Your Shopify store is growing and your time, blood, sweat and tears is finally turning into profits… but as you are riding your best cashflow wave yet … you suddenly find out that you owe the ATO thousands of dollars in unpaid GST from the last three years.
How did this happen? And how do you stop this from shutting down your business?
As a bookkeeper, I’ve lost count of the number of clients who, in their early stages when they were not yet registered for Goods and Services Tax (GST), unknowingly made a significant error when setting up their Shopify stores.
This mistake often cascades into their Xero accounting via Shopify’s integration, leading to significant reporting inaccuracies and unexpected tax liabilities.
The Common Pitfall: Mislabeling Tax Settings in Shopify
When configuring products in Shopify, businesses not registered for GST should ensure they’re not charging GST to their customers. However, a frequent misstep is setting products as ‘NO TAX’ instead of ‘GST free’. This subtle difference can have substantial implications.
“As a bookkeeper, I’ve lost count of the number of clients who, in their early stages when they were not yet registered for GST, unknowingly made a significant error when setting up their Shopify stores.”
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Understanding Xero’s Tax Codes: ‘BAS Excluded’, ‘GST free’ and ‘No tax’
Xero employs specific tax codes to categorise transactions, each with distinct meanings:
- GST on Income and GST on Expenses: Applied to transactions subject to GST. When values are entered as tax-exclusive, these rates add 10% GST to the transaction value. If entered as tax-inclusive, GST is calculated by dividing the line value by 11.
- GST Free Income and GST Free Expenses: Assigning these rates means GST isn’t calculated on the line value. However, these amounts are reported in the Activity Statement for the relevant period as either GST-free sales or purchases.
- BAS Excluded: When this rate is assigned, GST isn’t calculated on the line value, and the transaction isn’t reported in the Activity Statement. This is typically used for items like wages, superannuation, and other transactions not subject to GST reporting.
Implications of Incorrect Tax Settings
Misclassifying products as ‘NO TAX’ in Shopify often leads to these transactions being mapped to ‘BAS Excluded’ in Xero.
Consequently: If your business is not registered for GST, any retail product you sell and ship to a customer should be classified as GST free rather than NO TAX or BAS Excluded in your accounting software. This is because GST free ensures that the sale is still reported correctly, even though no GST is charged.
If you mistakenly select NO TAX or BAS Excluded, the sale may not appear in your financial reports or Activity Statements at all, leading to underreporting of income, and if you aren’t reporting all of your income then you won’t be paying all of the tax you owe the ATO.
We’ve seen this time and time again as we take on a new eCommerce client, clean up their Xero account, and uncover a significant tax liability that has been growing unnoticed for years.
It’s a nasty shock to find out you owe a large amount to the ATO that you had not planned for.
Steps to Avoid This Mistake
1. Accurate Product Tax Settings in Shopify:
- Navigate to ‘Settings’ → ‘Taxes’ in your Shopify admin.
- Ensure Australia is listed in the Tax rates. If not, add it as a shipping zone.
- For each product, set the tax status appropriately. If you’re not registered for GST, configure products as ‘GST free’ rather than ‘NO TAX’.
Not sure if you should be registered or charging for GST?
2. Regularly Review Xero Tax Codes:
- Ensure transactions imported from Shopify are assigned the correct tax codes.
- ‘GST Free Income’ should be used for sales of GST-free goods and services, ensuring they’re reported correctly on the BAS.
3. Consult with a professional:
- Engage with a bookkeeper like Dollars + Sense, or an accountant to periodically review your tax settings and financial reports. Just want to check if you’re DIY bookkeeping is above board? Book a Free Xero Review.
Just Uncovered A Huge Tax Liability?
Get in touch with Dollars + Sense for help negotiating a payment plan with the ATO, and planning your path out of debt that allows your business to continue growing.
Peace of Mind for the DIY Bookkeeper
Don’t let simple mistakes lead to costly surprises. Book a Free Xero Review with Dollars + Sense today, and let our experienced team ensure your financials are accurate and compliant.
By proactively addressing these tax settings, you can maintain accurate financial records, ensure compliance, and focus on growing your business without unexpected tax hurdles.