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Inland Revenue

Tax Policy

Chapter 7 - The Payments Basis Threshold

7.1 Chapter 6 introduced the possibility of what would in effect be a compulsory payments basis threshold for addressing GST base maintenance concerns. On the basis that significant tax base risk reductions will occur through the adoption of some of the other suggestions (such as the domestic reverse charge mechanism) outlined in this paper, this chapter considers whether changes to the payments basis threshold on the current non-compulsory basis should also be made.

The payments basis

7.2 The operation of the payments basis was briefly detailed in Chapter 2 (see Table 1) and the policy reasons for its inclusion in the GST system set out in Chapter 6.

7.3 Briefly, the payments basis permits a GST-registered person to recognise a GST liability on the supply of goods and services when payment is received from the customer. Similarly, a registered person accounting for GST on the payments basis is allowed an input tax deduction on its purchases only when the registered person makes payment.

7.4 Generally, a GST-registered person may account for GST on a payments basis if, during any 12-month period, the total value of its taxable supplies does not exceed $1.3 million or it is a non-profit body.[52] Provision is also made for certain local authorities to account for GST using the payments basis.[53]

7.5 The payments basis threshold was raised from $1 million to $1.3 million in 2000 to reflect movements in purchasing power since 1990 (when the threshold was last reviewed).[54] The increase to $1.3 million also included an amount for expected inflation to 2007. It is therefore timely that the current threshold be reviewed to ensure that it continues to meets its policy objectives.

Base maintenance and increases to the payments basis threshold

7.6 One of the key concerns associated with increasing access to the payments basis threshold is base maintenance – as illustrated in the Ch’elle cases.[55] The absence of proposals dealing with the payments basis in the discussion document Reducing tax compliance costs for small and medium-sized enterprises[56] largely resulted from this concern. The simplification discussion document anticipated the completion of further policy work, which now forms the basis of this paper.

7.7 If the tax base concerns are addressed by the measures outlined in the previous chapters, there is little reason why access to the payments basis should not be offered to a greater number of GST-registered persons. (This would not of course be a logical consequence of our suggestion in chapter 6 to limit access to the invoice basis.)

7.8 The clear objective of extending the payments basis as an option to GST-registered persons would be to reduce compliance costs. Being optional, the extension would allow taxpayers greater flexibility to use an accounting base that best met their business needs.

7.9 The current threshold allows about 93 percent of GST-registered businesses to use the payments basis of accounting. Raising the threshold to $2 million would cover about 96 percent of GST-registered businesses. This coverage is consistent with the definition of “small to medium-sized enterprises” used by the Ministry of Economic Development.[57]

7.10 The increase in the threshold will also help eliminate the costs associated with being forced to change the accounting basis to either the invoice or hybrid base in the taxable period immediately after reaching the threshold. Ongoing threshold increases would facilitate this further.

7.11 Ongoing increases will, however, need to be considered against the potential success of the options discussed in this paper and would also be subject to their fiscal sustainability.

Specific point for consultation

What benefits (or costs) would result if the current limitations on using the payments basis of accounting were adjusted?


52 See section 19A.

53 See the Goods and Services Tax (Local Authorities Accounting on Payments Basis) Order 2005.

54 Before 1990 the threshold was $500,000.

55 Ibid footnote 5.

56 New Zealand government, December 2007.

57 See SMEs in New Zealand: Structure and Dynamics Ministry of Economic Development, July 2007.