Hair salons and beauty clinics are, from a GST perspective, among the simpler businesses to manage — all services and product sales are taxable, there are no GST-free or input-taxed complications. But that simplicity is offset by a set of specific compliance challenges: chair rental arrangements that can inadvertently create employment relationships, Fair Work Act tip obligations that change how tips are processed, product sales tracking in a services-dominant environment, and the ever-present risk of unreported cash income in a business the ATO actively benchmarks. This guide covers the disciplines a bookkeeper needs in place.
GST: Fully Taxable, No Exceptions — But POS Must Be Correct
Every hairdressing and beauty service — cuts, colours, treatments, facials, waxing, nail services, spray tans — is a taxable supply. All retail product sales are also taxable. Unlike medical or dental practices, there are no GST-free health services to manage. This makes the BAS simpler, but it does not mean coding errors are impossible.
The most common GST error in this industry is a product being miscoded as GST-free in the point-of-sale (POS) system — typically a retail item set up incorrectly by a manager or receptionist when the product was added to the inventory list. A retail shampoo coded as GST-free means no GST is collected on those sales, the BAS under-reports GST collected, and the ATO may issue an amendment.
Review the GST coding of all inventory and service items in the POS system at least annually. Any item with a zero-rated or GST-free code should be documented with a specific reason — if no reason exists, the item should be corrected to taxable.
Chair Rental Arrangements: Getting the Structure Right
Chair rental (also called booth rental) is increasingly common in Australian salons. The salon owner leases a styling chair and workstation to an independent stylist at a fixed weekly rental. The stylist has their own ABN, sets their own prices, books their own clients, and keeps all client revenue. The salon owner's income from that stylist is simply the weekly rental.
The bookkeeping treatment when the structure is genuine:
- Rental income from the stylist is a taxable supply — the salon owner charges GST on the rental fee and accounts for it on the BAS
- Client revenue billed by the stylist is not the salon owner's income at all — it does not appear in the salon's books
- The stylist is responsible for their own BAS, super, and income tax obligations
However, the structure must reflect substance. If the salon owner dictates the stylist's hours, prices, uniform, clientele, booking system, or minimum weekly client quota, the arrangement may be characterised as employment under the ATO's employee vs. contractor analysis (TR 2023/4) and Fair Work's related sham contracting provisions. A mischaracterised chair rental arrangement creates a PAYG withholding obligation, a super guarantee obligation, and potential Fair Work penalties.
When onboarding a salon client with chair renters, review the actual chair rental agreements. If the agreements contain clauses that look more like employment contracts, flag this to the client and recommend legal advice before finalising the bookkeeping structure.
Tips: The Fair Work Act Change That Affects Your BAS and Payroll
From 1 July 2023, amendments to the Fair Work Act 2009 require employers to pass through tips, gratuities, and service charges to employees. This has direct bookkeeping consequences.
Tips paid by card via the business terminal are received into the business bank account. Under the amended Fair Work Act, these amounts belong to the staff who earned them. They are not business income. The ATO treats the redistribution of these tips to employees as wages — they are subject to PAYG withholding and superannuation guarantee.
The practical bookkeeping treatment:
- Tips received via EFTPOS are recorded as a liability (amounts owing to staff), not as business revenue
- When tips are redistributed to staff in the payroll run, they are processed as wages — PAYG is withheld, super is calculated
- The STP submission must include tip amounts as wages
Cash tips given directly by a customer to a staff member are the individual's own income — they do not enter the business's books at all. The employee is responsible for declaring this income personally.
Confirm with the salon client that their POS system and payroll software can handle tip tracking. Many older POS systems do not separate tip amounts from service income automatically.
Product Sales vs. Service Revenue: Tracking the Split
Most professional salon management systems (Kitomba, Shortcuts, Phorest, Timely) record service revenue and retail product revenue as separate categories. This split matters because:
- Margins are fundamentally different: service gross margins in a well-run salon run at 60–70%; retail product margins are typically 35–50%
- Product shrinkage: product is consumed in delivering services (colour, treatments, styling products) as well as sold over the counter. Shrinkage — the gap between product purchased for retail and product actually sold — is a key management metric
- ATO benchmarking: the ATO publishes small business benchmarks for hairdressing that include product-to-service revenue ratios. A business with an unusual split attracts attention
The bookkeeper should pull separate journal lines for service revenue and product revenue from the salon software each month. Do not let these collapse into a single "sales" line. Where the salon uses a separate inventory or product tracking module, reconcile the product sales line in the POS to the inventory movement.
Award Obligations: Hairdressing Award 2020
Employees in hair salons are covered by the Hair and Beauty Industry Award 2020 (the Hairdressing Award). Key compliance points:
- Casual loading: casual employees are entitled to a 25% loading on the base rate
- Weekend and evening rates: Saturday and Sunday penalty rates apply; evening work after 6pm on weekdays also attracts a loading
- Casual conversion: under the Fair Work Act, casual employees who have worked regular and systematic hours for 12 months have the right to request conversion to permanent employment — the employer must respond in writing
- Apprentice rates: hairdressing apprentices have specific pay rates under Schedule B of the Award; confirm the correct rate and year-of-apprenticeship are set in the payroll system
Payroll errors in hairdressing practices are among the most common underpayment complaints received by the Fair Work Ombudsman. Run a payroll audit annually — confirm every employee's classification, rate, and loadings are correct.
Cash: The ATO's Audit Focus
Hair salons that accept cash require strict daily cash reconciliation. The reconciliation should close three records:
- POS terminal Z report (end-of-day summary of all transactions)
- Physical cash drawer count (notes and coins counted at close)
- Bank deposit slip (amount deposited that evening or the next morning)
Any gap between the POS Z report cash sales figure and the bank deposit is either a counting error, a petty cash draw, or a potential cash skimming issue. Both the ATO and the Fair Work Ombudsman treat unexplained cash shortfalls seriously in this industry.
The ATO's small business cash economy program specifically targets businesses with high cash turnover, including hairdressers. The ATO uses benchmark ratios to identify businesses with declared revenue materially below what comparable businesses report. An operator declaring unusually low revenue per appointment, or a high cost-to-income ratio, is at risk of a review.
End-of-Period Checklist
- Verify all POS items are coded as taxable — confirm no products are incorrectly set to GST-free
- Reconcile chair rental income to rental agreements — confirm each chair renter has a current ABN and rental invoices have been issued with GST
- Review chair rental agreements for any clauses that indicate an employment relationship
- Confirm tip amounts received via EFTPOS have been processed as wages in the payroll run, not as business revenue
- Pull separate service revenue and product revenue lines from salon software; reconcile to POS reports
- Perform a product inventory reconciliation — compare opening stock + purchases against closing stock + sales + service usage
- Confirm all casual employees are being paid the correct Award rates including loadings
- Identify any casuals who have reached 12 months of regular work — flag casual conversion obligation to client
- Reconcile daily cash — POS Z report vs. cash count vs. bank deposit for each business day
- Compare revenue per appointment and cost ratios to ATO benchmark ranges for hairdressing