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Ruling
Subject: Cash accounting for GST when using the receipts method for income tax
Question 1
If you account on a cash basis for income tax purposes, can you continue to account for GST on cash basis, even thought you have exceeded the cash accounting turnover threshold?
Answer
Yes, you can continue to account for GST on a cash basis even if you have exceeded the cash accounting turnover threshold, as long as you are accounting on a cash basis for income tax.
Relevant facts and circumstances
You were eligible to use the cash basis of accounting when you registered for GST.
You later changed to a non cash basis of accounting.
You changed back to a cash basis.
You discovered that your turnover exceeded the cash accounting turnover threshold and therefore considered that you may be required to report your GST on a non-cash basis.
Your income tax return was prepared using receipts (cash) method of accounting.
You have been using the receipts accounting method as this provides a substantially correct reflection of your income in each year.
Your accounting software reports are set up for cash basis of accounting and produces accurate GST records.
You have reviewed Taxation Ruling TR 98/1 Income tax: determination of income; receipts versus earnings (TR 98/1) and considered that the accrual method of accounting would prove to be an artificial, unreal and unreasonably burdensome method of arriving at the income derived for your business.
You have chosen to report using the cash basis for GST, from the first day your accounting system was changed to an accrual method of reporting for GST.
To align your GST reporting with your income tax reporting, you will need to amend your activity statements.
Relevant legislative provisions
A New Tax System (Goods and Services Tax) Act 1999 Section 29-40.
A New Tax System (Goods and Services Tax) Act 1999 Section 29-45.
A New Tax System (Goods and Services Tax) Act 1999 Section 29-5.
Reasons for decision
Section 29-40 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) refers to choosing to account on a cash basis. Paragraph 29-40(1)(b) 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, for income tax purposes, you account for your income using the receipts method.
In the circumstances that you have outlined, you can continue to account for GST on a cash basis as you use the cash basis of accounting for income tax purposes. The fact that you have exceeded the cash accounting turnover threshold, does not deny you the ability to continue to account for GST on a cash basis.
Where you exceed the GST cash accounting turnover threshold and you wish to continue to account for GST on a cash basis, you can do so as long as you continue to account on a cash basis for income tax.
Paragraph 30 of GSTR 2000/13 states that you do not need to apply for permission to account or continue to account on a cash basis, if you satisfy the requirements as outlined in section 29-40 of the GST Act.
In the circumstances you have outlined where you account for Income Tax on a cash basis and wishes to continue to account for GST on a cash basis, you can do so without having to notify the Commissioner.
Furthermore, you do not need to notify the Commissioner that you have exceeded the cash accounting turnover threshold, which would normally preclude you from accounting on a cash basis. You can choose to account on a cash basis because you are using the cash basis for income tax purposes.
You are eligible to choose the date to start reporting your accounts using the cash basis of accounting.
Changing your accounting basis
Please not that if you effect a change in your accounting basis, there will be some supplies or acquisitions that will be attributed twice (where you start to account on a cash basis) and other supplies and acquisitions that will not be attributed at all (where you cease to account on a cash basis).
Division 159 of the GST Act deals with these situations and provides rules to determine the tax periods to which supplies or acquisitions should be attributed.