If your business buys goods or services from overseas, understanding how GST on overseas purchases works can save you both stress and money.
With more Australian businesses sourcing products, subscriptions, and services from abroad, the GST rules around imports have become a regular source of confusion. Let’s break it down in plain English. What you pay, when to claim, and how to record it properly (even in Xero).
What counts as an “overseas purchase”?
When your business buys from a non-Australian supplier, or imports goods and services into Australia, you’re dealing with an overseas purchase.
This could include:
- Buying machinery or tools from a U.S. or European supplier
- Importing stock or materials for resale
- Paying for digital services like software, advertising, or online subscriptions
- Buying low-value items under $1,000 from an overseas online store
The key question: does GST apply and who pays it?
GST and imported goods
What is a “taxable importation”?
When goods enter Australia, they usually become a taxable importation, meaning GST applies at 10% of the value of the taxable importation (source: ATO, 2024).
That “value” includes:
- The customs value of the goods (this is not always the purchase cost)
- Customs duties payable
- Freight and insurance to Australia
- Wine Equalisation Tax (if applicable)
Example:
If you import a $50,000 piece of equipment with $2,000 in duty and $3,000 freight, GST is 10% of $55,000 that’s $5,500.
When and how you pay
GST on imported goods is usually paid at the border to the Australian Border Force (ABF).
If you import frequently, you can apply for the Deferred GST Scheme, which allows you to defer payment of GST until your next BAS. This is a big cash-flow win for many small businesses.
Claiming GST credits on imports
If your business is registered for GST and the imported goods are used for your business, you can claim an input tax credit for the GST paid.
The ATO requires that you are listed as the “importer of record” on the customs declaration. If your customs broker or freight company is listed instead, you may lose your entitlement to claim the GST credit.
GST on imported services, digital products and low-value goods
If you buy services or digital products (like software, subscriptions, or design work) from overseas, the rules are different.
For consumers, overseas suppliers may add GST at checkout (on low-value imports under $1,000).
Reverse Charge – When you pay the GST yourself
The reverse charge system means you account for the GST, not the supplier.
You’ll need to do this if:
- You’re registered (or required to be registered) for GST
- You purchase goods, services or intangibles from an overseas business
- The purchase is used for your business in Australia
Example:
You buy a $1,200 annual software subscription from a U.S. supplier. They don’t charge GST. You must record this as a taxable purchase and account for 10% GST ($120) on your next BAS under the reverse-charge rules.
How to record GST on overseas purchases in Xero
This is where small business owners often get stuck. Knowing the rules is one thing, but getting it right in your accounting software is another.
According to Xero Central, you can set up a “GST on Imports” tax rate in Xero to record GST you’ve paid on imported goods.
Here’s how it works:
- Create a custom tax rate in Xero called GST on Imports (10%).
- Apply this rate to bills or transactions for imported goods where you’ve already paid GST at the border.
- The transaction will show up in your BAS as a creditable acquisition, meaning you can claim it back as a GST credit.
For services or digital purchases under the reverse-charge rule, use Xero’s non-standard tax rates feature to account for both the GST payable and the input tax credit in the same BAS period.
Pro Tip: If you use a customs broker, ensure they send you a copy of the import declaration showing the GST paid because you’ll need this document to support your claim in Xero and with the ATO.
Real-life example: Keeping it simple
A local plumbing business recently imported $25,000 worth of equipment from New Zealand. Their broker paid GST of $2,500 at customs on their behalf.
They entered the purchase in Xero using “GST on Imports” and attached the import declaration as proof. When they lodged their BAS, Xero automatically included the $2,500 as an input tax credit. Meaning they were reimbursed for the GST in the same reporting period.
Common mistakes to avoid
- Using the wrong GST code in Xero: don’t use “GST on Expenses” for imports. Use a dedicated “GST on Imports” rate.
- Broker named as importer: you can’t claim GST if your broker or freight company is listed as the importer.
- Ignoring reverse-charge obligations: if you buy services or software from overseas, make sure you account for the GST.
- Not keeping customs paperwork: without the import declaration, your claim can be denied.
Key takeaways
By now, you should understand:
- GST on overseas purchases applies at 10% for imported goods.
- You may claim the GST back if you’re registered and the purchase is for business use.
- Reverse-charge GST applies to many imported services and subscriptions.
- Xero can help you automate and track these transactions correctly.
Getting it right ensures you stay compliant, improve cash-flow, and avoid ATO penalties.
Need help with GST on overseas purchases?
If you’re unsure how to handle imports or offshore services, or you’d like a review of your Xero setup, we can help.
👉 Book a free 30-minute consultation with one of our accountants.
