There are two main methods you can prepare your GST returns based on, these are:
Payments Basis GST
This method calculates GST based on income you’ve actually received and expenses you’ve actually paid during the GST return period. It’s the easiest option and helps align GST payments with your cash flow.
To qualify for the payments basis, your total sales must have been $2 million or less in the past 12 months and are likely to remain $2 million or less in any upcoming 12-month period.
Sophie Richards is a graphic designer registered for GST on the payments basis. She uses accounting software to track her income and expenses, which shows total sales of $400,000 in the past 12 months.
For the GST period from 1 April 2023 to 31 May 2023:
- Sophie receives $50,000 in payments from clients for completed projects.
- She pays $20,000 to suppliers for software, printing, and other expenses.
Sophie calculates her GST:
- GST on income: $6,521.74
- GST on expenses: $2,608.70
- GST due to the IRD: $3,913.04 ($6,521.74 minus $2,608.70).
Because Sophie is on the payments basis, she only accounts for GST when she actually receives or pays money. This means she doesn’t pay GST on unpaid invoices, which helps her manage her cash flow better.
If Sophie were on the invoice basis, she would have to pay GST on all invoices issued during the GST period, even if her clients hadn’t paid yet.
Invoice Basis GST
The invoice basis calculates GST based on all invoices issued to customers and all invoices received from suppliers, whether or not the money has been paid. You also adjust for debtors (customers who owe you) and creditors (suppliers you owe) at the start and end of the GST period.
This method is more complex and is mandatory if your turnover exceeds $2 million per year.
Craig Taylor runs a construction business that’s growing quickly. By April 2023, Craig forecasts his sales for the next 12 months will exceed $2 million, requiring him to switch to the invoice basis for GST.
For the GST period from 1 April 2023 to 31 May 2023:
- Total invoices issued to customers: $300,000
- Total invoices received from suppliers: $150,000
Craig calculates his GST:
- GST on sales invoices: $39,130.43
- GST on supplier invoices: $19,565.22
- GST due to the IRD: $19,565.21 ($39,130.43 minus $19,565.22).
Among the invoices Craig issued is one for $60,000 to a client, Skyline Developments, who has not paid yet. However, Craig still needs to pay GST of $7,826.09 on this invoice by the due date.
Since Craig is on the invoice basis, he must pay GST on all invoices issued, even if payment hasn’t been received. This can cause cash flow challenges if clients delay payment. Craig needs to carefully manage his debtors, putting systems in place to get paid on time, to ensure he has enough cash available to meet his GST obligations.
Key Takeaways
- Payments Basis: You only pay GST on money received and claim GST on money paid. It’s simple and cash flow-friendly, ideal for smaller businesses.
- Invoice Basis: You pay GST on all invoices issued and claim GST on all invoices received, regardless of payment status. It’s more complex and often better suited to larger businesses with consistent cash flow and robust debtor management processes.
If you’re unsure which method is best for your business, consider your cash flow patterns and consult with an accountant or tax advisor.
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