On a cash basis you record income when the money reaches you and expenses when you pay them. On an accruals basis you record income when you issue the invoice and expenses when you receive one, regardless of when anything is paid. Most Australian sole traders account for GST on a cash basis, which is allowed while your GST turnover is under $10 million — the practical effect is that you never remit GST on money a client has not sent you.
The difference in one example
You invoice a client $2,200 including GST on 25 June. They pay on 20 July. Your quarter ends 30 June.
| Cash basis | Accruals basis | |
|---|---|---|
| Income recorded | 20 July, when the money arrives | 25 June, when the invoice is issued |
| Financial year it falls in | The new one | The one just ended |
| GST reported on the BAS | September quarter | June quarter |
| GST paid to the ATO | After the client has paid you | Before, out of your own money |
| What your profit figure shows in June | Nothing — the job is invisible until paid | $2,000 of income earned |
On accruals you would pay $200 of GST to the ATO in late July for a sale the client had not yet paid you for. On cash, the GST falls in the September quarter, after the money is in your account. Multiply that by a few large invoices around a quarter boundary and it is the difference between comfortable and scrambling.
GST: which basis can you use?
For GST the choice is a formal one you make with the ATO, and eligibility is a turnover test:
- Under $10 million GST turnover — you may account for GST on a cash basis. This covers essentially every sole trader.
- At or above it — accruals, unless the ATO permits otherwise for your type of enterprise.
- You choose when you register for GST, and you can change later. Changing has a transitional adjustment so that nothing is counted twice or missed, and there are rules about when a change takes effect.
- It applies to both sides. Cash basis means you also claim GST credits when you pay a supplier, not when they invoice you.
Whichever you pick determines what goes in the boxes on your BAS — the G1 sales figure on a cash basis is what you banked, not what you invoiced.
Income tax is a separate question
This trips people up: your GST accounting method and the basis on which you return income for tax are decided separately, and they do not have to match.
In broad terms, income from providing personal services can often be returned on a receipts basis, while a business that buys and sells trading stock is generally expected to use an earnings basis. Which applies depends on the character of your business rather than on your preference, and it is genuinely a question for a registered tax agent — getting it wrong shifts income between financial years, which is exactly the kind of thing that gets amended later with interest.
What each basis is good and bad at
| Basis | Good at | Bad at |
|---|---|---|
| Cash | Cash flow. You never remit GST on money you have not received, and the numbers match your bank statement, which makes reconciliation simple. | Telling you whether you are profitable. It ignores unpaid invoices, unpaid bills and anything paid in advance, so a month can look wrong for reasons that have nothing to do with the business. |
| Accruals | Showing what the business actually earned in a period, matching costs to the revenue they generated, and making a receivables problem visible. | Cash flow and complexity. You can owe GST and tax on invoices nobody has paid, and you need to track debtors and creditors rather than just the bank. |
The honest summary for a one-person business: cash for GST, because cash flow is the constraint, and keep an eye on your unpaid invoices separately so the cash figure does not flatter you. A quiet month on a cash basis might just be a client who is slow.
The trap in a cash-basis profit figure
Cash accounting tells you what happened to your bank account. It does not tell you whether the business is profitable, and the two diverge in predictable ways:
- A big December looks like growth when it is really November's invoices arriving late.
- Buying a year of software in advance shows as a terrible month rather than as a cost spread across the year.
- Work in progress is invisible. Three months into a large project with nothing invoiced, cash accounting says you earned nothing.
- An ageing receivables problem hides. On accruals, unpaid invoices pile up visibly. On cash, they simply never appear.
None of that is a reason to switch. It is a reason to look at your outstanding invoices list as often as you look at your bank balance — see how to get paid on time.
Related reading
- What is bookkeeping? — the records this method applies to
- What is a BAS? — where the choice shows up on the form
- Do I need to register for GST? — where you first make the choice
- Chart of accounts — the categories either method sorts into
Frequently asked questions
For GST, cash is the usual choice and is available while your GST turnover is under $10 million. The reason is straightforward: on a cash basis you never send the ATO GST on an invoice a client has not paid. The trade-off is that a cash-basis profit figure ignores unpaid invoices, so track your outstanding invoices separately.
They are separate decisions and they do not have to match. GST accounting method is a choice you make with the ATO subject to the turnover test. How you return income for tax depends on the character of your business — services income can often be returned on a receipts basis, while a business with trading stock is generally expected to use an earnings basis. Ask a registered tax agent about your case.
Yes, for GST, subject to eligibility and the ATO’s rules about when the change takes effect. Switching triggers a transitional adjustment so that transactions straddling the change are neither counted twice nor missed. It is not something to do casually mid-year — plan it for a period boundary.
You can account for GST on a cash basis if your GST turnover is less than $10 million, and in some other circumstances the ATO permits. Above that, accruals is the default. Thresholds do change, so confirm the current figure at ato.gov.au before relying on it.
Over the life of the business, no — the same income is taxed either way. What changes is timing: which financial year a sale falls into, and therefore which year’s tax bill and which quarter’s BAS it lands on. Around 30 June that timing difference can be worth real money either way.
Sources
The $10 million cash accounting turnover threshold, the rules for changing basis and the treatment of income for tax purposes come from the Australian Taxation Office. Thresholds change — confirm the current position at ato.gov.au or with a registered tax agent. Balaana is bookkeeping software, not a tax agent — this article is general information, not personal tax advice.