Customising Your Chart of Accounts (COA) for ATO Compliance

A Chart of Accounts (COA) is the backbone of your business’s finances, helping you clearly track income, expenses, assets, and liabilities. A well-structured COA ensures ATO compliance, GST reporting, and accurate financial records for Australian businesses.

Whether you are a small business owner or managing a larger enterprise, customising your COA to fit your operations improves cash flow management and tax efficiency.

Let’s Get Straight to the Point

If you're short on time, here's a quick breakdown of how to set up and customise a COA:

1. Understand COA Categories – Assets, Liabilities, Equity, Revenue, and Expenses.
2. Ensure Tax Compliance – Align with ATO tax codes and GST reporting.
3. Choose a Numbering System – Use a structured system for easy reporting.
4. Customise for Your Business – Tailor accounts to suit operations and industry needs.
5. Use Accounting Software – Ensure compliance with Single Touch Payroll (STP) and BAS lodgements.
6. Review COA Regularly – Update as the business grows or tax laws change.

Now, let’s go into setting up and customising a COA for Australian businesses.

What is a Chart of Accounts?

A Chart of Accounts is a structured list of financial accounts used to categorise transactions. It helps businesses record income and expenses, track liabilities and assets, and prepare financial statements.

Every account in the COA is assigned a unique number to ensure accurate reporting. These accounts are grouped into five main categories:

Main COA Categories

1. Assets – These are business-owned resources that hold financial value, such as cash, accounts receivable, inventory, property, and equipment.
2. Liabilities – These include all debts and obligations, such as loans, credit cards, accounts payable, and tax liabilities.
3. Equity – This represents the owner's interest in the business, covering owner contributions, retained earnings, and shareholder equity.
4. Revenue – This consists of all income the business earns, such as sales, interest, and rental income.
5. Expenses – These are costs incurred in running the business, including rent, wages, utilities, marketing, and office supplies.

Each account is customised based on the business structure, ensuring financial clarity and ATO compliance.

ATO Compliance and Tax Considerations

Australian businesses must align their COA with ATO tax obligations, including GST, PAYG withholding, and superannuation.

GST Reporting in COA

If your business is registered for GST, you must track GST on income and expenses. This means:

• GST Collected Account – Tracks the GST received from sales and services.
• GST Paid Account – Tracks GST paid on business purchases.
• BAS Reconciliation – Ensures GST amounts are correctly reported on the Business Activity Statement (BAS).

PAYG Withholding and Payroll Accounting

Employers must withhold PAYG tax and record superannuation obligations correctly. Essential payroll accounts include:

• Wages and Salaries Payable – Represents unpaid employee earnings at any given time.
• Superannuation Payable – Ensures compliance with Super Guarantee (SG) obligations.
• PAYG Withholding Payable – Tracks employee tax deductions and remittances to the ATO.
• WorkCover or State-Based Payroll Tax – Relevant for businesses that exceed payroll tax thresholds.

ATO-approved payroll software ensures compliance with Single Touch Payroll (STP) Phase 2, reducing the risk of reporting errors.

Setting Up a Chart of Accounts for Small Businesses

Step 1: Choose a Numbering System

A numbering system helps with financial organisation and reporting. A standard four-digit system works best:

• 1000–1999: Assets (e.g., 1010 Cash, 1020 Accounts Receivable)
• 2000–2999: Liabilities (e.g., 2010 Accounts Payable, 2020 Loan Payable)
• 3000–3999: Equity (e.g., 3010 Retained Earnings)
• 4000–4999: Revenue (e.g., 4010 Sales, 4020 Interest Income)
• 5000–5999: Expenses (e.g., 5010 Rent, 5020 Utilities)

Step 2: Customise COA Based on Business Type

Every business has different financial tracking needs. Here’s how different industries may customise their COA:

1. Retail Business

• Separate inventory tracking accounts.
• Accounts for merchant fees and discounts.

2. Service-Based Business

• Different revenue streams for various services.
• Labour and subcontractor expense accounts.

3. Construction Business

• Job costing accounts to track expenses per project.
• Equipment depreciation and loan repayment accounts.

Step 3: Implement COA in Accounting Software

Australian businesses commonly use Xero, MYOB, or QuickBooks to automate their COA. Features include:

• Automated GST tracking for BAS lodgements.
• Payroll integration with STP reporting.
• Real-time financial reporting and tax compliance.

How to Customise a Chart of Accounts

Why Customisation is Important

A generic COA may include unnecessary accounts or lack the details for accurate reporting. Customisation allows businesses to:

• Align with industry-specific accounting needs.
• Improve reporting accuracy for better decision-making.
• Ensure compliance with Australian Taxation Office (ATO) requirements.
• Track revenue and expenses in greater detail for budgeting and forecasting.
• Make tax preparation easier by separating taxable and non-taxable transactions.

A well-customised COA streamlines financial management, making it easier to track performance, manage expenses, and meet ATO requirements such as GST reporting and payroll tax compliance.

When Should You Customise Your COA?

