Tax codes … each accounting system has them but do you understand what they mean? Do you understand why it is important to get them right?
With the end of financial year upon us I have been going through several clients data files in the past 3 weeks and reviewing them for accuracy – for management reporting purposes and also to prepare their end of financial year Business Activity Statement.
It has truly shocked me how many errors I have come across due to transactions using the wrong tax code. For some clients, I have had to review every transaction for the past 12 months – which has cost clients hundreds of dollars of my time because previous bookkeepers did not understand the practical application of tax codes.
I have provided a basic summary of the three main tax codes below to help minimize errors:
The Three Main Tax Codes
N-T = Not reportable. This tax code should be used for items that are excluded from the GST regime and therefore not included to be reported on the BAS in the GST section. There are only minimal items which are not reportable for GST purposes, such as bank transfers between accounts, stamp duty, depreciation and salary/wages. This tax code is not to be used for every day transactions that are GST Free transactions.
FRE = GST Free. These are purchases/sales that have a O% GST rate. This could be because you are purchasing items from overseas (exports), or you are purchasing items from within Australia that are not subject to GST – such as fresh food, some education. You still need to report GST free sales/expenses on your BAS so it is important you use this code and not N-T for these items.
GST = items subject to GST at a rate of 10%. Some invoices might have some items with GST and some without. If this is the case, you might have to split the invoice over two lines and use both the FRE and GST codes. Be aware that you can only claim the GST as per the tax invoice.
Errors in coding transactions in your accounting system could mean that you have discrepancies between your BAS’s lodged and your annual accounts for your business. Depending on the variances, this could trigger an ATO audit.
You Need A Qualified Bookkeeper
Please ensure that your bookkeeper is not only qualified by education standards (minimum requirement is a Certificate IV in Bookkeeping to be a qualified bookkeeper) but is also qualified by experience. This will mean they know and understand how to apply the principles they have learnt in their study to real life business situations.
Don’t Waste Time Or Incur Unnecessary Costs
Inaccurate accounts and BAS reporting can cost your business hundreds of dollars, not to mention wasted time reviewing transactions by both business owner and bookkeeper, and potentially an external accountant as well.
Ensure you get it right from the start. If you are unsure about tax codes, please don’t hesitate to ask. A simple, quick question could save you a massive headache 12 months down the track.