Choosing the right GST accounting basis is one of those decisions that doesn't get much attention — until it starts affecting your cashflow. Here's a quick guide to help you understand your options.

Quick Summary

  • GST registration is generally required once taxable turnover reaches $60,000 over a 12 month period.
  • Businesses with annual turnover of $2 million or less can generally choose either the payments basis or invoice basis.
  • Businesses with turnover exceeding $2 million are generally required to use the invoice basis.
  • Choosing the right GST accounting basis can have a significant impact on cashflow.
Decision guide: GST payments basis or invoice basis?
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Do You Need to Register for GST?

If your taxable turnover reaches $60,000 over a 12 month period (or you expect it to), GST registration is generally required. Businesses below this threshold may choose to register voluntarily, particularly if they wish to claim GST on business expenses.

Once you're registered, the next decision is how you'll account for GST — this is where the payments basis and invoice basis come in.

Payments Basis

Under the payments basis, GST is accounted for when money actually changes hands. You return GST on sales in the period you're paid by your customer, and you claim GST on expenses in the period you pay your supplier (provided you hold the correct taxable supply information).

In practice, this means your GST generally follows your cashflow rather than invoices that haven't yet been paid. It's a popular option for small businesses, and is available if your turnover is $2 million or less and likely to stay that way.

Invoice Basis

Under the invoice basis, GST on sales is due in the period you invoice your customer — even if you haven't been paid yet. Likewise, you can claim GST on purchases in the period you're invoiced, even before you've paid your supplier.

This basis is commonly used by larger businesses, and becomes mandatory once annual turnover exceeds $2 million, consistent with the latest IRD guidance. It gives a clear, real-time picture of income and expenses, but can create cashflow pressure if customers are slow to pay.

Which Basis Suits You?

Most small businesses prefer the payments basis for the cashflow benefits it offers. Larger businesses, or those wanting to claim GST early on major purchases, often choose the invoice basis. If your circumstances change, you can apply to Inland Revenue to switch.

Get in touch with Prestige Accountants to discuss which GST accounting basis is right for your business.