Quick answer
Your GST accounting basis decides when a sale or purchase counts for GST. On the payments basis, available if sales are $2 million or less over 12 months, you account for GST only when money actually changes hands. On the invoice basis, open to anyone, you account when invoices are issued or received, paid or not. The hybrid basis mixes the two and often hurts small-business cash flow.
Key points
- Payments basis: GST follows the cash, and is open to businesses with sales of $2 million or less.
- Invoice basis: GST follows the paperwork, so you can owe GST on invoices customers haven't paid yet.
- Hybrid basis: invoice basis for sales, payments basis for purchases, which is usually the worst combination for cash.
- Businesses that give credit terms generally find the payments basis gentler on the bank account.
Two businesses can turn over exactly the same amount, charge the same 15% GST and still pay Inland Revenue at very different times. The difference is usually the accounting basis they chose when they registered. If your customers pay on account, this choice decides whether you’re ever asked to pay GST on money you haven’t received.
What are the three GST accounting bases?
Inland Revenue recognises three methods. Each one answers the same question: at what moment does a sale or a purchase count for GST?
| Basis | When sales count | When purchases count | Who can use it |
|---|---|---|---|
| Payments | When the customer pays you | When you pay the supplier | Sales of $2 million or less in the last 12 months (or expected to stay under) |
| Invoice | When you issue the invoice (or receive payment, if earlier) | When you receive the supplier’s invoice | Anyone |
| Hybrid | When you invoice | When you pay | Anyone |
The payments basis is the simplest to understand. GST follows the bank account: if a customer hasn’t paid, there’s no GST on that sale yet. The invoice basis follows the paperwork instead, so a sale invoiced on 25 May counts in the May period even if the money arrives in July.
How does the basis change your cash flow?
Illustrative example. A Hamilton electrical contractor invoices $60,000 plus GST in a two-monthly period, but customers on 20th-of-the-month terms only pay $35,000 of it before the period ends. Supplier purchases of $20,000 plus GST were all invoiced and paid within the period.
| Payments basis | Invoice basis | |
|---|---|---|
| GST on sales counted | 15% of $35,000 = $5,250 | 15% of $60,000 = $9,000 |
| GST on purchases claimed | 15% of $20,000 = $3,000 | 15% of $20,000 = $3,000 |
| GST to pay this period | $2,250 | $6,000 |
Over time the totals even out, because the unpaid $25,000 will count once it’s paid. But on the invoice basis the contractor is $3,750 out of pocket for a couple of months, funding GST on money still sitting in customers’ accounts. Multiply that by every period and every slow payer, and it becomes a permanent drag on working capital.
The effect is biggest for businesses with long or generous terms: trades on monthly accounts, wholesalers, manufacturers and professional firms. Retailers and hospitality businesses paid at the counter barely notice the difference, because sale and payment happen at the same moment.
Which basis should a small business choose?
For most small New Zealand businesses that give credit terms, the payments basis is the kinder option. A few situations point the other way:
- Heavy credit purchases. If you buy large amounts on account and pay suppliers slowly, the invoice basis lets you claim GST on those purchases as soon as the invoice arrives.
- Big upfront spending. A business fitting out premises or buying equipment on terms might claim refunds sooner on the invoice basis.
- Growth past $2 million. Once sales pass the threshold, the payments basis is no longer available and you’ll need to change.
The hybrid basis rarely suits small operators. Inland Revenue’s own guidance notes that small businesses usually avoid it because counting sales early and purchases late can leave you paying GST before the money arrives and claiming it back after it’s gone.
What if customers never pay?
On the payments basis, an unpaid invoice never generates GST, so a bad debt simply never enters your return. On the invoice basis you’ve already paid GST on that sale, so when a debt is genuinely written off you can claim the GST back as an adjustment. That works, but only after you’ve chased the debt and decided it’s lost, which can take months. Our guide to chasing unpaid invoices covers the steps before that point, including the Disputes Tribunal.
Does the basis interact with filing frequency?
Yes, and the two choices are best made together. A payments-basis business on a two-monthly cycle has a GST bill that tracks cash received in the last two months, which is about as predictable as GST gets. An invoice-basis business on six-monthly filing can face a large bill based on invoices from half a year ago. Read which GST filing frequency suits you alongside this page.
Whatever the combination, put the GST aside as you collect it. The GST & provisional tax set-aside planner estimates the weekly amount from your sales and costs, and how much GST to set aside explains the 3/23 rule for GST-inclusive takings.
When the basis isn’t the real problem
Sometimes switching basis eases the timing but the underlying issue is simply that cash comes in slower than the business grows. A bigger contract, a new customer on 60-day terms or a busy season can all stretch working capital. If that’s where you are, it’s worth knowing what funding could look like before it’s urgent; you can check your options in about a minute.
Getting the funding conversation right
Fix the timing first: the right basis, a sensible filing cycle and a separate GST account. Then, if the business still needs working capital to keep pace with its own growth, talk to us. We look at unsecured facilities for trading businesses and loans secured on residential or commercial property. Asking costs your credit file nothing, your enquiry isn’t passed to other lenders, and a real person reads it. Give us accurate figures and we can usually tell you on the first call what’s realistic. Start the enquiry.
Frequently asked questions
Can I use the payments basis if my turnover is growing?
You can use it while your total sales are $2 million or less over the last 12 months, or are expected to stay under that level. Once you pass the threshold you need to move to the invoice or hybrid basis, so growing businesses should plan the change with their accountant.
Why would anyone choose the invoice basis?
Businesses that buy a lot on credit, or make large purchases before they're paid for, can claim GST on supplier invoices sooner under the invoice basis. Some larger businesses also find it lines up better with their accounting systems.
What's wrong with the hybrid basis?
It counts sales when you invoice but purchases only when you pay. That means you can owe GST on sales before customers pay, while waiting to claim GST on costs until you've paid suppliers. Inland Revenue itself notes it's generally avoided by small businesses for that reason.
Does my GST basis affect income tax?
No. The GST accounting basis only controls GST timing. Income tax follows its own rules, which your accountant applies when preparing your annual return.