GST Cash and Accrual Mismatches: Avoiding the Avoidance

Australia, like many jurisdictions, allows small businesses to use cash basis recognition of expenses and supplies when accounting for GST. The commonly offered rationale for the concession – a measure to simplify the tax and reduce compliance costs – is at best problematic. The more plausible explanation is to provide an optional subsidy for small businesses, perhaps to offset the regressivity of GST compliance costs. Tax authorities in a number of countries have discovered that the availability of both cash basis and accrual basis rules opens the door to avoidance arrangements not contemplated by the legislature when the dual accounting rules were adopted. Enterprises exploited the timing mismatches between cash basis vendors and accrual basis customers to create input tax entitlements and consequent refunds for buyers where there were no contemporaneous output tax obligations for sellers. Legislators in the UK and New Zealand concluded the optimal response to these schemes was the adoption of a specific anti-avoidance rule, which is supplemented by a general anti-avoidance rule in the case of New Zealand. To date, Australian authorities have relied on ad hoc application of a general anti- avoidance rule to address the problem. This article considers whether a systematic fix derived from, but improving on, overseas models is preferable to the ad hoc approach currently used in Australia.