How to handle intercompany recharges in a Xero group

Raise an invoice from the entity that carries the shared cost to each entity that consumes it, on an allocation basis you have written down, and reconcile the mirrored intercompany accounts every month. Xero has no native intercompany function, so this is a convention you impose rather than a feature you switch on — which is exactly why it drifts.

The version that goes wrong is not usually the calculation. It is that the recharge exists in one ledger and not the other, and nobody notices until the accountant does, eleven months later.

Should an intercompany recharge be an invoice or a journal?

An invoice, in almost every case. The entity carrying the cost raises a sales invoice to the entity consuming it, which appears as a bill in the second entity’s Xero organisation.

A journal seems tidier and is worse in three specific ways. It produces no document, so when someone asks in eighteen months what the $4,200 was for, the answer is whatever the narration says — usually “Q3 recharge”. It has to be keyed twice, in two organisations, with nothing connecting the halves, so a change to one side silently breaks the pair. And where GST applies, an invoice is the instrument that carries it; a journal makes you handle the tax separately and by hand.

The invoice route costs the same effort and leaves an artefact that survives staff turnover. Use a journal for corrections and for genuinely non-transactional movements, not for recurring shared costs.

What counts as a defensible allocation basis?

One that reflects how the cost is actually consumed, was chosen before the number was calculated, and is applied the same way every period.

The common ones are headcount, revenue share, floor space, and time records — and which is right depends entirely on the cost. Group insurance usually follows headcount or payroll. Rent follows floor space. A software licence follows seat count, not revenue, even though revenue is easier to pull. A finance team’s time follows time records if you keep them and headcount if you do not.

Two tests are worth applying. First, could you explain the basis to someone outside the business in one sentence without sounding evasive? Second, would the number have come out differently if you had picked the basis after seeing the result? A basis chosen to land on a convenient figure is not an allocation, and it looks like what it is.

Write the basis down next to the recharge, not in someone’s head. The most expensive version of this is a recharge that has run monthly for three years on a rule nobody can now reconstruct.

Do you have to charge GST between your own entities?

If the entities are members of a registered GST group, no — intra-group transactions are ignored for GST, and you do not need to issue tax invoices for them. If they are not grouped, you generally do, and the recharge is an ordinary taxable supply between two separate entities.

This is the single largest administrative difference available on this topic in Australia, and it is under-used. Under the ATO’s GST grouping rules, one member is nominated as the representative member and deals with the group’s GST liabilities and entitlements. Sales to other members are not liable to GST, purchases from other members carry no input tax credit, and those transactions do not appear on activity statements at all. Non-representative members stop completing the GST section of the BAS entirely.

For a group doing monthly recharges across four or five entities, that removes a recurring category of work rather than reducing it — no intra-group tax invoices, no matching GST claimed in one entity against GST paid in another, no quarterly reconciliation of positions that should net to zero.

Eligibility is the catch, and it is genuinely structure-specific: members must satisfy the ATO’s tests and the representative member must be an Australian resident for tax purposes. Whether your particular set of companies and trusts qualifies is a question for your accountant, not for a web page. But it is a question worth actually asking, because the answer changes the shape of the monthly close, and plenty of groups have never put it to anyone.

Why do the two entities’ intercompany balances stop agreeing?

Almost always because one transaction was coded to intercompany in one file and to something else — usually an expense — in the other. The pair breaks at the point of coding, not at the point of payment.

The second cause is timing, and it is not an error. A transfer sent on 30 March and received on 2 April is correctly recorded in both files and legitimately produces two different balances at 31 March. The problem is not the difference; it is that nobody has written down which differences are expected, so the real ones hide among them.

The third is partial settlement. A recharge of $8,400 settled with a round $8,000 payment leaves $400 that both sides quietly stop thinking about, and a residue like that compounds across entities and periods until the balance is a number nobody trusts and everybody works around.

None of these announce themselves. From inside either organisation the books look fine, which is the recurring theme with anything spanning Xero files: each ledger is internally consistent and the error only exists in the relationship between them.

How often should intercompany accounts be reconciled?

Monthly, as a standing task with a named owner — because the same reconciliation costs minutes done monthly and days done annually.

The mechanism is straightforward: mirrored intercompany accounts in each entity’s chart of accounts, coded consistently, with the rule that the balance in A’s account for B equals the negative of B’s account for A once known timing differences are listed. Anything left over is a coding error, and it is findable while people still remember the transaction.

Left to year end, the same exercise becomes archaeology. Someone reconstructs a year of movements from bank statements and half-remembered decisions, at an accountant’s hourly rate, and the output is usually a plug journal that makes the balances agree without explaining why they did not. That plug is then the opening position for the following year.

The reason this task slips is not that it is hard. It is that no single entity’s month-end close owns it — it belongs to the group, and the group is not where the work is scheduled.

What does this look like at five entities rather than two?

The calculation stays trivial and the coordination does not. Two entities is one relationship; five is ten, and the effort tracks the pairs rather than the entities.

At two, one person can hold the whole picture and a spreadsheet is a perfectly reasonable answer. The practical breaking point tends to arrive somewhere around four or five, and it shows up as a specific complaint: month-end waits on one person exporting from each Xero organisation in turn, working the allocation in a spreadsheet, then keying invoices back into every affected entity. Teams describe that as half a day for what should be a five-minute task, and the half day is not the calculation — it is the switching, the re-keying, and the checking that the halves match.

That is also where the errors concentrate. Every manual re-key is an opportunity for the pair to break, and the volume of re-keying grows with the square of the entity count.

Does an unsettled recharge eventually become a loan?

In substance, yes — a recharge that is never settled stops being a payable and starts being funding from one related entity to another, and that has consequences a recharge does not.

Where those balances involve private companies, trusts and their shareholders or associates, Australian tax law takes a close interest in what has actually been lent to whom, and the treatment is genuinely technical. That is a conversation with your accountant, not something to resolve from a guide, and the answer depends on your structure rather than on your bookkeeping.

The bookkeeping point that does belong here is narrower: decide up front whether intercompany balances get settled in cash and on what cycle, and then do it. A group that recharges diligently and never settles has built a growing intercompany position by accident rather than by decision — and the difference between those two is the whole question when someone eventually asks.