Reinstate an STS Cash Accounting Method

Small Business Entities should be allowed to account for income on a cash basis once again.

Prior to the 30 June 2005 financial year, the STS Cash accounting requirement was a feature of the Simplified Tax System that allowed Small Business Entities to account for income and expenses on a cash basis. However prior to the 30 June 2007 financial year, entities that elected to utilise the STS were required to use ALL of the components of the system. This meant that entities that prepared their accounts based on the accruals method faced compliance costs in converting back to a cash basis if they were to use the STS rules. It was believed this cash accounting requirement was the reason for the low take‐up rate for STS prior to 30 June 2005.

The solution to the problem was to remove the STS Cash Accounting requirement entirely for 1 July 2005 onwards. However this change meant that those entities that do not track debtors and creditors were then disadvantaged, especially those who also use the GST Cash accounting method that is still an option.

There is also the continuing complexity from the transitional rule that allows entities that were using the STS Cash rules at 30 June 2005 to continue to use those rules so long as they have met the requirements continuously since then. This transitional provision requires an analysis of a taxpayer’s affairs over an 11 year period (and counting). This is especially difficult for taxpayers who have changed accountants, and for accountants who have entered the profession since 2005.

I would argue that the 2005 removal of the STS Cash Accounting requirement would not have been required given the later 2007 changes that made the separate components of the SBE system optional. Allowing a choice to use a Cash Accounting method for income tax purposes for those Small Business taxpayers who do not track debtors or creditors (and use the GST Cash accounting method) would have obvious compliance cost benefits, especially for micro business. The cost to revenue should be negligible (especially over time).

The former STS cash rules would be an appropriate template for reinstatement, however better alignment with the GST accounting rules may be an improvement.