Paid GST on an invoice that was never paid? How to get it back

Yes, you can usually get it back, but not straight away. If your business accounts for GST on a non-cash basis, you pay the GST when you invoice, not when you’re paid. When a customer never pays, the ATO allows a bad debt adjustment once the debt is written off or has been overdue for 12 months or more. Until then, that GST is your money sitting with the tax office.

Most owners only discover this rule the hard way: a big customer goes quiet, the BAS still includes the GST on their invoices, and the business ends up funding the tax office on a sale that never turned into cash.

Why do you pay GST on money you never received?

It comes down to your GST accounting method. The ATO explains two ways of attributing GST:

• Non-cash (accruals) basis. GST on a sale is reported in the BAS period when you issue the tax invoice or receive payment, whichever happens first. Issue an invoice in September, and the GST belongs on the September quarter BAS, paid or not.
• Cash basis. GST on a sale is reported in the period you actually receive payment, and only on the part you receive.

Businesses with aggregated turnover under $10 million can generally choose the cash basis. Many still sit on the non-cash basis, sometimes deliberately, sometimes because that’s how the accounting file was set up years ago.

On the non-cash basis, every invoice is a small GST liability the moment it’s issued. That’s fine when customers pay on time. It turns into a cash problem when one doesn’t.

When can you claim the GST back?

The ATO’s guidance on types of adjustments sets out two triggers for a bad debt adjustment on a taxable sale, for businesses on the non-cash basis:

1. You write the debt off as bad, or
2. The debt has been overdue for 12 months or more.

Either one opens the door to a decreasing adjustment on your activity statement, which reduces the GST you owe for that period. The ATO’s worked guidance on making adjustments treats writing off a bad debt, or a debt overdue 12 months or more, as a decreasing adjustment, and recovering a debt you previously wrote off as an increasing adjustment.

A few practical points:

• Writing off is a real decision. It isn’t just a journal entry to get the GST back sooner. Your accountant will want reasonable grounds, such as the customer entering liquidation or all collection efforts failing.
• Partly taxable sales adjust proportionally. If the original sale was only partly taxable, the adjustment is reduced to match.
• Recoveries reverse it. If the customer later pays some or all of it, you report an increasing adjustment for what you collect, when you collect it.

Situation	What happens to the GST
Invoice issued, customer pays on time	GST reported when invoiced; nothing more to do
Invoice unpaid, under 12 months, not written off	GST already paid; no adjustment yet
Debt written off as bad	Decreasing adjustment available
Debt overdue 12 months or more	Decreasing adjustment available
Customer pays after adjustment claimed	Increasing adjustment for the amount recovered

What’s the real cost to the business?

The GST eventually comes back, so the cost isn’t the tax. It’s the timing.

Picture the calendar. You invoice in July. The quarterly BAS covering July to September is due on 28 October, so you pay the GST then. If the customer simply goes quiet and you don’t write the debt off, the 12-month trigger isn’t met until the following July. The decreasing adjustment lands on a later BAS. That’s well over a year with your cash parked at the ATO.

Meanwhile, the unpaid invoice has usually done other damage. The materials, wages or subcontractors behind that sale were paid long ago. The GST is just the last layer of a bigger hole.

If that hole is making this quarter’s BAS hard to pay, it’s worth a short conversation. Tell us what’s owed and what’s due and a real person will talk through the options.

How do you bridge the gap until the adjustment comes through?

Owners in this spot usually look at one of these:

• A business line of credit. Draw what you need for the BAS and repay as other invoices come in. Our page on the business line of credit explains how limits and drawdowns usually work.
• Invoice or debtor finance on your good debtors. If the rest of your customer base pays reliably, invoice finance can release cash tied up in those invoices while the bad one is dealt with.
• An unsecured cash-flow loan. For trading businesses, unsecured and cash-flow options typically run from $5k to $500k, sized on turnover and bank statements. See cash flow loans.
• Clearing a BAS debt that’s already built up. If the GST has already gone unpaid and the ATO balance is growing, our page on ATO tax debt loans covers how lenders look at that.

The choice depends on whether this is a one-off customer failure or a pattern. A single bad debt suits a short-term fix. Regular late payers suggest a structural answer, such as invoice finance or a change to your terms.

Should you switch to the cash basis?

It’s a fair question to put to your accountant, especially if your business sells on credit terms to customers who sometimes pay late. On the cash basis, GST follows the money: if a customer never pays, you never report the GST.

A few things to weigh up:

• Eligibility. Aggregated turnover under $10 million is the main test, with some other categories listed by the ATO.
• Credits follow the same rule. On the cash basis you also claim GST credits on purchases when you pay for them, not when you’re invoiced. For businesses that buy on long supplier terms, that cuts the other way.
• Changing has transition rules. Switching methods takes effect from the start of a tax period, and moving from cash to non-cash brings unpaid invoices into that first period.

There’s no universally better method. It depends on whether your customers or your suppliers set the slower terms.

What does this look like in a real business?

Illustrative example only. A small commercial cleaning company bills a property manager $66k including GST for a six-month contract, invoiced monthly on the non-cash basis. The property manager pays the first two months, then stops and eventually enters administration.

By then, the company has reported GST on all six invoices across two BAS quarters. The unpaid part represents about $4k of GST that’s already left the business, on top of the wages it paid to clean those buildings.

Their accountant advises writing off the debt once the administrator confirms unsecured creditors are unlikely to be paid, which brings the decreasing adjustment forward. In the meantime, the owner uses a modest line of credit to pay the next BAS on time and keep wages flowing. When the adjustment comes through, it goes straight back against the line. The owner also asks the accountant to model the cash basis for the following year. The cleaning business loan page covers how lenders usually look at contract-based cleaners.

Got a bad debt squeezing your BAS? Let’s see what fits

A customer who doesn’t pay leaves you paying twice: once for the work, and again for the GST on it. If that’s left your next BAS looking out of reach, you don’t have to wait a year for the adjustment to catch up.

Enquiring takes about 60 seconds, and there’s no credit check when you first enquire. We won’t spray your details across a pile of lenders, so you won’t spend the afternoon fielding calls. A real person reads your situation, including the bad debt and when your BAS is due, and calls you to talk it through. Please fill the form in accurately, especially turnover and what you owe the ATO, so we can match the right option first time.

See if you qualify for cash-flow help →