provided in section 29-40 of the GST Act.

Subsection 29-40(1) of the GST Act provides that, 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 Income Tax Assessment Act 1997) for the income year in which you make your choice; or

· you do not carry on a business and your GST turnover does not exceed the cash accounting turnover threshold; or

· for income tax purposes, you account for your 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.

Further, subsection 29-40(3) of the GST Act provides that the cash accounting turnover threshold is:

· $2 million; or

· such higher amount as the regulations specify.

If your client is able to satisfy at least one of the criteria stipulated in subsection 29-40(1) of the GST Act, they can choose to account for GST on a cash basis.

Where a client is unable to satisfy the criteria stipulated in subsection 29-40(1) of the GST Act, under section 29-45 of the GST Act, the client can nevertheless formally seek the Commissioner's permission to account under the cash basis. Subsection 29-45(1) of the GST Act provides that the Commissioner may permit you to account on a cash basis if:

· you apply to the Commissioner in the approved form for permission to account on a cash basis; and

· the Commissioner is satisfied that having regard to the nature and size of the enterprise that you carry on and the nature of the accounting system that you use;

it is appropriate to permit you to account on a cash basis.

An application is in the approved form if the application meets the following requirements:

· the request is in writing

· the request provides details about the nature and size of each of your enterprises and the nature of their accounting system, and

· the request is signed by the person with the legal authority to represent the entity.

Based on the information provided in an application, the Commissioner will determine whether it is appropriate to permit a client to account on a cash basis. This decision will depend on the particular facts and circumstances of each case.

Subsection 29-45(2) of the GST Act provides that where the Commissioner decides to permit an entity to account on a cash basis, a notice of this decision must be given, and it must specify the date of effect of the permission. 

Further, under subsection 29-50(1) of the GST Act, you cease to account on a cash basis if:

· you are not a small business entity for an income year and you do not have permission to account on a cash basis; or

· if you qualified to account on the cash basis because you did not carry on a business and your GST turnover did not exceed the cash accounting turnover threshold, you no longer satisfy those requirements and you do not have permission to account on a cash basis; or

· you notify the Commissioner in the approved form that you are ceasing to account on a cash basis.

Please note that requests to change from cash to accrual basis are acceptable in all instances. However, requests to change from accrual to cash are only acceptable if our current records show that the client is entitled to choose the cash basis.

Goods and Services Tax Ruling GSTR 2000/13 (GSTR 2000/13) refers to accounting on a cash basis. As all the details cannot be covered in this private ruling, we have enclosed a copy of GSTR 2000/13 for your reference. Please refer to paragraphs 27-32 of GSTR 2000/13 in respect of permission to account on a cash basis.

Additional Information 

If an entity changes their GST accounting basis, there will be some supplies or acquisitions that would be attributed twice and other supplies and acquisitions that would not be attributed at all. 

The GST Act provides special attribution rules for the tax period at the start of which an entity changes its accounting basis. This is called the transition tax period, and it ensures that all GST and input tax credits are attributed to only one tax period. 

This is because, under the non-cash basis, GST is attributable once the entity becomes entitled to receive consideration for a supply rather than when it actually receives the consideration. Without a special rule, it would be too late to attribute that GST after changing from the cash basis, because entitlement to the consideration will have arisen in an earlier tax period.

With regard to the changing your accounting basis, please refer to paragraphs 40-41 of GSTR 2000/13.

Decision 2

As explained above, under subsection 29-40(1) of the GST Act, you may choose to account on a cash basis with effect from the first day of a tax period that you choose, if you satisfy any of the criteria of that subsection.

On the other hand, if a client has requested for the Commissioner's permission to change their accounting basis:

· from a non-cash (accruals) to a cash basis and the BAS for that tax period has not issued - the effective date is the first day of the tax period in which the request was made;

· from a non-cash to a cash basis and the BAS for that tax period has issued, the effective date is the first day of the next tax period;

· from a cash to a non-cash basis and the change is because the entity's annual turnover exceeds $2 million and it no longer meets any other eligibility requirements to report using the cash basis, the effective date is the first day of the tax period in which the threshold was exceeded;

· from a cash to non-cash basis and the BAS for that tax period has issued and the change is because the entity wishes to change reporting methods, but still remains eligible to use the cash basis, the effective date is the first day of the next tax period;

· from a cash to a non-cash basis and the BAS for that tax period has not issued and the change is because the entity wishes to change reporting methods but still remains eligible to use the cash basis, the effective date is the first day of the tax period in which the request was made;

Where the Commissioner grants permission to change from non-cash to a cash basis, a client receives a written notification from the Commissioner. Where this happens the effective date will be the date specified by the Commissioner on the notification.

Decision 3

As stated above, by default, all the clients registered for GST are initially subject to the accrual basis of accounting as provided by subsection 29-40(1) of the GST Act, unless they elect to account on the cash basis. In either case, the details will be recorded on the system and the Commissioner will be aware of the accounting basis under which a client accounts for their GST liability.

Further, if a client applies for the Commissioner's permission to change their accounting basis and the permission is granted, the client's records will be updated accordingly. Therefore, the Commissioner will be aware of any changes to the client's accounting basis from the effective date.