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GST Article – Ability to account for GST on the Cash Basis

This article outlines the recent controversy in which use of the cash basis by non-business entities and small business entities have moved out of virtual alignment. It notes some practical implications of this.

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You may have read about the controversy in relation to legislative changes which allow a small business entity with a turnover of up to $10m to use the cash basis of accounting for GST, while leaving non-business entities to account for GST on the cash basis only where their GST turnover does not exceed $2m. News reports indicate that the Commonwealth Treasurer has confirmed that the difference is intentional and not merely an oversight.

The starting point for understanding the controversy is that the ability to register for GST depends on whether your organization carries on an ‘enterprise’ for GST purposes and not whether it carries on a business. While an ‘enterprise’ for GST purposes includes carrying on a business, it is a broader concept. In particular, an ‘enterprise’ includes an activity/series of activities done:

  • ‘on a regular or continuous basis, in the form of a lease …’;
  • by the trustee of a fund that is a gift deductible entity (i.e. a fund covered by SubDiv. 30-B of the Income Tax Assessment Act 1997 (ITAA 97)and to which deductible gifts can be made); or
  • by a charity.

In the result, an entity that is registered for GST (including an entity that is voluntarily registered) may be carrying on, but does not necessarily carry on, a business.

Small Business Entity – access to cash basis

Under the GST Act (s. 29-40(i)(a)), a ‘small business entity’ can account for GST on the cash basis. For relevant GST purposes, in a particular year (‘the current year’) a ‘small business entity’ is an entity that carries on a business in the current year and either:

  • in the previous year had an ‘aggregate turnover’ of less than $10m; or
  • subject to the exception noted below, in the current year the entity’s likely ‘aggregate turnover’ will be less than $10m.

The exception is that if an entity meets condition (b) above, it will not be a small business entity where it carried on business in the two years preceding the current year and, its aggregate turnover in each of those preceding years was at least $10m.

‘Aggregate turnover’ is a statutory defined term (s. 328-115 ITAA 97). Basically, it recognizes that an entity can exist/operate so closely (i.e. ‘connected’ or ‘affiliated’ – see s. 328-125 and s.328-130 ITAA 97) with other entities that all the entities in the group should be treated as a single commercial unit. In essence, the aggregative turnover is the total of the ordinary income (exclusive of GST) which each member of the group derives from its business dealings with persons outside the group.

The $10m aggregate turnover threshold became effective on 1 July 2016, although it was enacted in 2017. Previously, the aggregate turnover threshold was $2m.

Entity that is NOT a Small Business Entity – access to cash basis

Under the GST Act (s. 29-40(1)(ab)), an entity which does not carry on a business and which has a ‘GST turnover’ equal to or less than $2m, can account for GST using the cash basis. In effect, this condition will be met at any time during a month where:

  • the value (i.e. basically, the GST exclusive price) of all supplies (other than excepted supplies under s. 188-15(1) of the GST Act) made in that month and the preceding 11 months is equal to or less than the GST turnover threshold of $2m.; or
  • the value (i.e. basically, the GST exclusive price) of all supplies (other than excepted supplies under s 188-20(1) of the GST Act) that are made/likely to be made in the month and next 11 months is equal to or less than GST turnover threshold of $2m.

It appears that the GST turnover threshold of $2m. is not going to be increased in line with the increase of the aggregate turnover threshold from $2m. to $10m.

The GST Act also allows an entity to use the cash basis where:

  • the entity uses the receipts method to account for its income – s. 29-40(b); or
  • each enterprise which the entity carries on is one to which the Commissioner of Taxation allows the taxpayer to choose to apply the cash basis – s. 29-40(c).

Practical Implications

Entities in the not-for-profit sector (‘NFP Entity’) may or may not carry on a business.

A not-for-profit entity that does not carry on a business (‘NFP non-business Entity’) may have interests in one or more other entities that is/are ‘connected’ with (s. 328-15 ITAA 97) or is/are affiliated with (s. 328-130 ITAA 97) the NFP non-business Entity. One or more of those other entities may carry on a business.

Not-for-profit entities that carry on a business and exceeded the previous $2m aggregate turnover threshold may like to consider whether they are now able to use the cash basis, due to the expansion of the aggregate turnover threshold to $10m.

Similarly, entities that carry on a business and are connected/affiliated with a NFP Entity may like to consider whether the increase in the aggregate turnover threshold enables them to use the cash basis.

It appears, for the time being, that NFP non-business Entities will remain subject to the GST turnover threshold of $2m. However, the GST Act provides that the GST turnover threshold of $2m. which governs use of the cash basis for GST can be varied by regulation (s. 29-40(3)(b)), so it would not be difficult for the Treasurer to implement any change of mind in the future.

Disclaimer: Information provided in this article, while correct at time of publishing, is subject to change.