A tiling contractor in Fairfield rang the old Perth desk in October because “the BAS said we had a good quarter” and the bank did not. He was on cash for GST. He had issued $180,000 of claims. He had been paid $110,000. The activity statement looked calm. The debtors list, which nobody had printed, did not.
Cash versus accrual is not a personality. It is two timing questions — one for GST, one for income tax — that Australian traders are allowed to answer differently if they meet the tests. Get the tests wrong and you lodge on a method you were never entitled to. Get the tests right and still treat cash GST as a picture of profit, and you will hire, buy a ute, or take a holiday on a number that has not happened yet.
This essay is general information for Australian readers. It is not tax, legal or BAS advice. Eligibility for cash or accruals sits in the GST law and the income-tax law, and both move. Confirm the current ATO tests and your own turnover before you elect a method.
Two questions, not one toggle
Software offers a single “accounting method” in the settings screen. The law does not. You can be:
- cash for GST and cash for income tax
- cash for GST and accruals for income tax
- accruals for both
You cannot be accruals for GST and cash for income tax in any useful way: if you must report GST on invoices, your books already know the invoices. What you can do is keep a cash GST file and still prepare management accounts that accrue debtors, creditors and WIP so you can decide whether the week was any good.
Write the two settings down. Put them on the chart of accounts legend and in the note you send the tax agent in July. A file that cannot say which method it uses is not a file.
Who can use cash for GST
The usual door is GST turnover. If you are under the ATO’s cash-accounting turnover threshold — published as $10 million of GST turnover — you can generally choose to account for GST on a cash basis. Some entities can use cash because they already account for income tax on cash. Some entities cannot use cash at all.
GST turnover for this purpose is not “what hit the bank”. It is the GST law’s turnover test: taxable and GST-free supplies, usually looking forward and back across a year. Input-taxed supplies stay out. GST itself stays out. If you are close to the line, do not guess from a Xero sales report. Read when to register for GST for how that turnover is built; the same architecture is used for other GST tests.
If you are over the threshold, you account on accruals. Invoices in, invoices out. Payment dates stop driving the activity statement.
Who can use cash for income tax
Income tax has its own small-business tests. Many sole traders and small companies may account for ordinary business income on a cash basis if they qualify as a small business entity. Base-rate companies pay company tax at 25 per cent; other companies pay 30 per cent. The rate does not choose the method. The method chooses when the income appears, and therefore when the 25 or the 30 is applied.
Professionals and anyone with material work-in-progress should not assume cash income tax is available, or that it is wise. WIP rules and the way a practice values unbilled time are a tax-agent question. A bookkeeper’s job is to make sure the unbilled work is visible somewhere, even if it is a management schedule rather than a posted journal.
What cash GST does to a week
On cash GST you report GST on sales when you receive the money, and you claim GST on purchases when you pay. A $11,000 invoice including GST of $1,000 does nothing to label 1A until the client pays. A $3,300 supplier bill including GST of $300 does nothing to label 1B until you pay it.
That is mechanically clean. It is also how a quarter goes quiet while the business gets busier.
Take the Fairfield tiler.
- July: three bathroom claims issued, $66,000 including GST. One paid, $22,000. Cash GST on sales: $2,000.
- August: two more claims, $44,000 including GST. Nothing collected. Cash GST on sales: nil. He buys $16,500 of tiles and pays on card. He claims $1,500.
- September: the builder pays $55,000. Cash GST on sales: $5,000.
The September quarter activity statement is not a picture of the work. It is a picture of who happened to pay. If he also has a growing stack of unpaid supplier invoices, he has not claimed those credits yet either. Cash GST is symmetric. It hides both the GST you will owe when the debtors pay and the credits you will get when you pay the trade accounts.
What accrual GST does instead
On accruals you report GST when you issue the invoice or receive a bill that is a creditable acquisition, subject to the usual tax-invoice rules. The Fairfield claims hit 1A in the quarter they were issued. The tile bills hit 1B in the quarter they were received, if he holds tax invoices.
Accrual GST can create a cash problem the other way: you owe the ATO on invoices the builder has not paid. That is not a bookkeeping error. It is why traders on accruals need a debtor-collection habit and a GST clearing account they look at before they spend the money. See the BAS lodgement calendar: the due date does not care that the builder is “good for it”.
