Modified Cash Basis Accounting Australia 2025: Guide for SMEs

In the fast-evolving world of Australian business accounting, the modified cash basis method is stepping into the spotlight in 2025. As compliance, tax planning, and digital reporting change, many small to mid-sized enterprises (SMEs) are rethinking how they track and report financials. Is modified cash basis the pragmatic middle ground between cash and accrual accounting?

What Is Modified Cash Basis Accounting?

The modified cash basis is a hybrid accounting method combining elements of both cash and accrual accounting. In practice, it means:

• Revenue is generally recognised when cash is received (like cash accounting).

• Major expenses and liabilities (such as loans, fixed asset purchases, or GST obligations) are recorded when incurred, not just when paid (like accrual accounting).

This approach gives business owners a more accurate picture of financial health than pure cash basis, without the administrative burden of full accrual accounting. In 2025, as ATO reporting requirements and cloud-based accounting platforms continue to mature, the modified cash basis has become easier to implement and more widely accepted for management and internal reporting.

Why Are Australian SMEs Turning to Modified Cash Basis in 2025?

Several trends and policy changes are driving interest in this method:

• Single Touch Payroll (STP) Phase 3 and real-time digital reporting mean businesses need more timely and accurate financial data.

• ATO’s new guidelines in 2025 clarify the use of hybrid methods for management and internal reporting, as long as statutory accounts (for tax purposes) comply with accepted standards.

• Cash flow volatility in the current economy makes it critical for SMEs to understand both their immediate liquidity and their future obligations.

For example, a regional construction business in NSW switched to modified cash basis to better track GST on large equipment purchases and long-term contracts. Their bookkeeper can now provide monthly reports that reflect both the cash on hand and the true liabilities, making it easier to plan for quarterly BAS submissions and meet lender requirements for up-to-date financials.

How Does Modified Cash Basis Work in Practice?

Let’s break down what adopting the modified cash basis could look like for a typical Australian SME in 2025:

• Receipts from sales are recorded when the payment is received.

• Major purchases such as vehicles or machinery are capitalised and depreciated over time, even if paid upfront.

• Unpaid bills for utilities or inventory may be recorded as liabilities if they significantly affect the business’s financial position.

• Tax and superannuation obligations can be tracked as soon as they are incurred, not just when paid, helping with accurate cash flow forecasting.

Accounting software like Xero, MYOB, and QuickBooks now offer customisable settings that allow bookkeepers to automate many aspects of modified cash basis reporting. This is particularly useful for sole traders and family businesses seeking greater financial clarity without the cost of complex accrual-based systems.

Potential Pitfalls and Best Practices

While the modified cash basis offers flexibility, it’s important to be aware of the potential challenges:

• Consistency is key: Mixing cash and accrual elements must be done systematically to avoid confusion or errors.

• Tax compliance: The ATO still requires most businesses above the $10 million turnover threshold to use accrual accounting for tax returns, so ensure your statutory accounts remain compliant.

• Stakeholder communication: Lenders, investors, and partners may ask for clarification on which accounting method is used, especially when reviewing profit, loss, and cash flow statements.

In 2025, many accounting firms are advising clients to use modified cash basis for internal management reports and planning, while maintaining traditional accrual-based statements for external reporting and compliance. This dual-track approach is becoming more common thanks to advances in cloud-based accounting tools.

The Bottom Line

Modified cash basis accounting is rapidly gaining traction among Australian SMEs who want a clearer view of their financial position without the overhead of full accrual accounting. As regulatory frameworks and digital tools evolve, this hybrid method is set to become a mainstay of smart business management in 2025. If your business is wrestling with cash flow visibility, compliance, or reporting headaches, it might be time to talk to your accountant about whether modified cash basis could work for you.