Open your Xero file and run Account Transactions on any account where you record income that carries no GST. If those lines are coded BAS Excluded rather than GST Free, the sales figure on your last activity statement was lower than the sales figure in your own accounts, and the fix is a coding convention rather than a formula.
- GST Free still reports on your activity statement. BAS Excluded reports nowhere at all
- BAS Excluded is about whether a transaction belongs on the statement, not about whether the supply carried GST
- On the profit and loss, almost every account should be GST or GST Free, and the exceptions are short and knowable
- One wrong default on one account repeats itself on every transaction that touches it
What does BAS Excluded actually mean in Xero?
BAS Excluded means this transaction will not appear anywhere on your activity statement. Not in your total sales, not in your GST collected, not in your GST paid, not in your purchases. It is an instruction to leave the amount out of the statement entirely.
That is a different question from whether GST was charged. GST Free means the supply is reportable but carries no GST, so the amount still lands on the statement. BAS Excluded means the amount is not part of the statement at all. People reach for BAS Excluded because they can see there was no GST on the receipt, and no GST is true of both codes. The code is not chosen on the GST, it is chosen on whether the transaction belongs in the report.
The code is not chosen on the GST. It is chosen on whether the transaction belongs on the statement at all.
What is the practical difference between GST Free and BAS Excluded?
GST Free amounts are reported on your activity statement while contributing nothing to the GST figures. BAS Excluded amounts are absent from every label. So a GST-free sale still increases the total sales you report, and a sale coded BAS Excluded quietly does not. Which labels a given amount reaches depends on your reporting method, so confirm that against your own statement rather than assuming. On Simpler BAS, which is what most small businesses use, there are three GST labels: G1 total sales, 1A GST on sales and 1B GST on purchases. A GST-free sale is reported at G1, inside the total, and so is an input-taxed one. Full reporting breaks more of it out. Either way the point holds: the GST-free sale is in the sales you report and the BAS Excluded one is not. See the Simpler BAS GST bookkeeping guide at the Australian Taxation Office.
This is why the error is so hard to see on the sales side. Your GST collected can be exactly right while your reported total sales is short by the amount you coded out of the statement, and nothing in the file flags it. The statement lodges, the GST looks plausible, and the variance only surfaces when someone compares your reported sales against your profit and loss.
Which code should a profit and loss account carry?
Almost every account on your profit and loss should default to GST or GST Free. That is the convention we apply to every file we work in, and it holds for income and for expenses. If a revenue or expense account is defaulting to BAS Excluded, treat it as a question to answer rather than a setting to leave alone.
There are four ordinary exceptions on the profit and loss:
- Wages, because payroll is reported through your payroll labels, not your GST labels.
- Superannuation, for the same reason.
- Bank revaluation, which is an accounting movement rather than a supply.
- Foreign exchange gain and loss, which is also a movement rather than a supply.
Everything else on the profit and loss earns GST or GST Free. Bank fees, government charges, insurance, subscriptions and fresh food all have a defensible GST or GST Free treatment, and none of them is a reason to leave the statement.
So where does BAS Excluded legitimately belong?
BAS Excluded belongs on non-business items, and on balance sheet items that are not fixed assets. Drawings, owner contributions, loan principal movements, transfers between your own bank accounts and the settlement of a liability are all balance sheet movements rather than supplies, and they do not belong on the statement.
The exception inside the exception is fixed assets. A capital purchase is reportable, so the equipment you bought last quarter is not a BAS Excluded transaction just because it sits on the balance sheet. Coding it BAS Excluded removes it from your purchases and removes the GST you were entitled to claim.
The pattern worth remembering. Profit and loss means reportable, with four exceptions. Balance sheet means not reportable, with fixed assets as the exception. Two sentences, and they resolve most of the coding decisions a business owner makes in a quarter.
What about an overseas software subscription?
This is the transaction that generates the most disagreement, because the supplier is offshore and the invoice may or may not show Australian GST. The treatment depends on whether the supplier is registered for Australian GST and on what the invoice actually says, so it is a question to answer per supplier rather than a rule to apply across the account. What is not defensible is coding the whole account BAS Excluded to avoid deciding. There is a rule here worth knowing if you are registered for GST: you should not be charged GST on imported services or digital products in the first place, provided you give the supplier your ABN and tell them you are registered. Reverse charge only reaches you in narrower cases, where you could not have claimed a full GST credit anyway, such as a personal-use or input-taxed purchase. See importing services and digital products at the Australian Taxation Office.
Read the invoice, not the account default. If the supplier charges Australian GST, the invoice will say so and give an ABN.
How do I find what has already been coded wrong?
Run the Account Transactions report over a full quarter and sort by tax rate. You are looking for two things: any profit and loss account with BAS Excluded lines in it, and any balance sheet account other than fixed assets with GST lines in it. Both are visible in a single pass, and both repeat monthly once the account default is wrong.
- Open Accounting, then Advanced, then Chart of Accounts.
- Check the tax rate column against the two sentence pattern above.
- Fix the account default first, because that is what creates tomorrow's errors.
- Then correct the transactions already posted, in the period they belong to.
- If a corrected period has already been lodged, the difference may warrant a revision rather than an adjustment in the current quarter.
Correcting the transactions without correcting the default gives you the same conversation next quarter. Correcting the default without correcting the transactions leaves the variance in your lodged history. Both need doing, in that order.
One more place it hides. Bank rules carry their own tax rate, and a bank rule set up once with the wrong code will keep applying it long after the chart of accounts was cleaned up. Review your rules at the same time.
Where this fits with the rest of the file
Coding is the second thing we look at, not the first. If your bank reconciliation is out, everything is out, because a correctly coded transaction that never made it into the file still reports nothing. Reconciliation first, then coding, then the statement.
If you want the coding conventions applied to your own file rather than a demo one, that is what our Xero training packages are built around, and a review of your existing setup is part of getting your statement to agree with your accounts. Anything in this article that affects a lodged statement is worth confirming with your registered practitioner before you act on it.
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