Last Updated: December 2025
If you run an advertising or creative agency in Australia, you need to separate your creative service revenue from media pass-through costs. Without this separation, you cannot see your true profitability, and you risk misstating your GST position to the ATO.
Agencies that fail to separate media costs from service revenue routinely overstate their turnover. This affects GST registration thresholds and potentially payroll tax obligations. With ATO data matching now comparing your reported revenue against media platform spending, incorrect treatment creates real audit risk. The time to fix this is before the ATO comes knocking, not after.
Running an advertising agency in Australia is financially complex. Unlike a consulting firm that simply bills for time, your agency juggles multiple revenue streams: retainer fees, project-based creative work, media commission, production markup, and technology fees. Each stream has different recognition rules, margin profiles, and GST implications.
The Australian advertising industry generates over $16 billion annually, yet agency profitability remains notoriously thin. Industry benchmarks suggest healthy agencies maintain 15 to 20 percent net margins on service revenue. Many Australian agencies operate below 10 percent because they cannot accurately identify which clients, campaigns, or service lines actually make money.
Poor financial management shows up in predictable ways. Agencies win new business at unsustainable rates to meet growth targets. They absorb scope creep without billing variations. They carry aged work in progress that never converts to revenue. They misclassify media costs in ways that obscure true performance. If any of this sounds familiar, you are not alone.
- Media buying complexity. When you buy media on behalf of clients, you must determine whether you act as principal (buying media and reselling to the client) or agent (arranging media purchases on the client's behalf). This distinction fundamentally affects your revenue recognition, GST treatment, and reported turnover. Get it wrong, and your financials are misleading at best and non-compliant at worst.
- Contractor classification pressure. The creative industry relies heavily on freelance designers, copywriters, videographers, and developers. ATO scrutiny on contractor arrangements has intensified, with Superannuation Guarantee Charge audits specifically targeting agencies using long-term contractors who should be classified as employees. A single misclassification can result in years of back-dated super plus penalties.
- Retainer versus actuals tension. Many agencies quote monthly retainers based on estimated scope, then struggle when actual work exceeds estimates. Without proper tracking, you either absorb overruns (destroying your margin) or attempt to bill clients retrospectively (damaging relationships). Neither outcome is good for your business.
- GST on mixed supplies. If you provide a combination of GST-free exports (work for overseas clients), taxable supplies (domestic creative services), and pass-through media (which may be principal or agent), your BAS preparation becomes complex. Errors here compound over time.
This guide is written for Australian advertising, marketing, creative, and digital agencies with annual revenue between $500,000 and $10 million. That includes full-service advertising agencies, specialist digital and performance marketing agencies, creative studios and design agencies, media buying agencies, and integrated marketing communications firms. The principles apply whether you operate as a sole practitioner, partnership, or company.
Before diving into the mechanics, you need to understand several terms that will appear throughout this guide.
- Retainer revenue is a fixed monthly fee for an agreed scope of services. This typically covers ongoing account management, strategy, and a defined allocation of creative hours. Your client pays the same amount each month regardless of whether you do slightly more or slightly less work.
- Project revenue refers to fees for specific campaigns or deliverables with defined start and end dates. You usually quote these as a fixed price or as estimated hours at agreed rates.
- Media pass-through is advertising spend placed with media vendors like Google, Meta, television networks, and publishers on behalf of clients. How you treat this in your accounts depends on whether you act as principal or agent.
- Work in progress (WIP) represents time, contractor costs, and direct expenses you have incurred on client work but have not yet invoiced. WIP sits on your balance sheet as a current asset until you bill the client.
- Agency commission is the traditional model where agencies receive a percentage (historically 15 percent, now often 3 to 10 percent) from media vendors for placing advertising. This model has largely been replaced by fee-based arrangements but still exists in some situations.
- Production markup is the margin you add to third-party production costs like printing, video production, and photography when you coordinate and manage these suppliers on behalf of clients.
Revenue recognition depends on the nature of each revenue stream, and getting this right is essential for accurate financial reporting.
For retainer fees, you recognise revenue monthly as services are provided. If a client pays quarterly in advance, you record a liability called unearned revenue and recognise one-third of that payment as revenue each month.
For project fees under fixed price arrangements, you recognise revenue based on percentage of completion. If a $60,000 campaign is 40 percent complete at month end, you recognise $24,000 as revenue regardless of whether you have billed the client yet.
