Cash vs accruals for GST: which basis should a sole trader use?

The cash basis

On a cash basis you account for GST on a sale in the tax period you receive payment, and for GST on a purchase in the period you pay for it. Invoice dates do not matter. If you send an invoice on 25 September and the client pays on 4 October, the sale belongs to the October to December quarter. If a client pays a deposit, the GST on that deposit is reported when it lands.

The great advantage is that the BAS matches your bank statement. Money in, money out, and the GST inside each. You never send the ATO GST on an invoice that is still unpaid, which for a sole trader with slow-paying clients is the difference between a manageable BAS and a cash-flow problem.

The accruals (non-cash) basis

On accruals you account for GST on a sale in the period you issue the invoice or receive any payment, whichever is earlier. Same for purchases: the period you receive the supplier’s invoice or pay, whichever is earlier.

This matches the accounting view of when income was earned and costs were incurred. It also means you can claim GST on a supplier account in the quarter you were invoiced, before you pay it. The downside is the mirror image: a $22,000 invoice you send on 28 September puts $2,000 of GST into the September quarter BAS even if the client does not pay until December, and you carry that cost until they do. If they never pay, you claim the GST back later as a bad debt adjustment, which is extra work.

Who can use the cash basis

You can account for GST on a cash basis if any of these apply:

• You are a small business entity, meaning aggregated turnover under $10 million.
• You are not carrying on a business but your GST turnover is $2 million or less.
• You account for income tax on a cash (receipts) basis.
• The ATO has determined that your type of enterprise can use it.

Almost every sole trader clears the first test. Businesses above the limit must use accruals unless the ATO approves otherwise.

A side-by-side example

A consultant invoices $11,000 on 20 September and is paid on 15 October. She also receives a $3,300 supplier invoice on 28 September and pays it on 10 October.

Cash basis. September quarter: nothing. December quarter: G1 $11,000, 1A $1,000, 1B $300, net $700 payable.

Accruals basis. September quarter: G1 $11,000, 1A $1,000, 1B $300, net $700 payable, due 28 October, which is before the client has paid her. December quarter: nothing from these two transactions.

Over a year the total GST is identical. The only differences are timing and how closely the BAS tracks your bank account.

Cash basis and the bank statement

If you work from an uploaded bank statement, as FlowFi does, the cash basis is the natural fit: each line on the statement is a receipt or a payment on a known date, and that date decides the quarter. There is no need to match invoices to payments to work out what has been paid. Deposits, part payments and platform payouts all simply count when they arrive. See deposits and progress payments for the detail on those.

Changing your basis

You can change through ATO online services (or ask your agent). The change takes effect from the start of the next tax period, not part way through a quarter. When you switch there is a transition to manage: a sale invoiced under accruals and paid under cash must not be reported twice, and one paid under cash that was already reported under accruals must not be reported again. Keep a list of the open invoices and bills at the changeover date and ask your accountant to check the first BAS after the switch.

The income tax question is separate. Your GST basis does not have to match how you report income for your tax return, though for most service-based sole traders both end up on a cash basis anyway.