Different Impact of GST system on CASH and ACCRUAL accounting systems
Attribution = when the GST liability is incurred
Can an entity change the basis of accounting?
Are there any advantages and disadvantages of the alternative basis?
Different Impact of GST system on CASH and ACCRUAL accounting systems
Attribution = when the GST liability is incurred
Can an entity change the basis of accounting?
Are there any advantages and disadvantages of the alternative basis?
The GST system will impact differently on the entity's business transactions depending on whether a business operates on a
cash basis or basis other than cash (commonly referred to as an accruals basis).GST may be accounted for in either of two ways. The rules of attribution in a tax period are different depending on whether the entity uses a cash basis or other than cash basis. For simplicity, we will call the `other than cash basis', an accruals basis.
Attribution
(Section 29-5)GST payable, input tax credits and adjustments to tax periods are attributable to different tax periods depending on whether the cash or accruals method of accounting is used.
The rules for determining which amounts are included in a tax period are referred to as the attribution rules.(Sections 29-5 and 29-40)
The features of accounting for GST on a cash basis are outlined as follows:
entities with annual turnover up to $500,000 may choose to account on a cash basis.
Entities with annual turnover of more than $500,000 may apply for permission to account on a cash basis.
The Commissioner may grant permission having regard to the
nature and size of the enterprise
accounting systems used and
how the entity accounts for income tax purposes;
GST payable on a taxable supply will be attributable to the tax period or periods when the customer pays the consideration or part of the consideration to the entity;
input tax credits can only be claimed in the tax period or periods when payment of the consideration or part of the consideration is made by the entity to the supplier of the goods or services;
adjustments to the net amount of the entity involving a change in consideration are made in the tax period when the change in consideration is paid or received. ; and
where a part of consideration is paid or received, GST only applies to the amount of consideration paid or received.
The features of accounting for GST on an accruals basis are outlined as follows:
GST payable on a taxable supply is attributable to a tax period at the earlier of, the receipt of any payment, or when the entity issues an invoice (ie. creates a debt);
input tax credits can be claimed in the earlier of the tax period when the invoice is issued or the tax period when any of the consideration is provided;
entities can choose to account for GST on an accruals basis even if their annual turnover is less than $500,000; and
adjustments to the entity's net amount takes place in the tax period when the entity becomes aware of the need to make the adjustment.
Example of the differences between cash and accrual basis
On 20 March 2001, Ipay Pty Ltd makes a taxable supply and issues an invoice to its customer.
The consideration is $110 payable in two equal instalments, $55 on both 20 March and 20 April.
If Ipay Pty Ltd does not account for GST on the cash basis (ie. accruals basis is used), the company is required to attribute all the GST payable for the supply in the tax period when consideration is received or invoices are issued, whichever is earlier.
The $10 GST payable on the supply will be attributable to the tax period ending 31 March 2001 as the invoice was issued on 20 March 2001 (assuming a monthly lodgment).
In contrast, where Ipay Pty Ltd accounts for GST on a cash basis, the company would attribute the GST payable to the tax periods only to the extent that consideration had been received. Therefore, as half the consideration was received in the tax period ending 31 March 2001, $5 GST payable for the supply is attributed. The remaining GST payable is attributed in the period ending 30 April 2001.
Can an entity change the basis of accounting?
Yes.
Where an entity's turnover is over $500,000 and no permission has been obtained from the Commissioner, to account on a cash basis, the entity must account for transactions on the accruals basis.
If annual turnover is less than $20million and the entity has previously chosen to account on a cash basis the entity may choose to stop using the cash basis. The entity must notify the Commissioner that it is ceasing to account on a cash basis.
Are there any advantages and disadvantages of the alternative basis?
Essentially, the major advantages and disadvantages of the alternative basis relate to cash flow.
Cash flow
The selection of the accounting basis an entity adopts may be influenced by the timing of when customers pay the entity and when the entity pays suppliers.
For example, if an entity pays for all their supplies just before the end of the tax period but is paid by customers in the beginning of the tax period, then the cash basis may be quite attractive. It is important to note that if there is a timing advantage many entities may wish to take the benefit. This will reduce the opportunity for others to receive the timing benefit in their cash flow.
There will be entities where input tax credits will regularly exceed the GST payable on taxable supplies (eg. exporters) or GST-free supplies (eg. health industry). The decision matrix would differ in these circumstances. Similarly entities supplying input taxed supplies as well as taxable supplies will have different criteria to use in arriving at their decision.
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