Understanding Tax Calculations
LiteWork automatically calculates GST (Goods and Services Tax) and other taxes on your invoices and quotes. Understanding how tax calculations work ensures accurate invoicing and smooth integration with Xero.
This guide explains tax-inclusive vs tax-exclusive pricing, line-level tax rates, tax summaries, and how taxes sync to Xero.
Tax Basics
What Is GST?
GST (Goods and Services Tax) is a consumption tax applied to most goods and services in New Zealand and Australia. In New Zealand, the standard GST rate is 15%. In Australia, it’s 10%.
Example (NZ):
- Service price: $100
- GST (15%): $15
- Total: $115
Tax Terminology
| Term | Meaning |
|---|---|
| Tax-Exclusive | Price does NOT include tax. Tax is added on top. |
| Tax-Inclusive | Price INCLUDES tax. Tax is calculated backwards from total. |
| Subtotal | Sum of all line items before tax |
| Tax Amount | Total GST/tax calculated |
| Total | Final amount (subtotal + tax) |
Tax-Exclusive vs Tax-Inclusive
Tax-Exclusive (Default)
Prices entered are before tax. Tax is calculated and added to the total.
Example:
Line Item: Website Design Unit Price: $1,000 (tax-exclusive) Tax Rate: 15% Tax Amount: $150 Line Total: $1,150
Calculation: Line Total = Unit Price + (Unit Price × Tax Rate)
When to use:
- B2B (business-to-business) invoicing
- Most professional services
- When clients need to see tax separately
- Recommended for Xero integration
Tax-Inclusive
Prices entered include tax. Tax is calculated backwards from the total.
Example:
Line Item: Website Design Unit Price: $1,150 (tax-inclusive) Tax Rate: 15% Tax Amount: $150 (calculated as $1,150 ÷ 1.15 × 0.15) Line Total: $1,150
Calculation: Tax Amount = Line Total ÷ (1 + Tax Rate) × Tax Rate
When to use:
- B2C (business-to-consumer) pricing
- Retail or fixed-price services
- When you quote prices including GST
Setting Your Default
- Go to Settings → Tax Settings
- Find “Tax Calculation Method”
- Choose:
- Tax-Exclusive (Recommended)
- Tax-Inclusive
- Click “Save Settings”
💡 Tip: Most businesses use tax-exclusive. It’s clearer for accounting and matches Xero’s default behavior.
Line Item Tax Rates
Setting Tax Rates
Each line item can have its own tax rate:
- When adding/editing a line item
- Find “Tax Rate” field
- Choose from dropdown:
- 15% GST (NZ standard)
- 10% GST (AU standard)
- Tax Exempt (0%)
- Custom rate (enter percentage)
- Tax calculated automatically
Common Tax Rates
| Rate | Use Case |
|---|---|
| 15% (NZ) | Standard goods and services in New Zealand |
| 10% (AU) | Standard goods and services in Australia |
| 0% (Exempt) | GST-free items: exports, financial services, some education |
| 0% (Zero-rated) | GST-free but claimable: exports to overseas clients |
Mixed Tax Rates
You can have different tax rates on different line items in the same invoice:
Example:
Line 1: Consulting (15% GST) - $1,000 + $150 = $1,150 Line 2: Exported Software (0% GST) - $500 + $0 = $500 Line 3: Training (15% GST) - $800 + $120 = $920 Subtotal: $2,300 Total Tax: $270 Total: $2,570
💡 Tip: LiteWork’s tax summary breaks down tax by rate, showing exactly how much GST at each rate.
How Tax Is Calculated
Tax-Exclusive Calculation
Formula
Line Subtotal = Quantity × Unit Price × (1 - Discount %) Tax Amount = Line Subtotal × Tax Rate Line Total = Line Subtotal + Tax Amount
Step-by-Step Example
Description: Web Design Quantity: 1 Unit Price: $1,000 Discount: 10% Tax Rate: 15% Step 1: Calculate discounted subtotal $1,000 × (1 - 0.10) = $900 Step 2: Calculate tax $900 × 0.15 = $135 Step 3: Calculate line total $900 + $135 = $1,035
Tax-Inclusive Calculation
Formula
Line Total (with tax) = Quantity × Unit Price × (1 - Discount %) Line Subtotal = Line Total ÷ (1 + Tax Rate) Tax Amount = Line Total - Line Subtotal
Step-by-Step Example
Description: Web Design Quantity: 1 Unit Price: $1,150 (tax-inclusive) Discount: 10% Tax Rate: 15% Step 1: Calculate discounted total $1,150 × (1 - 0.10) = $1,035 Step 2: Extract subtotal $1,035 ÷ (1 + 0.15) = $900 Step 3: Calculate tax $1,035 - $900 = $135
Note: Both methods result in the same final numbers. The difference is whether you enter the pre-tax or post-tax price.
