Goods and services tax (GST) is a 10% tax on almost all goods, services and other items sold and/or consumed in Australia. Every business is required to register for GST if they have a GST turnover of more than $75,000 per annum.
All GST registered businesses should issue tax invoices to their customers or clients. It is valuable for every business owner to put aside the GST they collect, so that they can eventually pay it to the tax office when it is due.
As a small business, if your annual turnover is less than $10 million, or you use cash accounting for income tax, you can apply one of two methods for accounting your GST. Your options are cash accounting or non-cash accounting. Depending on your circumstances, one option may be more suited to you than another.
Essentially, cash accounting means that you account for GST on your business activity statements that cover the period in which you made the sales.
Many business owners choose cash accounting because it can assist with cash flow. Ultimately, it means the money flowing into your business is better aligned with you activity statement liabilities.
This is a preferred method for smaller businesses who handle instant cash transactions, such as cafés or hairdressers.
Non-cash accounting (accruals)
The process of non-cash accounting means that you account for GST on the business activity statement that covers the period in which you issued the tax invoice and received payment.
Non-cash accounting is better suited to businesses that do not receive payment immediately for their services. It is often considered to be a way of tracking your true financial position, especially if dealing with multiple contracts or large sums of money.
Both methods of GST accounting can have positives and negatives. As a general rule, smaller businesses tend to use cash accounting because it is not as complex as non-cash accounting. However, every business will have their own unique reasons for choosing their accounting method.
To get some assistance with your record keeping or tax lodgements, you should engage with skilled bookkeepers and accountants.
If you would like to get in touch with one of our small business tax champions, you can contact us today.