GST-free and input-taxed are two distinct GST treatments that both result in zero GST on the output side — but differ dramatically in how they affect input tax credits. For a bookkeeper, confusing the two can produce a BAS that understates or overstates GST credits by thousands of dollars per quarter, and in some cases exposes the practice to ATO penalties.
This guide explains the difference, lists the most common supply types in each category, and explains how to code them correctly in your Australian bookkeeping workflow.
The core difference
Both GST-free and input-taxed supplies produce $0 output GST. But that's where the similarity ends.
GST-free supplies (FRE): The entity making GST-free supplies does NOT charge GST. But it CAN still claim input tax credits on the business expenses it incurs to make those supplies. The GST-free business is entitled to the full ITC because it is part of the GST system.
Input-taxed supplies (INP): The entity making input-taxed supplies also does NOT charge GST on its outputs. But it CANNOT claim input tax credits on expenses related to making those input-taxed supplies. The entity is effectively outside the GST system for that portion of its activity.
This distinction matters enormously when coding transactions for a client who makes both taxable and input-taxed supplies — a common situation for financial service providers, residential landlords, and some medical businesses.
GST-free supplies: what qualifies
GST-free supplies are defined in Division 38 of the GST Act. The main categories Australian bookkeepers encounter are:
Basic food
Most unprocessed food sold for human consumption is GST-free: fresh fruit, vegetables, meat, eggs, milk, bread, and most unprocessed grains. The exceptions are important — mixed supplies (a meal) and certain processed foods may be taxable. Supermarket and grocery transactions for clients in food production or retail require careful classification.
Health services
Medical, dental, allied health, and hospital services are generally GST-free when provided by a registered health professional and meeting the conditions in section 38-7 of the GST Act. Cosmetic procedures that are not medically necessary may be taxable. Bookkeepers for medical practices should confirm GST-free status with the practitioner's advisor.
Education
School courses, university courses, and approved vocational education courses are GST-free under section 38-85. Commercial training courses (corporate training, non-accredited professional development) are generally taxable.
Exports
Exports of goods and services to overseas recipients are generally GST-free. The conditions require the goods to leave Australia and the supply to be connected to an overseas entity. Freight and insurance for export goods may also be GST-free in certain conditions.
Eligible emissions units
Carbon units and Australian Carbon Credit Units traded under the Carbon Farming Initiative are GST-free.
Input-taxed supplies: what qualifies
Input-taxed supplies are defined in Division 40 of the GST Act. The main categories:
Financial supplies
The broadest input-taxed category. Financial supplies include:
- Lending money (interest-bearing loans)
- Buying or selling shares, bonds, or financial instruments
- Operating a bank account (for the financial institution)
- Credit card transactions (the credit card facility itself, not the underlying purchase)
- Life insurance (certain components)
For most bookkeeping clients, financial supplies appear as income received from interest, dividends, or managed fund distributions. These are coded INP.
Residential rent
Renting residential premises — houses, apartments, granny flats — to tenants for their personal use is input-taxed. Landlords cannot charge GST on rent for residential tenancies, and they cannot claim ITCs on expenses (maintenance, property management fees) relating to the residential rental.
This is one of the highest-volume areas where the FRE/INP distinction matters in practice. A residential property investor who also owns a commercial property must apportion expenses between taxable (commercial) and input-taxed (residential) activities.
Residential sales
The second or subsequent sale of residential premises (not new residential premises) is input-taxed. New residential premises and commercial property are taxable. The distinction requires the bookkeeper to understand the property's history.
Precious metals
The first supply of precious metals (gold, silver, platinum meeting certain purity standards) by the refiner is input-taxed. Subsequent supplies may be taxable.
Why the distinction matters for input tax credits
The critical practical consequence is partial ITC entitlement for businesses making both taxable and input-taxed supplies.
Example: Mixed property developer
A client owns both a residential rental property and a commercial office suite. Their expenses include:
- Property management fees
- Insurance
- Repairs and maintenance
Under Division 11 of the GST Act, the client can only claim ITCs on expenses attributable to the taxable (commercial) activities. The proportion attributable to the residential rental (input-taxed) must be excluded.
