How to Handle GST-Free and Input-Taxed Items in Odoo

Not everything in Australia attracts GST at 10%. Some supplies are GST-free (no GST charged, but you can still claim input tax credits), some are input-taxed (no GST charged AND you can't claim input credits), and some are outside the GST system entirely. Getting the classification wrong means your BAS is wrong, your prices may be wrong, and the ATO may come asking questions.

The three GST categories

• Taxable supplies (GST 10%) — Most goods and services. You charge 10% GST and can claim GST credits on related purchases.
• GST-free supplies — No GST is charged, but you CAN claim input tax credits on purchases related to making these supplies. Examples: basic food, medical services, education, exports, water/sewerage.
• Input-taxed supplies — No GST is charged AND you CANNOT claim input tax credits on purchases related to these supplies. Examples: financial services (lending, insurance), residential rent, sale of residential premises (not new).

Step 1: Set up GST-free tax records

The Australian localisation should include GST-free taxes. Verify or create them:

• Go to Accounting → Configuration → Taxes
• Verify GST Free (Sales) exists: Tax Type = Sales, Amount = 0%, tagged to BAS labels G1 and G3
• Verify GST Free (Purchases) exists: Tax Type = Purchase, Amount = 0%
• GST-free sales still count toward your G1 (total sales) — that's correct because GST-free is not the same as excluded
• GST-free purchases: you CAN still claim input tax credits on expenses related to making GST-free supplies

Common GST-free items

• Basic food — Bread, milk, fruit, vegetables, meat, eggs, flour, etc. But NOT: prepared meals, confectionery, soft drinks, alcohol, restaurant food.
• Medical and health services — GP consultations, hospital services, ambulance, most allied health. But NOT: cosmetic surgery, gym memberships.
• Education — School fees (primary, secondary, tertiary), course materials. But NOT: non-vocational adult education, hobby courses.
• Exports — Goods exported from Australia, services provided to non-residents for use outside Australia.
• Water and sewerage — Water and sewerage charges from a government authority.
• Childcare — Approved childcare services.
• Religious services — Services provided by a religious institution.

Step 2: Set up input-taxed tax records

• Create or verify Input Taxed (Sales): Tax Type = Sales, Amount = 0%
• Input-taxed sales do NOT appear in G1 on the BAS — they're excluded from GST turnover
• Tag input-taxed sales appropriately (they go in a separate BAS section if your business has significant input-taxed supplies)
• For purchases related to input-taxed supplies: use Input Taxed (Purchases) at 0% — this ensures no GST credit is claimed

Common input-taxed items

• Financial services — Lending money, arranging credit, issuing insurance policies, operating a bank account.
• Residential rent — Renting or leasing residential premises. But NOT: commercial rent (that's taxable), hotel/motel stays (taxable), short-term holiday rentals (may be taxable).
• Sale of existing residential premises — Selling a house that isn't new. But NEW residential premises (first sale by developer) are taxable.
• Precious metals — Sale of gold, silver, platinum (in certain forms).

Step 3: Apply taxes to products

• Go to each product and set the correct Customer Tax and Vendor Tax
• Products that are always GST-free (e.g., medical services): set Customer Tax = "GST Free (Sales)"
• Products that are always input-taxed (e.g., residential rent): set Customer Tax = "Input Taxed (Sales)"
• For businesses that sell both taxable and GST-free items (e.g., a grocer), set taxes per product or use product categories with default taxes

Step 4: Use fiscal positions for automatic tax mapping

Fiscal positions swap taxes automatically based on the customer or transaction type:

• Go to Accounting → Configuration → Fiscal Positions
• Create a fiscal position called "Export / Overseas Customer"
• Map: GST 10% (Sales) → GST Free (Sales)
• Assign this fiscal position to overseas customers on their contact record
• When you invoice an overseas customer, Odoo automatically applies GST Free instead of GST 10%
• You can also create fiscal positions for "Input Taxed" transactions if you have specific customer types that always receive input-taxed supplies

Step 5: Handle mixed supplies (apportionment)

If your business makes both taxable and input-taxed supplies, you can only claim a portion of the GST on shared expenses:

• Shared expenses (rent, utilities, IT costs) that relate to both taxable and input-taxed activities must be apportioned
• The ATO allows several apportionment methods: turnover-based, direct allocation, or a combination
• Example: if 80% of your revenue is taxable and 20% is input-taxed, you can claim 80% of the GST on shared expenses
• In Odoo, the simplest approach is to create a special purchase tax like "GST 10% (Apportioned 80%)" that only claims 80% of the GST credit
• Alternatively, do the apportionment manually as an annual adjustment journal entry
• If input-taxed supplies are less than $50,000 AND less than 10% of total supplies, you may be able to claim full GST credits (the "financial acquisitions threshold")

Step 6: Verify on the BAS report

• Run the Tax Report/BAS Report in Odoo
• G1 (total sales) should include taxable sales + GST-free sales, but NOT input-taxed sales
• G3 (GST-free sales) should show only GST-free revenue
• 1A (GST on sales) should be approximately (G1 - G2 - G3) × 10%
• 1B (GST on purchases) should include only credits you're entitled to — not purchases related to input-taxed supplies
• If the numbers look wrong, drill down into each label to find incorrectly coded transactions

Common traps

• Claiming GST on input-taxed purchases — If you incorrectly use "GST 10% Purchases" for an expense related to input-taxed supplies, you'll overclaim GST credits. Use "Input Taxed Purchases" instead.
• Confusing GST-free with BAS Excluded — GST-free items still appear on the BAS (in G1 and G3). BAS Excluded items don't appear at all.
• Export evidence — To treat a sale as GST-free export, you must have proof of export (shipping docs, customs declarations). Without evidence, the ATO can treat it as a domestic taxable sale.
• Mixed bundles — If you sell a bundle with both taxable and GST-free components (e.g., a hamper with food and non-food items), you may need to apportion the price across tax rates.