Invoice Tax Summary
Summary Breakdown
At the bottom of every invoice, LiteWork shows:
| Field | Description |
|---|---|
| Subtotal | Sum of all line items (before tax) |
| Tax (15% GST) | Total GST at 15% rate |
| Tax (0% GST) | Total of tax-exempt items |
| Total | Grand total (subtotal + all taxes) |
Example Tax Summary
Invoice with mixed rates:
Line Items: Consulting (15%) - $1,000 Exported Services (0%) - $500 Design (15%) - $800 Tax Summary: Subtotal: $2,300.00 Tax @ 15%: $270.00 (on $1,800) Tax @ 0%: $0.00 (on $500) Total: $2,570.00
Tax Breakdown by Rate
LiteWork automatically groups taxes by rate:
📊 Tax Breakdown: 15% GST: $270.00 (on $1,800.00) 0% GST: $0.00 (on $500.00) Total Tax: $270.00
This breakdown is useful for:
- GST returns (BAS/GST filing)
- Audit trails
- Client transparency
Tax Rounding
Rounding Rules
LiteWork uses standard rounding:
- Line-level rounding: Each line item tax rounded to 2 decimal places
- Total rounding: Invoice total rounded to 2 decimal places
- Rounding method: Standard (0.5 rounds up)
Rounding Example
Line 1: $100 × 15% = $15.00 (exact) Line 2: $33.33 × 15% = $4.9995 → $5.00 (rounded up) Line 3: $33.33 × 15% = $4.9995 → $5.00 (rounded up) Total Tax: $25.00 (instead of $24.999)
Why Rounding Matters
Rounding differences (usually 1-2 cents) can occur when:
- Using tax-inclusive pricing with odd numbers
- Multiple line items with fractional amounts
- Syncing with Xero (both systems must round the same way)
💡 Tip: LiteWork matches Xero’s rounding behavior to avoid sync conflicts.
Tax and Discounts
Discount Application Order
LiteWork applies discounts before calculating tax:
Unit Price: $1,000 Discount: 20% Tax Rate: 15% Step 1: Apply discount $1,000 × (1 - 0.20) = $800 Step 2: Calculate tax $800 × 0.15 = $120 Line Total: $800 + $120 = $920
This is the standard accounting practice and matches Xero’s behavior.
Invoice-Level Discounts
If you apply a discount at the invoice level (not line-level):
- Discount applies to subtotal (pre-tax)
- Tax calculated on discounted subtotal
- Same result as line-level discounts
Tax Settings Configuration
Accessing Tax Settings
- Click Settings (gear icon)
- Go to “Tax Settings”
- Configure options
- Save
Available Settings
1. Default Tax Rate
- Sets the default rate for new line items
- Usually 15% (NZ) or 10% (AU)
- Can be overridden per line item
2. Tax Calculation Method
- Tax-Exclusive: Prices before tax
- Tax-Inclusive: Prices include tax
3. Tax Label
- Customize tax name shown on invoices
- Default: “GST”
- Options: “GST”, “VAT”, “Sales Tax”, “Tax”
4. Tax Number (ABN/IRD)
- Your business tax number
- Appears on invoices
- Required for GST-registered businesses
5. Multiple Tax Rates
- Enable if you use multiple rates regularly
- Quick access dropdown for common rates
Tax and Xero Integration
Tax Code Mapping
When posting to Xero, LiteWork maps tax rates to Xero tax codes:
| LiteWork Rate | Xero Tax Code (NZ) | Description |
|---|---|---|
| 15% | OUTPUT2 | GST on Income (15%) |
| 0% (Exempt) | EXEMPTINCOME | GST Exempt Income |
| 0% (Zero-rated) | ZERORATEDINCOME | Zero-Rated Income (exports) |
Xero Tax Settings
To ensure correct sync:
- Go to Settings → Xero Integration
- Find “Tax Code Mapping”
- Verify mappings match your Xero setup
- Adjust if using custom Xero tax codes
Sync Validation
Before posting to Xero, LiteWork validates:
- Tax rates are supported by Xero
- Tax codes exist in connected Xero organization
- Totals match (no rounding discrepancies)
If validation fails, you’ll see an error with instructions to fix.
