Customer deposits and GST: when the tax is really due

Customer deposits are one of the best pieces in any funding mix. They cost nothing, they arrive before the work, and they commit the customer. But there’s a timing trap that catches plenty of New Zealand businesses: the GST on a deposit is usually due long before the job is finished — and often before the final payment arrives. Spend the whole deposit on materials, and a GST bill turns up with nothing set aside to pay it.

This guide explains when GST is triggered on deposits and progress payments, how your accounting basis and filing frequency affect the picture, and how to plan so deposits stay a funding piece rather than becoming a tax squeeze. It’s general information — your accountant should confirm how the rules apply to your business.

When does GST apply to a deposit?

GST works on the idea of a time of supply — the point at which GST on a supply has to be accounted for. Inland Revenue’s guidance on special supplies is direct on deposits: when a supplier receives a deposit under a contract, the general time of supply will be triggered. It also notes that, for progress payments, the time of supply is the earlier of when a progress payment was made or when an invoice was provided.

In practice, for a GST-registered business:

• A deposit received under a contract generally belongs in the GST return for the period in which it’s received.
• A progress payment belongs in the period of the earlier of the payment or the invoice for it.
• The final payment follows the same rule.

So if you take a 40% deposit in September for a job you’ll finish in December, the GST on that 40% generally belongs in September’s period, not December’s.

Doesn’t my accounting basis change that?

Your GST accounting basis matters, but mostly on the other side of the ledger. Inland Revenue offers three bases:

Basis	Who can use it	How it works
Payments basis	Total sales of $2 million or less in the last 12 months	Record amounts actually paid and received
Invoice basis	Any business	Record amounts invoiced, whether paid or not
Hybrid basis	Any business	Invoice basis for sales, payments basis for expenses

For deposits, the outcome is often similar under each basis: a deposit is money received, and the deposit rule triggers the time of supply on receipt. Where the basis really matters is when you can claim GST on your own purchases:

• On the invoice basis, you can claim GST on supplier invoices once you hold the right supplier information, even before you’ve paid.
• On the payments basis, you claim GST on purchases once you’ve paid for them.

So a business on the invoice basis that orders materials with a deposit may be able to claim the GST on those materials in the same period, softening the effect of the deposit’s GST. A business on the payments basis claims only once it pays the supplier. Your accountant can tell you which basis you’re on and whether a change makes sense.

When is the GST actually payable?

Inland Revenue states your GST return is due by the 28th of the month after the end of your taxable period, and payment is due on the same day. Two exceptions:

• The period ending 31 March is due by 7 May.
• The period ending 30 November is due by 15 January.

Your filing frequency sets the length of each period:

Frequency	Eligibility
Monthly	Required if sales exceed $24 million in any 12-month period; available to others
Two-monthly	Available for businesses under $24 million in annual sales
Six-monthly	Only for businesses with sales under $500,000 in any 12-month period

The longer the period, the more deposits pile up before a return — and the larger the bill when it lands.

How does a deposit become a GST squeeze?

Illustrative only; describes no real business.

A Napier joinery business, GST-registered on the payments basis and filing two-monthly, takes a $46,000 (GST-inclusive) deposit in late September for a kitchen to be installed in December. It spends almost all of it on timber, hardware and appliances in October.

• GST in the deposit: $46,000 × 3/23 = $6,000.
• GST on the materials: the business pays suppliers in October, inside the same September–October period, so it can claim that GST in the same return.
• Result: the September–October return, due 28 November, includes the $6,000 of GST on the deposit, offset by GST claimed on the materials. But if suppliers were paid in November instead, the full $6,000 would be due on 28 November with no offset until the following return.

Multiply that across several jobs and the GST on deposits can easily run to tens of thousands of dollars due before the work is finished. The business hasn’t done anything wrong — it just hasn’t planned for the timing.

How do you keep deposits working for you?

Ring-fence the GST

The simplest habit: every time a deposit arrives, move the GST portion (3/23 of a GST-inclusive amount) into a separate account. It’s not your money; it belongs to Inland Revenue in the next return. If materials purchases bring GST credits in the same period, the leftover can return to working capital after the return is filed.

Align purchase timing

If you’re on the invoice basis, materials invoiced in the same period as the deposit can offset its GST. If you’re on the payments basis, paying suppliers in the same period has a similar effect. Don’t distort your supplier terms for this — but where you have a choice, line them up.

Watch the period boundary

A large deposit received on the last day of a period lands in that period’s return. If you can reasonably time the request for the start of the next period, you gain a whole period before the GST is due. That’s legitimate timing, not avoidance — the GST is still paid in full.

Review filing frequency

Shorter periods mean smaller, more frequent GST payments that are easier to cover from normal cash flow. Longer periods give you longer use of the money but bigger lumps. For businesses that take large, irregular deposits, two-monthly or monthly filing often makes cash flow more predictable.

Put GST into the forecast

Your cash flow forecast should show every GST return date and the expected amount, including GST on deposits. The page on sizing your funding gap shows how to build it.

What about refunds and cancellations?

If a customer cancels and you refund a deposit on which GST has already been accounted for, you can generally make an adjustment, usually through a credit note. If you keep a deposit as a cancellation fee, the GST treatment can differ. Check with your accountant, and make sure your deposit terms clearly state what happens on cancellation.

How do deposits fit with other pieces of the mix?

Deposits are the customer side of funding a job. They pair naturally with:

• Supplier terms on materials, so you pay suppliers after the deposit arrives.
• Progress billing on longer jobs, so the gap between work and payment stays short.
• A small line of credit to cover GST dates when deposits and purchases don’t line up.

For contract work, the big contract remix shows a complete mix. For tax bills more broadly, see the GST and provisional tax remix.

What if the GST on deposits has already caught you out?

If a GST bill is due and the deposits that created it are already spent, act before the due date:

1. Work out the exact amount and the date.
2. Contact Inland Revenue early if you can’t pay in full. A formal instalment arrangement is treated very differently from paying late without one.
3. Look at upcoming receipts — progress payments and final invoices — that could cover it shortly after.
4. Consider a short bridging facility if the gap is brief and clearly repaid by money already due to you.

If a short bridge is the right piece, you can ask a real person to look at it — there’s no credit check when you enquire.

Ready to make deposits a reliable piece of your funding?

Deposits are excellent funding when the GST on them is planned for. Ring-fence it, line up your purchase timing, choose a filing frequency that suits your cash cycle and keep every GST date in your forecast. If you still need help covering a gap, tell us about it. Your enquiry won’t be sprayed across a list of lenders, a real person will call to talk it through, and starting costs nothing on your credit file. Please give accurate figures on the form — the deposit, the GST due and when the job pays out — so we can suggest the right piece first time.