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Ruling

Subject: GST and cash basis of accounting

Question

Can you account for GST on a cash basis?

Answer

Yes.

This ruling applies for the following period

The scheme commenced on

Relevant facts

· You provide services.

· You are a newly business and registered for GST effective 200X. You chose to account on a non-cash basis.

· Being a service oriented business your main costs are for labour, and your overheads are minimal.

· Most of your supplies are on an account basis.

· Your aggregated turnover is under $2 million.

· You have lodged all your outstanding activity statements.

Relevant Legislative Provision

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 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 the start of tax period Y.

Detailed reasoning

An entity may choose to account for GST on a cash basis if it satisfies the requirements of subsection 29-40(1) of the A New Tax System (Goods and Services Tax) Act 1999 (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.

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

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 328-110 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 newly established 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 and may choose to account on a cash basis.

The Commissioner considers that the date of effect 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 tax period Y. 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 choice to account on a cash basis is the start of tax period Y. You may account for GST on a cash basis with effect from that date.

Starting to account on a cash basis

Please note that when you change your accounting basis and start to account on a cash basis, there will be some supplies or creditable acquisitions that could be attributed twice. That is, you may be paying GST twice for some supplies or you may be claiming input tax credit twice for some acquisitions.

Sections 159-20 and 159-25 of the GST Act deal with these situations and provide rules to determine the tax period to which supplies or creditable acquisitions should be attributed. The effect of these provisions is that after you change over to a cash basis, you don't have to pay further GST on the payment you receive where you have already paid GST on that supply when you were on the accruals basis.

Similarly, you cannot claim a further input tax credit on the payment you make, after you change to a cash basis, where you have already claimed the input tax credit for that acquisition when you were on the accruals basis.

Paragraphs 40 and 41 of Goods and Services Tax Ruling GSTR 2000/13 provide guidance on how to treat supplies, acquisitions, and adjustments in this instance. You can access GSTR 2000/13 on our website, www.ato.gov.au