Cash Accounting in Australia (2025): Benefits, Rules & Updates

Cash accounting is the unsung hero for many Australian small businesses—offering simplicity, clarity, and control over cash flow. But as tax rules evolve in 2025, understanding the latest on cash accounting is more important than ever. Let’s dive into how cash accounting works in Australia right now, who it suits, and what to watch out for under the new policy updates.

What Is Cash Accounting—and Who Should Use It?

Cash accounting is a method where you record income and expenses only when money actually changes hands. This means you only count money when you receive or pay it, not when you issue or receive an invoice. It’s a practical approach for businesses looking to keep things straightforward, especially those with modest turnover or unpredictable cash flows.

• Eligibility in 2025: The ATO continues to allow businesses with a GST turnover under $10 million to use cash accounting for GST and tax purposes.

• Popular with: Sole traders, freelancers, tradies, and small partnerships who want to keep their books lean and avoid the headaches of accrual accounting.

For example, a Melbourne-based graphic designer invoicing clients in March only reports that income when the payment lands in her account—even if it’s weeks later. Expenses are similarly recorded when paid, not when billed.

Key Changes and Compliance: 2025 Policy Updates

The 2025 Federal Budget introduced a few tweaks to cash accounting, mainly to clarify eligibility and tighten compliance:

• Digital record-keeping push: The ATO now expects all businesses using cash accounting to maintain digital records (spreadsheets or accounting software) for five years.

• GST turnover threshold review: The threshold remains at $10 million, but the ATO will review turnover annually instead of every three years.

• Hybrid methods under the microscope: Businesses mixing cash and accrual methods must clearly justify their approach—especially if using cash accounting for GST but accrual for income tax.

These updates are designed to close loopholes and ensure businesses don’t slip through the cracks by switching methods to gain short-term tax advantages.

Pros and Cons of Cash Accounting in the Current Climate

Is cash accounting the right fit for your business in 2025? Let’s weigh up the pros and cons in light of recent trends:

Pros:

  - **Simple and intuitive:** You always know exactly how much money you have to work with—no nasty surprises.

  - **Cash flow control:** Especially useful for small businesses facing late payments or seasonal income.

  - **Tax timing flexibility:** Delay recognising income until it’s received, which can be handy near the end of the financial year.

  - **Lower accounting costs:** Fewer complex entries mean less time (and money) spent on bookkeeping.

Cons:

  - **Not always accurate for larger businesses:** If you have significant debtors or creditors, your accounts won’t reflect the full picture.

  - **Can’t use for inventory:** If your business carries significant stock, you’ll likely need to use accrual accounting.

  - **ATO scrutiny increasing:** The 2025 digital compliance crackdown means you need airtight records or risk penalties.

  - **Limited eligibility:** Once your GST turnover tips over $10 million, you must switch to accrual accounting.

For many, the trade-off is worth it. For example, a Sydney-based tradie who invoices at irregular intervals and gets paid in bursts will often find cash accounting gives a truer sense of financial health than accrual accounting ever could.

Real-World Example: Cash Accounting in Action

Let’s say ‘GreenLeaf Landscapes’, a Brisbane gardening business, invoices $5,000 in May 2025 but only receives payment in July. With cash accounting, the income is recorded in July, lining up with the business’s actual bank balance. This helps GreenLeaf avoid overestimating profits and facing cash flow issues come tax time.

However, if GreenLeaf’s turnover grows past $10 million as they land a major council contract, they’ll need to switch to accrual accounting from the next quarter—capturing all income and expenses as soon as they’re invoiced or billed, not when paid.

How to Stay Compliant and Optimise Your Cash Accounting in 2025

• Use cloud-based accounting software (e.g., Xero, MYOB, QuickBooks) to automate record-keeping and reduce manual errors.

• Review your eligibility annually—don’t assume you’ll always qualify for cash accounting.

• Keep digital copies of all receipts, invoices, and bank statements for at least five years.

• If you’re considering switching methods, model the impact on your tax position before making changes.

The Bottom Line

Cash accounting remains a valuable tool for many Australian businesses in 2025, especially those who value simplicity and real-time cash flow visibility. But with tighter compliance rules and digital record-keeping now the norm, staying up to date with policy changes is crucial. Review your method each year—and make sure your records are bulletproof, just in case the ATO comes knocking.