Ever feel like the Goods and Services Tax (GST) system was designed just to mess with your head? You’re not alone. But before your next GST return turns into a late-night panic session, let’s break down one key thing: the GST accounting method you choose actually matters. A lot.
In New Zealand, you’ve got two main options: the payment basis or the invoice basis. Each one changes when you report taxable supplies, claim input tax, and make your GST payments. It also affects your cash flow, admin workload, and how you handle invoicing.
Whether you’re a small business juggling invoices or just figuring out your GST obligations, we’ll explain both GST calculation methods in plain English—with real-world examples.
By the end, you’ll know which accounting basis fits your business, what the IRD expects, and how to stay on top of your tax compliance without losing sleep (or receipts).
What Do Payment Basis and Invoice Basis Mean?
Alright, let’s not overcomplicate this. There are two main ways to account for GST in New Zealand: payment basis and invoice basis.
Both are GST reporting methods, but they handle timing very differently. The method you choose will affect when you pay GST to the IRD, when you can claim it back, and how your cash flow behaves month to month.
If you’re on a two-monthly GST cycle, that timing becomes even more important
Payment basis – cash in, cash out
This one’s pretty straightforward. You only account for GST when money actually changes hands. You get paid? That’s when you include it in your GST return. You pay a bill? That’s when you claim it.
It’s a bit like a pay-as-you-go system. Easier on the cash flow, especially for small businesses that don’t always get paid on time.
Invoice basis – GST is due before the money hits your account
With the invoice basis, you’re dealing with GST the moment you issue or receive an invoice — even if no money has changed hands yet. That means you might have to pay GST before the client actually pays you. Great, right?
This is more like the standard accrual basis you’d see in financial reporting. It gives you a clearer picture of what’s owed and what’s owing, but it’s definitely more admin-heavy.
What’s the actual difference?
Let’s compare the two:
| Payment Basis | Invoice Basis | |
|---|---|---|
| When GST is paid or claimed | When you receive or pay the money | When you send or receive the invoice |
| Cash flow | Easier – you only pay when you’ve been paid | Can be tighter – you might pay GST before getting paid |
| Admin | Simpler, fewer adjustments needed | More admin – you’ll need to track invoices and reconcile more often |
A simple example to make it real
You’re a freelancer. On 1st May, you send a client an invoice for $1,150 (including $150 GST). They pay you on 31st May.
If you’re on payment basis:
You include that $150 GST in the return covering May/June, but only once the cash actually hits your account on the 31st. No cash? No GST due yet.
If you’re on invoice basis:
That $150 GST goes into your May/June return regardless of whether the money’s arrived or not. You’ve invoiced, so it’s on the books.
Same sale, same amount — completely different GST timing.
Timing matters with tax. Just like with Fringe Benefit Tax (FBT), it’s not just about what you’re reporting — it’s when you report it that can make all the difference.
Here’s a simple breakdown of how FBT works if you’re offering perks like company cars or gym memberships.
Which GST Basis Should You Choose?
So now you’re probably thinking… cool, but which one should I actually go with?
It depends on how your business runs, how your clients pay you, and how much admin you’re willing to put up with.
When the payment basis makes more sense
This method is usually better if:
- You’re a small business or sole trader
- Your clients often pay late (classic)
- You want to keep things simple and protect your cash flow
- You don’t have a full-time bookkeeper chasing every cent
Basically, you only pay GST once the money’s in. Ideal if you’re operating on tight margins or just don’t like surprises.
There are rules, though. To use the payment basis, your turnover needs to be under $2 million per year. That’s the IRD threshold. Go over that, and you’re likely looking at the invoice basis instead.
When the invoice basis is a better fit
This method works best if:
- You’re invoicing large amounts regularly
- Your clients tend to pay quickly (lucky you)
- You want to claim GST on expenses as soon as you’re invoiced, even if you haven’t paid them yet
- You’ve got solid accounting systems in place
Yes, the invoice basis requires more admin. But for bigger businesses, or those with more complex taxable supplies, it gives better visibility over what’s owed and when.
Can you switch between methods?
Short answer: yes, but it’s not a free-for-all.
If your situation changes — say your turnover drops or you restructure — you can apply to the IRD to change your accounting method. You’ll need to show why the change makes sense and how it’ll affect your GST obligations. They don’t always say yes.
So… don’t just pick one and forget about it. Revisit it if your business evolves.
Need Help Deciding?
If all this GST chat made your brain melt a little, you’re not alone. Choosing the right GST accounting method can save you money, time, and stress — but only if you get it right from the start.
At BH Accounting, we’re not here to throw tax jargon at you. We help you figure out what actually works for your business, and connect you with pros who can make it all a bit easier.
Whether you’re just sorting out your GST registration or thinking about switching methods, we’ll help you make the call that suits your cash flow — not just what the IRD says on page 47 of a PDF.
Flick us a message or check out more of our no-fluff guides. Your future self (and your bank account) will thank you for it.
This article is for information only—not legal, financial, or tax advice. Every business is different, and rules change, so don’t make major decisions based on what you read here. If you’re unsure, talk to a professional—it’s cheaper than fixing a costly mistake later.