Account for GST

Your Responsibilities
As a GST-registered person, your main responsibility to Inland Revenue is to account for GST regularly. The way you account for GST is called your accounting basis.

There are 3 options by which you can account for GST:

  1. Invoice basis
  2. Payments (or cash) basis
  3. Hybrid basis.

1) Invoice Basis

Using the invoice basis you claim GST when you receive an invoice. Account for GST when you receive an invoice or receive a payment, whichever comes first.

The invoice basis is similar to the accrual basis of accounting in that adjustments are made at the end of the period for creditors and debtors.

If you use a cashbook or bank statements to record business transactions, you will also have to keep lists of debtors and creditors at the end of each period. This is because you will have to account for items where you have received or issued an invoice, but which don’t appear in your cashbook because you have not paid or been paid for the supplies.

Who can use the invoice basis
The invoice basis may be used by any registered person.

Advantages of the invoice basis
You may claim for GST incurred on purchases before making payment (except for secondhand goods).

Disadvantage of the invoice basis
You may have to account for GST to Inland Revenue before actually receiving payment.

2) Payments (or Cash) Basis
If you use the payments basis you account for GST in the taxable period in which you make or receive payment. This is why it is sometimes called the cash basis.

Who can use the payments basis
The payments basis may be used by any registered person if either of these criteria applies. The total value of taxable supplies for the last 12 months was $1.3 million or less, or the total value of taxable supplies is not likely to exceed $1.3 million in any period of 12 months beginning on the first day of any month.

However, IRD may, on written application, allow you to use the payments basis if you expect to exceed $1.3 million in any 12-month period.

IRD will take into account:

  • the nature, value and volume of taxable supplies, and
  • the type of accounting systems used.

Non-profit bodies can use the payments basis, even if they don’t meet any of these criteria. Local authorities listed in an Order in Council will also be allowed to use the payments basis.

Delayed settlement transactions
If you are on the payments basis and (as vendor) enter into a delayed settlement transaction where the value of the supply exceeds $225,000 (including GST) then you may be required to account on an invoice basis for that supply.

Advantages of the payments basis
The payments basis is suitable for small businesses that use a cash system. Cashbooks can be easily used to account for GST. For an example of how to use a cashbook in completing your GST return. You usually only account for GST when payment is received from the customer. This is to your benefit if you give lengthy periods of credit to customers.

Disadvantages of the payments basis
You can only claim for GST incurred on purchases or expenses after making payment to the supplier. Depending on the transaction, you may be subject to the rules concerning delayed settlement transactions.