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Ruling

Subject: Goods and services tax (GST) and accounting methods

Question

Can you account for GST on a cash basis with effect from a certain date?

Answer

No. However, you can account for GST on a cash basis with effect from a certain date.

This ruling applies for the following periods:

The scheme commences on:

Relevant facts and circumstances

You are registered for GST.

You report GST on a monthly basis.

You were accounting for GST on an accruals basis in a certain financial year

You made a choice to account for GST on a cash basis on a certain date.

You are carrying on a business in a certain financial year.

You carried on a business in a certain financial year.

Your aggregated turnover for a certain financial year was under $2 million.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 subsection 29-40(1)

A New Tax System (Goods and Services Tax) Act 1999 section 29-50

A New Tax System (Goods and Services Tax) Act 1999 section 157-5

A New Tax System (Goods and Services Tax) Act 1999 section 159-20

A New Tax System (Goods and Services Tax) Act 1999 section 159-25

A New Tax System (Goods and Services Tax) Act 1999 section 195-1

Income Tax Assessment Act 1997 subsection 328-110(1)

Income Tax Assessment Act 1997 subsection 328-110(2)

Income Tax Assessment Act 1997 subsection 328-110(3)

Income Tax Assessment Act 1997 subsection 328-110(4)

Reasons for decision

Summary

You may account for GST on a cash basis with effect from a certain date as you are a small business entity for a certain financial year and you made your choice to account for GST on a cash basis in a certain tax period.

Detailed reasoning

An entity may choose to account for GST on a cash basis if it satisfies the requirements of subsection 29-40(1) or section 157-5 of the GST Act.

Subsection 29-40(1) of the 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:

(a) you are a *small business entity (other than because of

subsection 328-110(4) of the *ITAA 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 turnover threshold; or

(b) for income tax purposes, you account for your income using the

receipts method; or

(c) 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.

Small business entities

The Australian Taxation Office (ATO) considers that in order to meet the requirement of paragraph 29-40(1)(a) of the GST Act an entity must be a small business entity in the income year in which the taxpayer makes their choice to account on a cash basis.

Section 195-1 of the GST Act provides that the term 'small business entity' has the meaning given by subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997). Subsection 995-1(1) of the ITAA 1997 provides that the definition of the term 'small business entity' is to be found in section 38-110 of the ITAA 1997.

Subsection 328-110(1) of the ITAA 1997 states:

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

(a) you carry on a business in the current year; and

(b) one or both of the following applies:

(i) 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;

(ii) your aggregated turnover for the current year is likely to be less than $2

million.

Subsection 328-110(3) of the ITAA 1997 states

However, you are not a small business entity for an income year (the current year) because of subparagraph (1)(b)(ii) if:

(a) you carried on a *business in each of the 2 income years before the current year; and

(b) your *aggregated turnover for each of those income years was $2 million or more.

An entity is also a small business entity for an income year if it satisfies the requirements of subsection 328-110(4) of the ITAA 1997. However, for the requirement of paragraph 29-40(1)(a) of the GST Act to be satisfied, an entity must be a small business entity as a result of satisfying the requirements of subsection 328-110(1) of the ITAA 1997.

You are carrying on a business in the current income year. You carried on a business in the income year before the current income year and your aggregated turnover for the income year before the current income year was less than $2 million. Therefore, you are a small business entity for the current income year. Hence, you meet the requirement of paragraph 29-40(1)(a) of the GST Act.

The ATO considers that the date of effect of the cash accounting basis where the taxpayer makes a choice to account on a cash basis under paragraph 29-40(1)(a) of the GST Act is the first day of the tax period during which the entity makes its choice or the first day of any subsequent tax period. However, the date of effect cannot be the first day of a tax period that has ended before the entity made its choice.

You made your choice to account on a cash basis in a certain tax period. You do not want the date of effect of the cash accounting basis to be the first day of a subsequent tax period. Therefore, the date of effect of your cash accounting basis is a certain date. You may account for GST on a cash basis with effect from that date.

ATO Interpretative Decision ATO ID 2003/1179 Goods and Services Tax GST and date of effect to account on a cash basis was considered in making this decision

If you are not a small business entity (of the kind referred to in paragraph 29-40(1)(a) of the GST Act) for a future income year and you do not have special permission (under section 29-45 of the GST Act) to account on a cash basis, you must cease accounting on a cash basis with effect from a certain day in a certain month in that income year.

If you notify the ATO at some point in the future that you are ceasing to account on a cash basis, the cash basis of accounting will cease from the start of the next tax period to commence after you notify the ATO.

Section 159-20 and section 159-25 of the GST Act provide special transitional attribution rules for the situation where an entity's accounting basis changes from accruals to cash.