For media costs, the treatment depends on whether you act as principal or agent. If you are the principal, the gross media spend is your revenue and the media cost is your expense. If you are the agent, only your agency fee or commission counts as revenue.
Production pass-through follows the same principal versus agent analysis as media costs.
Understanding these mistakes will help you avoid them in your own agency.
Your chart of accounts needs to separate service types so you can analyse performance. Structure your revenue categories as follows:
If you act as principal for media buying, you also need Media Revenue categories covering Digital Media Revenue and Traditional Media Revenue. If you act as agent, you need Pass-Through Recovery categories covering Media Cost Recovery, Production Cost Recovery, and Third Party Cost Recovery.
For direct costs, create categories for Freelancer and Contractor Costs, Stock Photography and Assets, Project-Specific Software and Subscriptions, Production Costs (printing, video, photography), and Media Costs if you act as principal.
This structure lets you calculate gross margin on service revenue accurately while handling pass-through costs appropriately.
Every client engagement needs a project code. For retainer clients, create annual project codes with monthly sub-projects. For campaign work, create discrete project codes for each engagement.
For each project, track:
Here is an example project structure for a full-service client called GreenTech Solutions:
This separation lets you see profitability at each level and identify which clients and project types deliver the best margins.
Accurate time tracking is non-negotiable for agency profitability. Every billable team member must track time daily against specific projects.
At minimum, capture:
Target utilisation rates vary by role. Billable hours as a percentage of available hours should look something like this:
As an example, a mid-level designer working 38 hours weekly should record 29 to 32 billable hours, representing 76 to 84 percent utilisation. The remaining hours cover internal meetings, professional development, and administrative tasks.
A structured monthly rhythm keeps your finances accurate and your cash flowing.
Week 1 (first five business days): Finalise prior month timesheets, calculate WIP movements by multiplying hours worked by billing rates, reconcile media spend against platform reports, and prepare draft client invoices.
Week 2: Issue client invoices, review aged debtors and follow up outstanding amounts, process contractor and supplier payments, and reconcile bank accounts.
Week 3: Review project profitability reports, analyse utilisation by team member, identify WIP requiring write-off or billing, and prepare management reports.
Week 4: Review upcoming month scope and resources, assess retainer clients for over or under-servicing, plan capacity and contractor requirements, and update cash flow forecasts.
You must register for GST once your annual turnover reaches $75,000. Most agencies well exceed this threshold.
Standard 10 percent GST applies to creative, strategic, and account management services you provide to Australian clients.
For media buying, the GST treatment depends on whether you act as principal or agent per ATO guidance. Understanding this distinction is critical.
In a principal arrangement, you purchase media in your own name, take title to the advertising inventory, and resell to your client. You report gross media as revenue, gross media as cost, and charge GST on the total amount billed to the client.
In an agent arrangement, you arrange media purchases on behalf of your client, who is the disclosed principal. You report only your commission or fee as revenue. Media costs flow through as reimbursement, not revenue. You charge GST only on your fee component.
Most Australian agencies operate as agents for media buying. This means only the agency fee, not the gross media spend, counts toward turnover. This distinction matters significantly for payroll tax thresholds and PSI rules.
Practical example: Your agency bills a client $100,000 monthly, comprising a $15,000 service fee and $85,000 in media spend where you act as agent. Your revenue for GST turnover calculation is $15,000, not $100,000. You collect $1,500 GST on the service fee and pass through $8,500 GST on the media. Your net GST position is $1,500 output tax on services.
Services you provide to non-resident clients for use outside Australia may be GST-free under export rules. If you have international clients, review each engagement against ATO requirements.
All employees must receive superannuation at the current rate of 12 percent of ordinary time earnings. You must pay super quarterly to compliant funds by the 28th of the month following each quarter.
Even if workers invoice you as contractors, superannuation may still be required if they work under a contract wholly or principally for labour per the extended definition of employee. This commonly applies to:
The ATO specifically targets creative industries for SGC audits. If you use regular freelancers, document each arrangement and seek advice if classification is uncertain.
All employers must report salaries, wages, PAYG withholding, and superannuation to the ATO through Single Touch Payroll. Reports must be lodged each pay cycle. Most payroll software handles STP automatically.
