Handling Workcover
Scenario:
A client is a payroll service entity. They have collected Workcover from end clients and have not yet gotten an assessment for the 2016 year.
1. How do we account for the Workcover collected as at June 30, 2016?
They have invoiced the clients and the amount received is reflected in the accounts as an income. They have a liability to pay Workcover sometime later in the 2016/17 year. The liability will be somewhat similar to what they have collected. However, we cannot ascertain the actual amount until assessed.
The Workcover amount collected from the end clients should be treated as a liability in the books and not an income.
2. If it is treated as a liability, what happens with the GST on the Workcover amount collected? (The client is on a cash basis for GST reporting)
Explanation:
The amount should not be treated as an income but a liability. The business has invoiced its customers in relation to an expected liability for Workcover. That liability will have to be settled later in the year and must therefore be reflected as a liability in the balance sheet and not an income in the profit and loss statement.
Given that the clients have actually paid, it is irrelevant whether the business operates on a cash or accruals basis. Either way, GST needs to be accounted for in the period in which the money is collected (i.e. in the quarter to June 30, 2016). Any input credits in relation to the transaction will then be able to be claimed in the appropriate later period.