Where does Xero get the sales tax figures from?
Learn how Xero calculates sales tax to generate the Sales Tax Report (summary and audit). Your user role determines whether you can view and create reports.
Sales tax treatment
Sales tax calculations are based on when and how you enter transactions into Xero, and the tax rate selected for each line item.
- Xero uses only one sales tax account. If you add sales tax accounts to your chart of accounts, any tax amounts assigned to them aren't included in the Sales Tax Report (the summary and audit).
- The sales tax portion of each transaction (or line items within a transaction) in Xero is determined by the tax rate you select when creating the transaction–Tax on Sales (n%) or Tax on Purchases (n%).
You must select your tax basis to generate sales tax figures. Based on your selection, the report includes transactions for the selected period in the different ways.
- Accruals Basis–Cash, invoice and bill transactions using the date they were made or invoiced:
- Spend money and receive money transactions using the date they occurred
- Approved invoices, bills and credit notes using the date they were created
- Posted manual journals using the journal date
- Expense claims using the reporting date (regardless of whether they've been paid
- Cash Scheme–Cash payments using the date they were 'paid' in Xero.
- Spend money, receive money, payments made or received for invoices, bills or credit notes and expense claims
- Posted manual journals if you've selected the Show journal on cash basis reports checkbox
Custom tax rates & sales tax lookup
Xero provides basic default tax rates – all set to 0%. You can edit the defaults, create your own, or use the sales tax lookup. If you apply rates to accounts in your chart of accounts, they're automatically used whenever you choose that account in a transaction.
Tax rates and components
Set up as many rates and components as you need to record sales tax on your transactions. Create them as you need to match the tax reporting requirements of your region.
Get advice from your accountant or bookkeeper if you're unsure what tax rates to use.
Items with a tax rate
You can choose whether the overall transaction has sales tax, how it's calculated, and the tax rate to apply to each line item.
- The tax treatment for transaction is No Tax, Tax Inclusive or Tax Exclusive. You can set this in the Amounts are option on invoices and bills, or the Include tax checkbox on bank transactions and journals. It controls how sales tax is calculated overall based on the individual rate used on each line item. The No Tax option is different from a line item or transaction that simply doesn't attract sales tax (that is, is 0% tax).
- The tax rate selected for each line item is the actual percentage used to calculate the tax on that line. The transaction total displays either the total tax for the item as being included in the subtotal or excluded and added on depending on the tax treatment chosen for the transaction. The tax rate for each line item will default to the tax rate set for the account, unless you've specified a rate particular to your customer or supplier and you can change to another tax rate for just this transaction as required. Xero calculates tax for rates that have more than one component by totaling up all the components and applying that rate to the line amount. Each component is displayed in the tax subtotal once the invoice or bill is approved and on the print (PDF) version. Find out more about components and rates in the help for creating your own tax rates.
- The tax rate selected for each line item defaults to the rate set for the account, unless you've set a specific rate for the customer or supplier, and you can change to another tax rate for just this transaction as required. Xero calculates tax for rates that have more than one component by totaling up all the components and applying that rate to the line amount. Each component is displayed in the tax subtotal once the invoice or bill is approved and on the print (PDF) version.
Items without a tax rate
- If you don't want sales tax to be included at all on your transaction, you need to use No Tax. Specify this each time you create a transaction using the 'Amounts are' option on invoices or bills or uncheck the 'Include tax' checkbox on bank transactions and journals.
- If your transaction is set to 'No Tax', Xero determines that you do not want this transaction included in sales tax totals and therefore the tax rate column or field will not be editable and the transaction will be kept separate from those where sales tax was incurred (including those where the rate was 0%).
- If you mean that your transaction is reportable but incurs no sales tax (that is, tax is 0%) then you should leave your overall tax treatment as 'Tax Inclusive' or 'Tax Exclusive' and choose an appropriate tax rate that doesn't attract sales tax - one of the rates you've set to 0%, perhaps you've a 'Tax Free' or 'Zero Rated' tax rate.
- There is a default rate for transactions that you want to be exempt from sales tax, and line items that use this rate, along with transactions that have amounts set to 'No Tax' will be grouped together on the Sales Tax Audit report if you need a total for transactions that were exempt from sales tax.