State-based payroll tax applies when Australian wages exceed state thresholds. Current thresholds vary by state, ranging from approximately $700,000 to $1.2 million depending on jurisdiction. Agencies operating in multiple states face apportionment requirements.
Importantly, contractor payments may count toward payroll tax wages under relevant contractor provisions. If you use significant contractor labour, review your payroll tax implications with your accountant.
Agencies structured as companies or trusts must consider PSI rules if income derives primarily from the personal efforts of one individual. This commonly affects small agency principals operating through company structures. PSI rules limit deductions and require attribution of income to the individual. Seek advice if this applies to your situation.
Accounting platform: Xero remains the standard for Australian agencies. The Business plan at $78 monthly supports unlimited invoices, multi-currency, and project tracking. Xero Projects add-on at $13 per user monthly enables time tracking and project profitability reporting within the accounting system.
Alternative: MYOB Business at approximately $130 monthly suits agencies preferring traditional desktop-style interfaces with cloud access.
Time tracking: Harvest at $12 per user monthly provides dedicated time tracking with project budgets, invoicing integration, and utilisation reporting. It integrates with Xero.
Toggl Track at $13 per user monthly offers simpler time tracking suitable for smaller teams.
Agencies using Xero Projects can track time directly within Xero, avoiding additional software costs.
Project management: Monday.com from $12 per user monthly handles campaign workflows, creative briefs, and approval processes. Asana from $15 per user monthly provides similar functionality with strong timeline and workload views. Basecamp at $349 monthly flat fee for unlimited users suits agencies wanting simple, predictable pricing.
Media management: Agencies managing significant media spend benefit from dedicated platforms. Swydo at $49 monthly automates client reporting from Google Ads, Meta, and other platforms. Supermetrics from $39 monthly pulls platform data into spreadsheets and dashboards.
Creative software: Adobe Creative Cloud at $87 per user monthly for the full suite remains industry standard. Budget $1,000 to $1,200 per creative annually for software. Figma at $19 per editor monthly serves as primary design tool for digitally-focused agencies.
Example software costs for a 10-person agency:
Track these metrics to understand your agency's financial health.
Financial KPIs:
Operational KPIs:
Retainer optimisation: Review retainer clients quarterly. Compare hours worked against retainer scope. Clients consistently exceeding scope require fee increases or scope reductions. Clients consistently under scope represent either overcharging (relationship risk) or under-delivery (value perception risk).
Project pricing improvement: Track actual hours against estimates for every project. Build a database of project types with actual versus estimated hours. Use this data to improve future estimates and identify pricing gaps.
Contractor cost management: Regular freelancers often accept retainer arrangements with guaranteed hours at slightly reduced rates. This improves your margin while providing freelancers with income certainty.
Capacity planning: Map team capacity 90 days forward. Identify gaps requiring contractor support early. Last-minute freelancer hiring typically costs 20 to 30 percent more than planned engagement.
How should advertising agencies recognise retainer revenue?
Retainer revenue should be recognised monthly as services are provided, not when invoiced or collected. If a client pays quarterly retainers in advance, record the payment as unearned revenue (a liability) and recognise one-third as revenue each month. This ensures your financial statements accurately reflect when services are delivered. For retainers with defined hour allocations, track actual hours against the allocation to identify over or under-servicing.
What is the difference between acting as principal versus agent for media buying?
When acting as principal, you purchase media inventory in your own name, take ownership, and resell to the client. You report gross media as revenue and gross media as cost of sales. When acting as agent, you arrange media purchases on behalf of the client (who is the disclosed principal). Only your agency fee or commission is revenue, and media costs flow through as reimbursements. Most Australian agencies act as agents for media buying, meaning only fees count toward revenue. This distinction significantly affects reported turnover, GST treatment, and potentially payroll tax obligations.
How should agencies handle work in progress?
WIP represents time, contractor costs, and direct expenses incurred on client work but not yet billed. Record WIP as a current asset on the balance sheet. When work is invoiced, WIP transfers to accounts receivable and corresponding revenue is recognised. Review WIP monthly and investigate any WIP over 30 days old, as this often indicates billing delays, scope disputes, or work that should be written off. Target WIP days under 30.
Should freelance creatives be classified as contractors or employees?
