Why Food Business Bookkeeping Is Different
A regional bakery, farm-gate food producer, or artisan food manufacturer has a more complex bookkeeping profile than a typical service business, and the complexity isn't about size. It's about the number of moving parts that interact with tax and payroll law in ways that don't arise for a trades business or a professional services firm.
In the Colac, Geelong, Ballarat and broader south-west Victoria food corridor, we see a consistent pattern: food businesses that have been trading for years with good revenue but unclear profit, because the bookkeeping hasn't caught up with the complexity of what they're actually doing.
GST on Food: The Classification Problem Every Bakery Faces
The GST Act divides food into taxable and GST-free categories. For a bakery, this is not a once-off decision, it applies per product line, per method of sale, and sometimes per serving temperature.
GST-Free Bakery Items
Under Schedule 1 of the A New Tax System (Goods and Services Tax) Act 1999, GST-free food includes bread, bread rolls, plain croissants, flour, uncooked pastry, and most staple packaged foods sold in standard quantities for home preparation. A loaf of bread sold cold at a bakery counter is GST-free.
Taxable Bakery Items
The following categories are taxable at 10% regardless of where they're sold:
- Hot food sold ready to eat (pies, sausage rolls, pasties sold warm)
- Cakes, slices, muffins and biscuits (unless sold as a staple food pack)
- Café-style sandwiches, toasties, or prepared wraps
- Decorated cakes for special occasions
- Beverages including coffee, juice and flavoured milks
Common Bakery Products: GST Status Quick Reference
| Product | GST Status | Why |
|---|---|---|
| Bread loaf (sold cold) | GST-Free | Basic food staple |
| Bread rolls (cold, unpackaged) | GST-Free | Basic food staple |
| Pie, sausage roll (sold hot) | Taxable 10% | Hot food ready to eat |
| Muffin, slice, biscuit | Taxable 10% | Excluded from GST-free food |
| Plain croissant (cold) | GST-Free | Bread substitute, not a pastry product |
| Croissant sold warm / filled | Taxable 10% | Hot/prepared food |
| Celebration / decorated cake | Taxable 10% | Not a basic food staple |
| Coffee / café drinks | Taxable 10% | Beverages are taxable (except plain water) |
| Wholesale flour / raw ingredients (to another business) | GST-Free | Unprocessed food ingredients |
In Xero, each product code or sales category should have the correct GST rate assigned at the account level. Assigning everything to a single "Sales" account and applying 10% GST across the board, which is the most common error we see, overstates your GST liability on every BAS.
COGS Tracking: The Number Most Bakeries Can't Tell You
Ask a bakery owner what their gross margin is and the most common answer is "I'm not sure." That's a bookkeeping problem, not a business problem. Cost of Goods Sold, the direct cost of producing what you sell, must be separated from operating expenses (rent, wages, utilities) in your chart of accounts to get a meaningful profit picture.
What Goes in COGS for a Bakery?
- Flour, dairy, eggs, sugar, chocolate, fruit and other primary ingredients
- Packaging materials (boxes, bags, paper liners, labels)
- Direct gas/electricity used for ovens (if separately metered)
- Ingredients purchased for wholesale or wholesale-specific production runs
What Doesn't Go in COGS
- Wages and salaries (these are Labour, a separate line on the P&L)
- Rent and occupancy costs
- Marketing, delivery, and general business overheads
Illustrative Bakery P&L Structure
| Line | $ (illustrative) | % of Revenue |
|---|---|---|
| Total Revenue | $520,000 | 100% |
| Less: Cost of Goods Sold (ingredients, packaging) | ($156,000) | 30% |
| Gross Profit | $364,000 | 70% |
| Less: Labour (wages + superannuation) | ($182,000) | 35% |
| Less: Occupancy (rent, utilities) | ($72,000) | 14% |
| Less: Overheads (marketing, admin, insurance) | ($38,000) | 7% |
| Net Profit | $72,000 | 14% |
Without separating COGS from labour and overhead, the gross profit line disappears and you're left staring at a net profit figure with no way to diagnose what's driving it. ATO benchmarks for bakeries show gross margins typically between 55–75% depending on product mix and wholesale vs. retail split. If yours is outside that range, you need to know, and you can't know if COGS isn't being tracked.
Payroll for Bakeries: Early Starts, Weekend Rates and STP Phase 2
Bakery payroll is among the more complex payroll scenarios for a small food business because of early morning start times, split shifts, and the mix of Award-covered employees in different roles.
Which Award Applies?