Debtors, creditors and the lying cash P&L
Even if both GST and income tax are on cash, you still have debtors and creditors. They live on the balance sheet whether or not they have hit the profit and loss.
A cash P&L in a trade business is a cash-movement report wearing a profit hat. It will look wonderful in a month when three old jobs pay and you have issued nothing. It will look disastrous in a month when you have tiled four houses and the builder’s payment run is late. Neither month tells you whether the jobs made money.
The cure is not to abandon cash GST if you are entitled to it and it fits the cash. The cure is a parallel view:
- aged receivables, including retention
- aged payables, including the tile supplier who has you on seven days
- a job cost that uses invoices raised and costs incurred, not cash
- a GST control that matches the method you actually elected
If those four are not in the month-end pack, cash GST has become a story you tell yourself.
Work-in-progress is where cash goes quietest
WIP is work you have done and not yet billed. A tiler has WIP when the bathroom is half grouted and no claim has gone in. A café has almost none; the coffee is sold or it is not. A clinic has a little, in unbilled reports and unpaid health-fund claims. A builder or a professional firm can have a quarter of a year’s labour sitting in WIP.
Cash GST does not see WIP. Accrual GST does not see it either, until you raise the invoice. Income tax might, depending on the entity and the rules in force. Management accounts must.
If you do not touch WIP at month-end, you will understate how much working capital the jobs have eaten. The Fairfield tiler who “doesn’t invoice until the builder asks” is financing the builder. Cash GST will not mention this. A job-cost worksheet will.
Retentions are a related trap. Retention is a debtor with a long sleep. On cash GST you do not report the GST until the retention is released and paid. On accrual GST you generally reported it when you claimed it. Either way, list retentions by job and by due date. They are not a rounding.
When cash GST hides a problem
Watch for these shapes. They are the ones the Rosebery desk used to circle.
Debtors growing faster than sales. You are working more and collecting the same. Cash GST looks stable. The business is becoming a bank for its customers.
A big unpaid supplier. You have the tiles on site and the tax invoice in the tray, but you have not paid. On cash you have not claimed the credit. The job cost looks worse than the BAS. People then “fix” the job by recoding the bill. Do not. Pay, or accrue for management, and leave the GST method alone.
A method change. Moving from cash to accruals (because you grew, or because a tax agent told you to) requires a transitional calculation so that invoices are not taxed twice or missed. This is not a software toggle. It is an adjustment with a working paper. Do it with the agent, in a quarter you are not also changing software.
Private drawings in a cash file. The owner pays the home mortgage from the trading account. On cash, that is not a purchase and not a sale. It still needs a name. Cash accounting is not a licence to leave related-party mess in “miscellaneous”.
Payroll. Super Guarantee is 12 per cent from 1 July 2025. Payday Super is in force from 1 July 2026. Neither waits for your GST method. Wages are accounted when you run the pay, and the super leaves with the pay. A cash-GST trader who treats super as a quarterly leftover is already behind the law.
A café is not a tiler
A small café in Newtown on cash GST is usually fine. Customers pay before they leave. Suppliers are on seven or fourteen days. Inventory is the larger honesty problem: milk and bread you have received but not paid for, and stock that died in the coolroom. Cash GST will roughly match the till. The P&L still needs a stock figure if you want to know whether the food margin is real.
The same owner who opens a second venue, starts invoicing corporate catering, and gives 30-day terms has quietly become the tiler. Revisit the method and the pack the quarter the terms change, not the year the overdraft appears.
What to keep in the working papers
Whatever method you elect, the source documents stay the same: tax invoices, contracts, remittances, statements. Add one page that says:
- GST method and the date you elected it
- income-tax method, if different
- the turnover test you relied on
- a list of unpaid sales and purchases at each quarter-end
- any WIP or retention schedule
Simpler BAS will not show that page. Full BAS will not show it either. It is how a boutique file explained itself when someone else opened the drawer.
If you cannot write that page, you are not choosing cash or accrual. You are hoping. Hope is not a method the ATO recognises, and it is not a method a tax agent can use. Choose, write it down, and keep a set of numbers that still tell you whether the jobs paid. The BAS and GST hub is the lodgement side of the same choice.
