GOODS AND SERVICE TAX- THE VARIOUS BASIS'S AND HOW TO CHANGE A BASIS

Businesses sometimes have problems paying tax on time when customers are late in paying for work.     One particular area mentioned is having to pay GST long before payment is received for a job.

This problem may be reduced by changing the way in which you account for GST.

Someone registered for GST can choose to account for the GST they collect in one of the following three ways:

Taxpayers may account for GST on the following basis:

INVOICE BASIS

The invoice basis is the most common way of accounting for GST. When you register for GST you are automatically put on to the invoice basis unless you ask to go on one of the other options.

When using the invoice basis you must generally account for GST in the earlier of the taxable period in which you:

One advantage of using the invoice basis is that you may claim GST incurred on purchases before making payment (except for secondhand goods). It may also suit your existing accounting system.

The disadvantage of using the invoice basis is that you may have to account for GST on sales before you receive payment from your customer.

PAYMENTS (OR CASH) BASIS

The payments basis is often used by small businesses and is considered the simplest for someone using bank statements or a cash book to record business transactions.

If you use the payments basis you generally account for GST in the taxable period in which you make or receive payment. This is why it is sometimes called the cash basis.

You should consider the payments basis option if your business often has customers who pay late.

Under the payments basis you do not account for debtors and creditors at the end of each return period.

However, you may only claim for GST incurred on purchases or expenses after making payment to the supplier.

The payments basis may be used by any registered person if the total value of taxable supplies:

HYBRID BASIS

The hybrid basis is a mix between the invoice basis and the payments basis.

If you adopt the hybrid basis you account for GST on your income using the invoice basis and you claim GST on your expenses using the payments basis.

CHANGING YOUR GST BASIS

If you think a change to your accounting basis for GST might help your business, you need to apply to Inland Revenue in writing. If your application is approved, they will send you a letter advising when you can start using the new accounting basis.

You may need to make a one-off adjustment for debtors and creditors.

A change may affect your other tax affairs, such as how your income tax returns are prepared, so it may be advisable to discuss the change with your Accountant first.