How tax is calculated on invoices and estimates

Avaza works out tax one line at a time, because each line on an invoice or estimate can have a different tax. It rounds each line's tax to the decimal places of the invoice's currency, usually two, then adds up the rounded amounts to get the invoice's tax total. Credit notes, recurring invoices and retainer invoices work the same way.

How each line's tax is worked out

1. Line amount: quantity × unit price, less the line's discount, rounded.
2. Tax on the line, depending on the invoice's Amounts are setting:
   • Tax Exclusive: line amount × tax rate.
   • Tax Inclusive: the tax already inside the line amount, which is line amount × tax rate ÷ (1 + tax rate).
3. Rounding: the line's tax is rounded to the currency's decimal places. Half a cent or more rounds up.
4. Totals: the invoice's tax is the sum of the rounded line taxes, and the Total Discount is the sum of the line discounts.

Tax inclusive and tax exclusive amounts walks through both settings with a worked example.

An example with three tax rates

Three lines on a Tax Exclusive invoice, each with a different tax:

The invoice shows 47.30 of tax and a Total Amount of 574.30. Because each line is rounded first, the tax total can differ by a cent from a figure worked out on the invoice total.

The invoice shows which tax each line has, but not the tax amount per line. To see the tax on every line, run the Transaction Item List report, which has Amount Before Tax and Tax Amount columns.

Where each line's tax comes from

Avaza fills in each line's Tax Rate for you, and you can change it on any line before you save:

• Lines you type: the Tax Rate of the inventory item you choose. It's set under For Sales on each item in Settings › Inventory Items.
• Add Time: the tax of the Default Inventory Item for Timesheets, in Settings › Invoice & Bill Settings.
• Add Expense: the tax recorded on each expense.
• Add Fixed Amount: the tax of the inventory item chosen for the fixed amount on the task.

Your customer sees each tax by the Name you gave it in Settings › Tax, for example "GST". The Tax Rate list on the invoice shows the tax's Description, for example "Goods & Services Tax".

Taxes with more than one component

In Settings › Tax, a tax can be made up of several components: open the tax and click Show advanced. One component can be marked Compound, which means it's charged on the amount plus the other components. Each line uses the tax's Effective Tax Rate.

For example, a 10% component and a 5% compound component give a Total Tax Rate of 15% and an Effective Tax Rate of 15.5%. On a 200.00 line, the tax is 31.00: 20.00 at 10%, plus 5% of 220.00.

If your invoice template lists the components (All Tax Component Rates under How are Tax Totals Displayed?), each component's amount is rounded on its own. The components can then add up to a cent more or less than the tax total. See setting up tax information.

When a tax rate changes

Each line's tax is saved with the invoice or estimate. If you change a tax's rate in Settings › Tax:

• invoices and estimates you've already saved keep their tax amounts, until you edit them;
• when you click Edit on one of them, including an invoice that's been sent or paid, its lines show tax at the new rate. When you save, the new tax is kept, even if you changed nothing else;
• recurring invoices that use the tax are updated to the new rate straight away;
• the Tax Summary report works out tax at the current rate, so earlier periods change too.

What saving an older invoice does to its total depends on its Amounts are setting:

• Tax Exclusive: the total changes. If it goes up, a paid invoice becomes Partially Paid, with the difference still to pay. If it goes down below what's already been paid or credited, the invoice isn't saved, and you see "Oops! The invoice total amount is less than applied payments & credit notes." A sent invoice with no payments simply gets a new total, which is different from the one your customer received.
• Tax Inclusive: the total stays the same, but the tax inside it changes, and so does the amount before tax.

Avaza doesn't warn you about this. To keep past invoices and reports as they were, add a new tax for the new rate instead of editing the old one. If you've already changed the rate, check the totals on the edit page before you save an older invoice.

Only Administrators and Finance Managers can create invoices and estimates, and change the taxes in Settings › Tax. When you need your tax figures for a period, run the Tax Summary report.