How to choose your accounting basis for GST
IntroductionIf you are registered for Goods and Services Tax (GST) you must account regularly to the Inland Revenue Department (IRD). The "accounting basis" is the method by which you account for GST. There are three options from which to choose:
- the invoice basis
- the payments basis
- the hybrid basis
For information on registering for GST, see How to work out whether you must register for GST.
The "invoice" basisUnder this basis, you account for or claim GST for a transaction in the tax period in which the invoice is issued, as opposed to the period in which payment is received or made.
In general, you will be required to hold a tax invoice in order to claim a tax credit for transactions of more than $50 (including GST).
You will have to keep a list of debtors and creditors as at the end of each period. This is because you will have to show a record of items sold and received, and these will not be reflected in your cash statements.
The perceived advantage of the invoice basis is that, if you are the buyer, you can claim GST on a purchase before paying for it. Conversely, if you are the supplier the disadvantage is that you must account to the IRD for GST before receiving payment.
Even if you generally use the payments basis (see below), you are required to use the invoice basis to account for some major property transactions with delayed settlement dates. This applies to any single transaction in which you supply property or services of a value of more than $250,000 (including GST), if the settlement date, or the date when the services must be performed, is to be more than one year from the date of the agreement.
The "payments" basis (or "cash" basis)Using this method involves accounting for GST for a transaction in the taxable period in which you make or receive payment.
As with the invoice basis, you will generally be required to hold a tax invoice in order to claim a tax credit for transactions of more than $50 (including GST). Unlike the invoice basis, you do not account for debtors and creditors at the end of each taxable period.
There are restrictions on who may use the payments basis. It can be used by any registered person if any of these criteria apply:
- The total value of taxable supplies for the last 12 months was $1.3 million or less.
- The total value of taxable supplies is not likely to be more than $1.3 million in any 12-month period beginning on the first day of any month.
- The payments basis would be the most appropriate one to use, taking into account the nature, value and volume of taxable supplies and the accounting system used.
These criteria don't apply, however, to non-profit organisations and some local councils. These bodies can use the payments basis even if they don't satisfy any of these criteria.
The perceived advantages of the payments basis is that in supplying goods and services you need to account for GST only when you have received payment. Conversely, as a buyer you cannot claim GST on purchases until after you have paid the supplier. The payments basis is seen by the IRD as suitable for small businesses currently using the cash system, because their cash books can easily be amended to account for GST.
The "hybrid" basisThe third option is the hybrid basis, which can be used by any person or business registered for GST. As the name suggests, the hybrid system combines the invoice and payments system, in that the invoice basis is used to account for GST on your sales while the payments basis is used for your purchases.
Because the invoice system is used for your sales, you will need to keep a list of your debtors as at the end of the taxable period. Because the payments basis is used for your purchases, there is no need to keep a list of your creditors.
What if I don't notify IRD of the accounting basis I would like to use?If you haven't notified IRD of the accounting basis you wish to use for your business, you will automatically be placed on the invoice basis.
Changing your accounting basisYou can apply in writing to the IRD at any time to change your GST accounting basis. IRD will notify you of whether they have approved your application and, if it is approved, of when you can change to the new accounting basis.
In some circumstances you may be required to change your accounting basis. This will be the case if you have been using the payments basis and your annual turnover increases to more than $1.3 million (unless the increase was caused by selling or replacing any plant or asset, or caused by reducing the scale of your taxable activity). If this occurs then you must inform the IRD in writing within 21 days and you will be required to change to either the invoice or the hybrid basis.
If you change your accounting basis, the IRD will inform you of adjustments that you will need to make in your final GST return that uses the old basis.
- As with all tax issues there is a tendency for the law in this area to be technical, complex and confusing. As the penalties for non-compliance can be quite severe, it is advisable that you seek advice from a tax lawyer or accountant or both before changing your GST accounting basis.