There are two main methods of accounting for GST.
The Invoice Method
Under this method, you account for GST when you make a sale of goods or services and you claim a credit when you purchase goods or services. In each case, the important dates are the date of the sale or purchase; and if you prepare invoices, the date of the invoice. Under the Invoice Method, payment dates are irrelevant.
To claim a tax credit for transactions of more than $50 (including GST) you need to hold a tax invoice .
You need to keep a record of debtors and creditors at the end of each GST period. This is because your GST liability is based on your record of
- goods and services sold (whether or not you have been paid) and
- goods and services received, (whether or not you have paid).
The advantage of the Invoice Method is that, if you are the buyer, you can claim GST on a purchase before you pay for it.
If you sell on credit terms, you are disadvantaged by having to account to Inland Revenue for GST before necessarily receiving payment.
If your turnover is running at $1.3 million or more annually, you must use the Invoice Method – you have no choice.
Small businesses may have difficulty with the Invoice Method without a well-organised accounting system.
The Payments Method
This is a variation intended for small businesses with simple accounting systems. Using this method you account for GST when you receive or make payment.
As with the Invoice Method, you need to hold a tax invoice to claim a tax credit. Unlike the Invoice Method, you must not include unpaid sales and unpaid suppliers.
You can use this method if your taxable supplies (or turnover) is running at $1.3 million or less annually.
The advantage of the Payments Method is that as a seller of goods and services you need to account for GST only when you have received payment. On the other hand, you cannot claim a GST credit on purchases until you have paid the supplier.
The payments method is usually the most suitable one for a small business, as it can be managed without the use of a complex accounting system.
Which one suits you best?
Of the two principal methods, the Payments Method is favoured by many small businesses because of its simplicity. It is easy to understand and to operate.
However, if your business receipts come in at the time of the sale (with no delays because you need to bill your customers) the Invoice Method benefits you by allowing you to claim an immediate credit on suppliers accounts which you pay on normal monthly terms.
A third “hybrid method” may suit a few taxpayers – please ask about this if you are interested. There are also special variations for charitable institutions.
Far North Tax Professionals