Is GST Charged on Credit Card Surcharges? A DIY Bookkeeper’s Guide
When a supplier passes on their credit card processing fee, the amount that lands in your bank feed is higher than the bill you published in your bookkeeping software. You add a line for the credit card surcharge so the totals match, then hesitate, because most bank fees are GST Free. Should the surcharge be GST Free too? Short answer: it depends on the GST status of what you bought.
THE BASIC CREDIT CARD SURCHARGE RULE
A credit card surcharge inherits the GST treatment of the original purchase.
Original purchase has GST > surcharge includes GST
Original purchase is GST Free > surcharge is GST Free
That is the Australian Taxation Office’s position in GSTR 2014/2
WHY THE BANK FEED FIGURE IS DIFFERENT
You enter the supplier’s bill for the goods or services.
You pay by card.
The merchant on‑charges the card fee, so your bank statement shows a slightly higher amount.
Xero needs the extra amount added in so the bill reconciles.
A COMMON CODING MISTAKE
Many DIY bookkeepers choose GST Free Expenses or BAS Excluded – Bank Fees for the surcharge because it looks like a bank charge. That can under‑claim GST when the underlying purchase included GST. Treat the surcharge as more consideration for the same supply, not as a separate bank fee.
THREE TYPICAL EXAMPLES
Example 1 - Taxable Purchase with a credit card surcharge
You pay an invoice for OfficePro Stationery. Everything you buy from them has 10% GST on it. You pay by credit card and again when you review your bank statement you see a different amount from the invoice because of the surcharge added to the transaction. The credit card surcharge carries GST because the underlying purchase was taxable. Add a new line “Credit card surcharge”, enter the amount, and apply the GST on Expenses tax code. The bill now equals the amount that cleared your bank, and your BAS will capture the correct GST credit.
Example 2 - GST Free Purchase with a credit card surcharge
You order bulk spring‑water bottles for the office. The charge for the water on the invoice is GST Free. When you pay by credit card the supplier passes on the 1% surcharge. Because the original purchase did not attract GST, the surcharge is also GST Free. In Xero you add a new line called “Credit card surcharge”, enter the amount, and select GST Free Expenses as the tax code so the bill total matches the figure in the bank feed.
Everyday example 3: Supplier not registered for GST with a credit card surcharge
You receive an emailed invoice from Graphic Spark Designs, a sole‑trader designer who is not registered for GST. The invoice is for $500 worth of website redesign work and clearly states “No GST has been charged”. A week later you click the “Pay Now” link, enter your credit card details and notice that the payment gateway adds a 2 per cent processing fee. Your bank feed therefore shows $510 leaving your account.
Because the original service was not subject to GST, the surcharge is likewise not subject to GST. In Xero open the bill, add a new line labelled “Credit card surcharge”, type $10 and select GST Free Expenses as the tax code. Save the bill, then match the $510 payment in the bank‑reconciliation screen. The surcharge is now correctly treated as GST Free, just like the rest of the purchase.
BUT WHICH EXPENSE ACCOUNT?
When you add the line for the credit card surcharge, should it go to the Bank Fees expense account?
We generally recommend putting it to the same account as the original purchase. That shows the true cost of buying those particular supplies and makes the GST decision for the fee obvious.
However, if you want to track how much you pay in surcharges across all suppliers set up a dedicated Credit Card Surcharges Paid account and use it consistently.
TWO WAYS TO ADD THE FEES IN XERO
As is often the way in Xero, there are multiple ways to do things. The trick is to work out which best fits your processes, document this and stick with it.
Method 1: Edit the original bill
Open the bill sitting in Awaiting Payment.
Add a new line with description “Credit card surcharge”, enter the amount, and select the same GST code as the main items. Update the total to match.
Attach evidence of the surcharge if you have it (updated invoice, card receipt, or payment gateway slip).
Save the bill, then match the full amount in your bank‑reconciliation screen.
Why this method works well
Keeps the entire purchase on one document, so anyone reviewing the supplier can see the true cost in one place.
Makes the GST treatment obvious because the surcharge line sits next to the original items.
Maintains accurate supplier totals for cost analysis and budgeting.
Things to consider
The supplier’s PDF will now be different to the figure in Xero unless they issue an updated invoice.
You can’t edit bills once any payments have been applied.
Pay attention to whether you Bill data-entry default is set to GST Inclusive or GST Exclusive so that you enter the correct amount in the line you’re adding.
Some teams lock bills after approval. If that is your policy, choose the next workflow instead.
If you are paying a credit account statement, for multiple invoices then the credit card fee doesn’t really ‘belong’ to any of those individual invoices.
When to choose this workflow: you control the bookkeeping file, you are allowed to update bills, and you want the cleanest audit trail.
Watch the quick screen recording below to see how to add the credit card surcharge to the existing bill in Xero.
Demonstration of adding the credit card surcharge within the bill in Xero (44 sec)
Method 2: Use the “Bank Fee” adjustment in the reconciliation screen
From the payment on the reconcile tab, use Find & Match to locate the bill that relates to it.
Select the correct bill, you will note the out of balance variance showing at the bottom.
Click Adjustments, then choose Bank Fee.
Enter the surcharge amount and override the GST code if the purchase included GST.
Complete the match, creating a separate Spend Money transaction for the surcharge.
Why people like this approach
Fast, no need to re‑open or edit an approved bill.
Keeps the supplier’s original invoice untouched, which can be important for audits or locked‑period rules.
Things to consider
Xero defaults the adjustment line to GST Free. You must change the code when the purchase was taxable or GST Free for a different reason.
The surcharge now lives in a separate transaction. If you later analyse supplier spending you will need to remember to include both the bill and the adjustment.
Attribute the surcharge to the same Supplier Contact Card as the original purchase so you can see who it related to.
When to choose this workflow: When you are entering one bank fee for multiple bills at once, bills are locked, time is tight, or your policy forbids editing documents once issued.
Watch the quick screen recording below to see how to add a credit card surcharge straight from the Reconcile tab when you’re matching a payment to one or more open bills.
Demonstration of adding credit card surcharges as you reconcile payments on the bank feeds in Xero (1m.14 sec)
KEY TAKEAWAY FOR DIY BOOKKEEPERS
When a credit card surcharge appears, ignore the word “bank”. Treat it as part of the same purchase. Use the same supplier name, GST code and expense account as the main item. Pick one entry method, document it in your procedures, and follow it every time.
Disclaimer:
This article explains the standard approach under Australian GST law (see ATO GSTR 2014/2). It is general information, not personalised tax advice. If your accountant, BAS Agent or Tax Agent has instructed you to code credit card surcharges differently, follow their guidance as it is based on your specific circumstances.