If a bookkeeper codes all property expenses as GST (taxable) input tax credits, the client overclaims ITCs. If the ATO audits, the client faces back-payment plus interest and potentially penalties.
The correct approach:
- Identify the percentage of the client's income that is input-taxed vs taxable
- Apply that percentage to apportion expenses that relate to both activities
- Use reduced ITC for apportioned amounts, full ITC for expenses solely related to taxable activities
Most accounting software allows recording a partial ITC percentage. In Reconlink, the transaction coding panel supports per-transaction ITC percentage entry for mixed-activity clients.
Example: Financial services business
A mortgage broker earns commissions from lenders (a financial supply — input-taxed). They also receive fees from clients for preparation of loan documentation (taxable). Their office expenses must be apportioned.
The broker cannot claim 100% ITC on their office rent, internet, or software subscriptions because part of their activity is input-taxed. They must determine an apportionment method (turnover method or fair and reasonable method) and apply it consistently.
Common coding mistakes bookkeepers make
1. Coding all zero-rated income as FRE
When a client's invoices show $0 GST, it is tempting to code everything FRE. But residential rent, bank interest, and dividend income are INP, not FRE. The difference doesn't affect the output GST on the income (both are $0) — but it affects whether the client's expenses can be coded with full ITC or must be apportioned.
2. Treating residential landlord repairs as fully ITC-eligible
A client who owns a residential rental property cannot claim the ITC on plumbing repairs, painting, or landscaping — even though those suppliers charge GST. The supply being repaired is input-taxed, so the expense is non-claimable. Bookkeepers should code these as N-T (not GST-applicable for ITC purposes) or at the client's determined apportionment percentage.
3. Missing the new residential premises exception
The sale of new residential premises IS taxable, not input-taxed. A property developer building and selling new apartments must charge 10% GST on the sale price (under the margin scheme in some cases). Coding new residential sales as INP understates output GST significantly.
4. Confusing bank interest income with bank account fees
Interest received on a bank account (the depositor receiving interest) is input-taxed income for the depositor — code INP. Bank fees charged by the financial institution on the account are a taxable service from the bank's perspective — code GST for the expense ITC (assuming partial or full ITC entitlement based on the client's activity mix).
How to code in practice
In your Australian bookkeeping software, the standard codes are:
| Transaction type | Code |
|---|---|
| GST-free sale (food, health, education, export) | FRE |
| Input-taxed income (residential rent, interest, dividends) | INP |
| Expense with full ITC (taxable activity only) | GST |
| Expense with no ITC (related to input-taxed activity) | N-T |
| Expense with partial ITC | GST at apportioned % |
| Capital acquisition with ITC | CAP |
For clients with mixed activities, confirm the apportionment method at the start of each financial year and document it in the client file. The ATO's preferred methods are described in GST Ruling GSTR 2001/8.
Frequently asked questions
Can I claim the ITC on an expense if my client makes both taxable and GST-free supplies?
For GST-free activities: yes. GST-free supplies do not reduce ITC entitlement. The business is in the GST system — it just doesn't charge output GST on those supplies. Full ITC is available on expenses related to GST-free activities.
Is commercial rent input-taxed?
No. Commercial rent (offices, retail space, factories) is taxable at 10% GST. Only residential rent is input-taxed.
My client runs a childcare centre — what's the GST treatment?
Childcare provided by an approved childcare service is GST-free under section 38-145, provided it meets the conditions in the Act. Confirm the centre's approved provider status and code accordingly.
Do I apportion or fully exclude input-taxed expenses?
It depends on whether the expense relates only to input-taxed activities or to both taxable and input-taxed activities. Expenses solely for input-taxed activities (e.g., property management for a residential landlord) are fully excluded from ITC. Mixed expenses (office overheads for a mixed business) are apportioned.
This article was last reviewed on 27 May 2026. GST rules are set by the A New Tax System (Goods and Services Tax) Act 1999. Always confirm current treatment at ato.gov.au or with a registered tax agent. This is general guidance, not specific tax or legal advice.