Classification depends on the nature of the working arrangement, not the payment method. Freelancers who work exclusively or primarily for one agency, use agency equipment and software, work set hours, attend team meetings, and are integrated into the agency are likely employees regardless of their ABN status. Employees require superannuation at 12 percent, PAYG withholding, leave entitlements, and workers compensation coverage. The ATO actively audits creative agencies for contractor misclassification. Review each arrangement against ATO guidelines and seek advice for uncertain situations.
What software do advertising agencies need for bookkeeping?
At minimum, agencies need accounting software (Xero or MYOB), time tracking (built into Xero Projects or standalone like Harvest), and project management (Monday.com, Asana, or similar). Agencies managing media spend benefit from reporting tools like Swydo or Supermetrics. Typical software costs run $700 to $1,500 per employee annually depending on tool selection. Integration between systems reduces manual data entry and improves accuracy.
How do agencies calculate project profitability?
Project profitability requires tracking all costs against each project: staff time (hours multiplied by cost rates including salary, super, and overhead allocation), contractor fees, direct expenses, and any allocated costs. Compare total project costs against revenue billed. Calculate gross margin percentage as revenue minus direct costs, divided by revenue. Target gross margins of 50 to 60 percent on creative projects. Margins below 40 percent typically indicate underpricing, scope creep, or inefficient delivery.
What GST applies to services for overseas clients?
Services provided to non-resident clients for use outside Australia may be GST-free under export rules. To qualify, the client must be a non-resident, the services must be used or enjoyed outside Australia, and documentation requirements must be met. Agencies with international clients should review each engagement against ATO requirements. Mixed situations where work benefits both Australian and overseas operations require careful analysis.
How often should agencies bill clients?
Monthly billing is standard for retainer clients. Project work should be billed at agreed milestones or monthly for longer projects. Agencies allowing quarterly billing or significant payment terms of 60 days or more face cash flow pressure. Include payment terms in engagement letters with 14 to 30 days being reasonable. Follow up overdue accounts promptly. Debtor days exceeding 60 indicates credit control issues.
What are typical agency overhead costs?
Australian agency overheads typically run 35 to 45 percent of service revenue. Major components include rent at 5 to 10 percent, technology and software at 3 to 5 percent, professional fees and insurance at 2 to 4 percent, marketing and business development at 2 to 5 percent, administration salaries at 5 to 10 percent, and other operating costs at 5 to 10 percent. Your overhead percentage affects the markup required on staff costs to achieve target margins.
How should agencies handle media cost discrepancies?
Reconcile actual media platform spend against client authorisations and billings monthly. Discrepancies occur due to platform spending variations, currency fluctuations for international platforms, and timing differences. Options include billing based on actual spend reconciled monthly, billing based on authorisation with periodic true-ups, or absorbing small variances within fee arrangements. Document your approach in client agreements to avoid disputes.
Scale Suite provides specialised bookkeeping and finance services for Australian advertising and creative agencies. We manage the complexity of multiple revenue streams, media reconciliation, WIP tracking, and project profitability analysis.
Our team handles complete agency bookkeeping including retainer recognition, project revenue tracking, contractor management, media cost reconciliation, and BAS preparation. We understand the difference between principal and agent arrangements for media buying and ensure your financial reports accurately reflect service revenue versus pass-through costs.
For agencies with 5 to 50 staff, our embedded finance service costs less than hiring a dedicated bookkeeper while delivering specialist agency accounting expertise. We work as an extension of your team through daily Slack integration, responding to questions and processing transactions in real time rather than operating as a traditional external accounting firm with monthly contact.
Scale Suite delivers embedded finance and human resource services for ambitious Australian businesses. Our Sydney-based team integrates with your daily operations through a shared platform, working like part of your internal staff but with senior-level expertise. From complete bookkeeping to strategic CFO insights, we deliver better outcomes than a single hire without the recruitment risk, training time, or full-time salary commitment.
Disclaimer: This guide provides general information only and does not constitute tax, legal, or financial advice. GST treatment on media buying, contractor classification rules, and instant asset write-off thresholds change regularly. Always verify current requirements with the ATO, consult with a registered tax agent for tax matters, and seek legal advice for employment and contractual matters specific to your circumstances.
Scale Suite delivers embedded finance and human resource services for ambitious Australian businesses.Our Sydney-based team integrates with your daily operations through a shared platform, working like part of your internal staff but with senior-level expertise. From complete bookkeeping to strategic CFO insights, we deliver better outcomes than a single hire - without the recruitment risk, training time, or full-time salary commitment.
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