Most production bakers, counter staff, and pastry chefs in a standalone bakery are covered by the Bakery Industry Award 2020. Bakeries that operate as cafés, where employees also serve food and drinks, may have some roles covered by the Restaurant Industry Award 2020 instead. Getting Award classification wrong flows through to incorrect minimum wage rates, incorrect penalty rates, and incorrect superannuation, all of which show up as underpayment liability later.
Key Penalty Rates Under the Bakery Industry Award 2020
| Shift / Day | Penalty Rate (of ordinary rate) | Note |
|---|---|---|
| Ordinary weekday hours | 100% | Base rate |
| Early morning shift (starting before 6am) | 115% | Applies for full shift if start is pre-6am |
| Saturday | 125% | Full-time and part-time employees |
| Sunday | 150% | Full-time and part-time employees |
| Public holiday | 225% | Plus a substitute day |
| Overtime (after 38 hrs/week or daily limit) | 150% (first 3 hrs) / 200% | Thereafter |
STP Phase 2 and Allowances
Under STP Phase 2, allowances and penalty payments cannot be bundled into an employee's ordinary gross wages figure. Each component must be disaggregated and reported to the ATO separately per pay run. If you're running bakery payroll in Xero, your pay items must be set up with the correct STP Phase 2 reporting codes, Early Shift Allowance, Saturday Penalty, Sunday Penalty, and each must flow to the correct gross income type in the STP submission. A bookkeeper who sets this up correctly once saves the payroll from being incorrect on every single pay run going forward.
Agricultural and Farm-Gate Businesses in Regional Victoria
The Colac–Otway and Corangamite region, centred on Colac, about 100km south-west of Geelong, is one of Victoria's most productive dairy and agri-food areas. Farmers and food processors in this region operate under bookkeeping rules that are genuinely different from urban small businesses.
Primary Production Concessions
The ATO recognises primary producers as a distinct category for several tax concessions:
- Income averaging: Tax is calculated on a 5-year average income, which helps in years of high profit following lean years.
- Farm management deposits (FMDs): Taxable income can be deposited into an FMD account and deducted in the year of deposit, then withdrawn and taxed in a later (lower-income) year.
- Immediate deductibility for water and landcare: Certain on-farm water facility and landcare expenses are immediately deductible rather than depreciated.
- Livestock trading stock valuation: Three valuation methods available (cost, market selling value, or elective) and annual election is required in the tax return.
GST on Farm-Gate Sales
Raw, unprocessed farm produce, milk, grain, wool, livestock, unprocessed fruit and vegetables, is generally GST-free. Once that produce is processed (turned into cheese, butter, preserved goods, or baked products), the GST position changes. Regional Victoria producers who have expanded from raw produce into value-added processing frequently have a mixed GST profile that needs to be tracked at the product line level, not the transaction level.
Farm-Gate and Food Processing: GST Quick Reference
| Product / Activity | GST Status | Key Consideration |
|---|---|---|
| Raw milk (sold to processor or farm gate) | GST-Free | Unprocessed agricultural produce |
| Cheese, butter, yoghurt (produced on farm) | Taxable 10% | Processed food, no longer a basic food input |
| Grain (wheat, barley, canola) sold to silo or trader | GST-Free | Unprocessed grain is GST-free food ingredient |
| Flour milled on-farm and sold | GST-Free | Flour is a GST-free basic food |
| Live cattle / sheep (sold to abattoir or at market) | GST-Free | Livestock for food production is GST-free |
| Dried fruit, jams, preserves produced on-farm | Taxable 10% | Processed / preserved food, excluded from GST-free |
| Agri-tourism, farm stays, events on property | Taxable 10% | Services are taxable, separate from produce sales |
Seasonal Cash Flow and BAS Timing
Agricultural and food production businesses in regional Victoria often have seasonal revenue patterns that create BAS timing issues. A Colac dairy farmer might receive most of their income in spring and autumn milk price peaks. A Colac grain farmer receives a lump at harvest. A market-stall bakery has peak trading over weekends and holiday periods and lower revenue in mid-year.
This creates a common trap: the BAS is lodged quarterly, but income arrives in lumps. A business that lodges a quarterly BAS in October may have collected significant GST in September but spent the cash assuming it was trading income. Planning for BAS liability, especially if you're on quarterly lodgement, requires either a separate GST holding account or cash flow forecasting in Xero's Analytics Plus to flag the quarterly liability before it's due.
Setting Up Xero for a Bakery or Food Producer
Chart of Accounts Considerations
A food business Xero setup should include separate revenue accounts for each sales channel (wholesale, retail, market stalls, café) with the correct GST rate per account. COGS accounts should sit separately from overhead expenses. Payroll should be set up with the correct Award and STP Phase 2 pay item codes before the first pay run is processed.
