How to Record Government Grants in Xero: A Guide for Australian Businesses

The Problem

Businesses can greatly benefit from receiving government grants in order to better manage their cash flow, support and fund operations, or engage in growth opportunities and development. Accounting mistakes, problems with tax compliance, and inaccurate reporting might result from improperly documented grant income. To stay out of trouble, Australian companies should use Xero’s straightforward and compliant transaction management features.

The Solution

Businesses should properly classify and reconcile government grants in Xero to keep accurate financial records and comply with Australian Tax Office rules. To guarantee correct documentation and conformity, this manual will lead you through the procedure bit by bit.

The Outcome

Your business will be well-positioned for future success if you follow this step-by-step guide and implement its recommendations for improved financial management, streamlined tax filing, and clean financial records.

Step 1: Create a New Account for Grant Income

1. To begin, open Xero: Access your company’s dashboard.
2. Access the Chart of Accounts: Click on Accounting > Chart of Accounts.
3. Add a New Account:
   • Click Add Account.
   • Account Type: Select Other Income.
   • Account Code: Assign a suitable code (e.g., 810 for “Government Grant Income”).
   • Name: Enter a descriptive name, such as “Government Grants” or “COVID-19 Support Income.”
   • Tax Code:
     • The generic code for GST-free grants is GST Free (GFR). Nevertheless, the rules governing taxes may differ for different kinds of grants; some may be totally free from taxes, while others may be subject to input taxes.
     • It is recommended that you check the ATO website or consult a financial professional to ensure that you are using the correct tax code for each specific grant.
   • Click Save.

Step 2: Recording Grant Income

1. Go to Bank Reconciliation: Select the bank account that will be receiving the grant payments from your dashboard and go to Bank Reconciliation.
2. Locate the Grant Payment: Check your bank feed for the appropriate transaction.
3. Allocate the Income:
   • Add Details: If the transaction is not automatically matched, you can enter it manually by clicking ‘Add Details’.
   • Contact Name: Enter the name of the granting authority (e.g., “ATO” for JobKeeper payments).
   • Account: Select the account you created for government grants.
   • Description: Add a relevant description (e.g., “Business Support Grant” or “Export Market Development Grant”).
   • Tax Code: Verify that, in accordance with ATO regulations, the appropriate tax code is used.
   • Click OK to reconcile the transaction.

Step 3: Tracking and Reporting Grant Income

1. Use Tracking Categories: To track income by project or grant type, consider setting up tracking categories in Xero.
2. Generate Reports:
   • Go to Accounting > Reports to run profit and loss statements or other financial reports.
   • Filter by account or tracking category to monitor grant income and usage.

Step 4: Ensure Compliance with ATO Requirements

1. Tax Treatment: First, make sure you’re in compliance by checking with your accountant on how each grant is taxed.
   • While you might not have to disclose GST on some grants, it might be necessary for others.
   • Review the ATO website or consult with a financial advisor for the most up-to-date guidance.
2. Accurate Reporting:
   • Report grant income correctly in your Business Activity Statements (BAS) and income tax returns.
   • Keep up with the latest information by visiting the ATO website or talking to a financial adviser.

Step 5: Best Practices for Grant Management

• Keep Things Organised: To Keep Things Straight, Keep Grant Money Separated From All Other Funds.
• Review On A Regular Basis: Make sure your financial records are accurate by reviewing them regularly.
• Get Expert Opinion: Check with your accountant to make sure you’re recording and reporting grants correctly.

Final Thoughts

Accurate financial records and compliance with Australian regulatory standards are both promoted by correctly documenting government grants in Xero. Following these measures can help your organisation stay compliant while efficiently managing grant income. Pattens is available to help you with any questions you may have about government grants.

FAQs

1. What Tax Codes Should I Use for Grant Income in Australia?

For grants that are not subject to GST, like some COVID-19 support payments, use GST Free (GFR). Please choose GST on Income (GST) if the grants are taxable. When in doubt, check with your accountant or the ATO website.

2. How Do I Set Up Grant Accounts in Xero?

Navigate to Accounting > Chart of Accounts in Xero, select Add Account, choose Other Income, assign a unique code (e.g., 810), name it appropriately (e.g., “Government Grants”), and apply the correct tax code before saving.

3. What Reporting Practices Should I Follow?

To keep track of grant income, run the Profit & Loss and Cash Summary reports in Xero on a regular basis. To break down and examine revenue sources according to grant type, use tracking categories.

4. How Should I Reconcile Bank Transactions Related to Government Grants?

Before you can reconcile a transaction in your bank feed, you must first find it, click Add Details, assign the right contact and account, explain the payment, and choose the correct tax code.

5. How Can I Make Sure That My Grant Income Reports Meet All Australian Requirements?

For appropriate reporting on income tax returns and Business Activity Statements (BAS), it is important to keep detailed records of all transactions linked to grants. Additionally, it is wise to consult an accountant to validate the tax treatment. Reviewing on a regular basis aids in keeping compliance.