Customisation isn’t just for businesses starting fresh. You may need to adjust your COA when:

• The business expands into new services or products – Additional revenue streams require new accounts to track income sources separately.
• You switch accounting software – Each system has a default COA that may need adjustments to suit your reporting needs.
• ATO tax laws change – If GST rates, payroll tax thresholds, or superannuation requirements change, updating your COA ensures compliance.
• Financial reporting requirements evolve – Growing businesses may need more detailed tracking for investors, lenders, or auditors.
• The business undergoes restructuring – Mergers, acquisitions, or shifts in operational focus may require reclassification of accounts.
• Financial reports become difficult to read – If management struggles to extract meaningful insights from reports, the COA might be too complex or not detailed enough.

Best Practices for Customising a COA

When setting up or modifying your COA, follow these best practices:

• Keep It Simple – Avoid overcomplicating the structure. Too many accounts can make financial reports difficult to interpret.
• Use Consistent Numbering – Stick to a clear numbering format for easy reference.
• Ensure Tax Compliance – Include separate accounts for GST, payroll tax, and superannuation.
• Maintain Logical Groupings – Group similar accounts together for better analysis.
• Use Software That Supports Customisation – Cloud accounting platforms like Xero, MYOB, or QuickBooks allow businesses to tailor COA structures.
• Train Staff on COA Usage – Ensure employees entering financial data understand how accounts are categorised.
• Get Professional Advice – Consult an accountant if unsure about tax compliance or COA structure.

Reviewing and Updating Your Chart of Accounts

A Chart of Accounts (COA) is not a static document. As your business evolves, your financial tracking needs change. Regularly reviewing and updating your COA ensures it remains relevant, organised, and aligned with ATO compliance, tax obligations, and business reporting requirements.

Many Australian businesses set up a COA before launching but fail to revisit it. Over time, outdated, redundant, or overly complex accounts can create confusion, making financial reporting more challenging than necessary.

A well-maintained COA ensures:

• Accurate financial statements.
• Efficient Business Activity Statement (BAS) reporting.
• Proper tracking of income, expenses, assets, and liabilities.
• Compliance with ATO tax changes and payroll laws.
• Clear financial insights for better decision-making.

Your COA should reflect any growth, industry changes, or revenue stream additions.

When Should You Update Your COA?

Regularly reviewing your COA prevents it from becoming cluttered or inaccurate. Here are some clear indicators that it’s time to update:

1. At the Start of a New Financial Year

The Australian financial year runs from 1 July to 30 June, making July the perfect time to conduct a COA review. Many businesses finalise their tax returns in June and use this period to:

• Remove unused or duplicate accounts.
• Add new accounts for better reporting.
• Adjust tax categories based on ATO changes.

If your business submits annual financial statements, updating your COA at the start of the financial year ensures that reporting remains consistent.

2. When Tax Laws Change

ATO regulations frequently update, affecting GST, superannuation, payroll tax, and business deductions. Changes that might require a COA update include:

• Superannuation Guarantee Rate Changes – The super rate is 11.5%.
• GST Threshold Updates – Businesses nearing the $75,000 turnover threshold should ensure GST tracking is set up.
• Single Touch Payroll (STP) Reporting Adjustments – If new ATO requirements arise, payroll-related accounts must be modified.
• New Tax Deductions or Offsets – If the ATO introduces new tax incentives, you may need additional accounts to track eligible expenses.

Ignoring tax law changes can lead to ATO non-compliance, misreported financials, and incorrect BAS submissions.

3. When Your Business Expands or Restructures

If your business grows rapidly and introduces new products, services, or locations, your COA should reflect that expansion.

For example:

• A retail store opening a second location should track revenue and expenses separately for each store.
• A service-based business adding online sales should create new income and cost categories for digital transactions.
• A construction company taking on government contracts might require additional accounts for grant tracking, compliance costs, or new payroll structures.

Similarly, consolidating accounts might simplify financial management and reduce unnecessary reporting complexity if your business is downsizing or restructuring.

4. Before Switching Accounting Software

If you migrate to a new accounting system (e.g., from MYOB to Xero or QuickBooks), your COA may need adjustments. Different platforms have pre-built COAs; importing an outdated COA can cause errors.

Before switching:

• Review your current COA for accuracy.
• Remove inactive accounts that no longer serve a purpose.
• Ensure your COA aligns with ATO tax reporting categories in the new software.
• Set up automated GST, super, and payroll tracking to match ATO requirements.

Many businesses use software migration as an opportunity to streamline their COA and remove unnecessary complexity.

5. When Your Financial Reports Are Confusing

If you struggle to understand your profit and loss statement (P&L), balance sheet, or BAS reports, your COA might be too complex or poorly structured.

Signs your COA needs an update:

• Too many detailed accounts that could be combined.
• Overuse of "Other Expenses" or "Miscellaneous" accounts, leading to unclear reporting.
• Difficulty distinguishing between fixed and variable costs.
• Revenue streams not separated properly, making it hard to analyse performance.

By simplifying your COA structure, you make financial data easier to interpret, helping business owners and accountants make better financial decisions.

Steps to Review Your COA

1. Identify redundant accounts – Merge or remove unused accounts.
2. Check ATO compliance – Ensure tax reporting aligns with the latest regulations.
3. Consult your accountant – A professional review helps with optimisation.
4. Test financial reports – Ensure new account structures do not affect reporting accuracy.

Conclusion

A well-structured and customised COA is essential for Australian businesses. You can ensure efficient financial tracking and compliance by aligning it with ATO tax rules, using smart numbering systems, and customising it based on business needs.