Tracking Categories for Product Mix Analysis
Xero's tracking categories allow a single business to run reports split by product line, sales channel, or location. For a bakery with both a retail counter and a wholesale account, applying tracking categories to revenue (and ideally COGS) makes it possible to run a separate P&L per channel without needing separate Xero subscriptions.
Watch: Bakery and Food Business Bookkeeping Explained
Read the video transcript
If you run a bakery or a food production business in regional Victoria, whether that's in Colac, Geelong, Ballarat, or anywhere across the south-west, there are three bookkeeping issues that come up more than any others. And they're not hard to fix, but they do need to be set up correctly in Xero.
The first one is GST on food. People assume that food is simple for GST purposes, but it really isn't once you're running a bakery. Bread is GST-free. A muffin is taxable. A croissant sold cold is GST-free, but if you heat it up and serve it with coffee, that's two taxable items. The ATO has very specific rules about what counts as a basic food staple and what counts as a prepared or restaurant-style food item. And if you're applying 10% GST across everything because it seems simpler, you're overpaying on your BAS every quarter.
So the fix is to set up separate revenue accounts in Xero, one for your GST-free items, one for your taxable items, and assign each product line correctly when you're doing your bookkeeping. Your Xero-connected card reader or point-of-sale system should also be mapped to those accounts so the GST coding happens automatically as sales come through.
The second issue is COGS, cost of goods sold. Most bakery owners track their ingredient purchases and their wages and everything else as general expenses. But if you're not separating out the direct cost of making your product, you can't see your gross margin. You just see the end net profit number, and you have no way to know whether the problem is that ingredients cost too much, or labour costs too much, or overhead is too high. You're managing blind.
Setting up COGS in Xero takes about thirty minutes with your bookkeeper. You create a dedicated COGS account for ingredients and packaging, and from that point on, when you buy flour, butter, eggs, chocolate, or packaging materials, those go to COGS rather than general expenses. Your profit and loss report then shows gross profit, and you can compare it against ATO benchmarks for your industry to see if you're operating within a normal range.
The third issue is payroll. Bakery staff are usually covered by the Bakery Industry Award, and that award includes early morning penalty rates, weekend rates, and public holiday rates that are higher than standard. Under STP Phase 2, all of those components need to be reported to the ATO separately, you can't just lump everything into a gross wages figure. If your payroll isn't set up with the correct STP Phase 2 pay item codes, every single pay run you submit is being lodged incorrectly.
For agribusinesses in the Colac region specifically, there's also the question of income averaging, farm management deposits, and how to handle livestock valuations. These are things that your bookkeeper should flag every year, because the tax concessions for primary producers are real and they're worth using, but only if the bookkeeping is set up to support them.
If you're a bakery or food producer in regional Victoria and you'd like to talk through your bookkeeping setup, we work with businesses across Colac, Geelong and the south-west. Book a free call at truetally.com.au or call us on 0468 159 950.
Last updated July 2026
Frequently Asked Questions
Is bread subject to GST in Australia?
Plain bread sold cold, loaves, rolls, baguettes, is GST-free as a basic food staple. Bread sold hot as part of a meal, or filled and served café-style, becomes taxable. A bakery selling both must track the GST status per product line.
How do I track COGS in Xero for a bakery?
Create a separate COGS account in your Xero chart of accounts and code all ingredient and packaging purchases to it. From there, your P&L report will show gross profit. If you want per-product margin analysis, tracking categories in Xero let you split revenue and COGS by product line without multiple subscriptions.
What Award covers bakery employees?
Most standalone bakery staff, bakers, pastry chefs, counter staff, are covered by the Bakery Industry Award 2020. Businesses that operate as cafés may have some roles under the Restaurant Industry Award 2020 instead. Both awards include early morning and weekend penalty rates that must be paid correctly and reported separately under STP Phase 2.
What tax concessions apply to primary producers in regional Victoria?
Primary producers can access income averaging (5-year average income for tax), farm management deposits (defer taxable income to future lower-income years), immediate deductibility for certain water and landcare expenditure, and specific livestock valuation rules. These concessions are available nationally but are especially relevant in high-variability regional Victoria farming regions like Colac-Otway.
Do I need a separate bank account for my farm or bakery?
Yes, a dedicated business bank account is the minimum for clean bookkeeping. Where you have multiple income streams (retail, wholesale, farm gate, markets), separate accounts or tracking categories in Xero prevent the revenue streams from blending and make it possible to see which channel is actually profitable.
Bakery or food business in regional Victoria?
We work with food producers, bakeries and agribusinesses across Colac, Geelong and south-west Victoria. Book a free 20-minute call to talk through your setup.
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