Tax-Exempt Items
When to Use 0% Tax
Some items are GST-exempt or zero-rated:
GST-Exempt (No GST)
- Financial services
- Residential rent
- Donated goods (charities)
Zero-Rated (0% but claimable)
- Exports (services provided to overseas clients)
- International transport
Setting Items as Tax-Exempt
- In line item, set Tax Rate to 0%
- Choose appropriate Xero tax code:
- EXEMPTINCOME for truly exempt
- ZERORATEDINCOME for zero-rated exports
⚠️ Important: Consult your accountant about which items qualify for tax exemption. Incorrect classification can cause issues with IRD/ATO.
Tax Reports
Generating Tax Reports
LiteWork provides tax summary reports:
- Go to Reports → Tax Summary
- Select date range
- Choose report type:
- Tax Collected: GST on invoices (income)
- Tax Paid: GST on expenses (if tracking)
- Net Tax: Tax collected – tax paid
- View or export report
Report Contents
Tax reports show:
- Breakdown by tax rate
- Total tax collected per month
- List of invoices contributing to each total
- Xero sync status (posted or not)
Use case: Preparing GST returns (BAS in AU, GST Return in NZ).
Common Tax Scenarios
Scenario 1: Standard Invoice (Single Rate)
All items @ 15% GST: Web Design: $2,000 Hosting: $200 Subtotal: $2,200 Tax (15%): $330 Total: $2,530
Scenario 2: Mixed Rates (Domestic + Export)
Domestic Consulting (15%): $1,000 → Tax: $150 Export Services (0%): $500 → Tax: $0 Subtotal: $1,500 Tax (15%): $150 Tax (0%): $0 Total: $1,650
Scenario 3: Tax-Inclusive Pricing
Fixed-price package (tax-inclusive): $1,150 Calculation: Subtotal = $1,150 ÷ 1.15 = $1,000 Tax = $1,150 - $1,000 = $150 Total: $1,150 (as quoted)
Scenario 4: Discounts Applied
Service: $1,000 Discount: 10% Tax: 15% Discounted Subtotal: $900 Tax: $900 × 0.15 = $135 Total: $1,035
Troubleshooting
Tax Calculation Seems Wrong
Solutions:
- Check if using tax-inclusive vs tax-exclusive
- Verify tax rate is set correctly (15% not 0.15)
- Confirm discounts are applied before tax
- Check for rounding differences (usually 1-2 cents)
Totals Don’t Match Xero
Solutions:
- Ensure same tax calculation method in both systems
- Verify tax code mapping is correct
- Check if Xero has different rounding settings
- Re-import from Xero to sync totals
Can’t Change Tax Rate
Solutions:
- Check if invoice is locked (posted to Xero and approved)
- Create a new revision to modify
- Ensure you have edit permissions
Zero-Rated Not Showing Correctly
Solutions:
- Verify tax rate is exactly 0% (not blank)
- Check Xero tax code is ZERORATEDINCOME
- Ensure tax summary includes 0% section
Common Questions
Should I use tax-inclusive or tax-exclusive?
Tax-exclusive is recommended for most businesses. It’s clearer for accounting, matches Xero’s default, and is standard for B2B invoicing.
Can I have different tax rates on one invoice?
Yes! Each line item can have its own tax rate. LiteWork calculates and displays tax breakdown by rate.
Do I need to register for GST?
In New Zealand, you must register if your annual turnover exceeds $60,000. In Australia, it’s $75,000. Consult your accountant for specific advice.
What if my client is overseas (export)?
Services exported to overseas clients are typically zero-rated (0% GST). Use the ZERORATEDINCOME tax code in Xero.
Can LiteWork handle VAT or Sales Tax?
Yes. While designed for GST, LiteWork’s tax calculations work for any percentage-based tax (VAT, Sales Tax, etc.). Just configure your rate in settings.
What’s Next?
Learn more about invoicing and accounting:
- Using Discounts – Apply discounts to line items
- Posting Invoices to Xero – Sync tax data to Xero
- Tax Settings and Configuration – Configure tax settings
- Creating Your First Invoice – Invoice basics