Tax is no small thing. For some, tax is something to be done; an annual chore that we like to leave to the last minute or an opportunity for some ‘cash back’. The truth isn’t so simple. Tax – in a very real sense – is the streets we walk on, the money we carry, the trains we ride, the hospitals we use; it keeps the wheels turning, the engines pumping, the lights on. Little wonder then why the government takes it so seriously! Of course, while we all benefit from what tax provides, no one wants to pay more than they need to. That’s why understanding your tax obligations is an important part of running a successful business. Thankfully, it doesn’t need to be complicated. A little effort and planning will go a long way to putting you and your business on the right side of the issue.
How much tax do I need to pay?
The long story short is, as a small business owner, you are legally obliged to pay tax. Sorry – there’s no escaping that. The amount of tax you pay will largely depend on your business type and structure, the number of employees (if any) you employ, and your total business income. Whatever your structure may be, all small businesses – generally defined as one with an annual aggregate turnover of less than $10 million – pay one or more of the following taxes:
- Company (income) Tax
- Goods and Services Tax (GST) and;
- The Capital Gains Tax (CGT)
- Payroll and Land Taxes
You can choose to make these tax payments monthly, quarterly or annually. The aim of the game here is to figure out how you can appropriately determine, record and contribute tax to get on with what you do best; run your business!
The Nitty Gritty
Did you know, keeping on top of your business taxes can actually save you money in the long run? If you stay ahead of the game, and keep good records, the Australian Tax Office (ATO) are less likely to have to follow up on additional repayments, discrepancies or perform an audit. And, if they do, you’ll be prepared! So, let’s dive right in.
Company (income) tax
All Australian resident companies need to pay company tax. The Australian Government comes up with this particular type of tax, and it’s enforced by the ATO. The exact amount you have to pay though, will be largely determined on your individual business circumstances. Let’s take the 2019-20 financial year as an example; most companies were required to pay a base rate tax of 27.5%, while medium-scale credit unions pay up to 41.25% and non-for-profit organisations aren’t required to pay any company tax at all if they’re earning less than $416 per annum. The income features and structure of your business will ultimately determine how the government sees their role in relation to Company Tax.
Goods and services tax (GST)
A little less complicated, GST is simply a flat 10% tax on most of what you sell or receive as a business. If you’re a service-based business, apply the 10% to all client charges. If you’re a goods-based business, the 10% would be additional to the price of the product itself. Easy! Important to note though, GST does need to be registered for and approved before being applied to pricing with the ATO. Need to apply? Check out this link. Once you’ve followed the prompts, you can really leverage GST by spending money to make money. Sounds too good to be true, right? Well, it isn’t! The money spent can, in some cases be ‘deducted’ from your taxable income, reducing the amount of tax you pay – basically like a credit at the end of the financial year!
Are you looking to or have you already employed staff members? First, congratulations – doing well enough to hire either casual, part-time or full-time employees is a huge achievement. Now you just need to get your head around payroll tax! Don’t worry, we’ll fill you in. Applied to wages paid to employees and dependent on your state’s payroll tax percentage and exception threshold, payroll tax is a must. Generally, if the amount of wages paid per month exceeds the relevant exemption threshold, the tax can be calculated by dividing the total amount of wages paid per month divided by the Payroll Tax percentage. If you’re unsure, a good bookkeeper, accountant or HR software can help you meet your obligations.
Capital Gains Tax (CGT)
Time to make some gains… capital gains! When we talk capital, we’re referring to purchases like a new company car or an office space. The CGT comes into play when you’re actually disposing of these assets and applies to the fiscal (Government revenue) difference of buying or selling it. If you’re a small business, you’ll be able to minimise the application of CGT. You may be in luck with a bit of flexibility listed below. If these apply to you, you can thank us later!
- You have owned the sold asset for a minimum of 15 years;
- You are retiring or have been declared medically incapable of completing business-related tasks;
- Are aged 55 years or older or;
- Small businesses are also eligible for a 50% active asset reduction if the business has been owned for 12 months or more.
Understand your financial reporting obligations
All Australian businesses are required to keep clear and consistent records of their financial expenses and income. These records need to be prepared in line with Australia’s legislative requirements. We’re talking about your BAS, or Business Activity Statement; lodged to the Australian Tax Office in order to make payments and report their taxable income. As thrilling as this sounds (hint of sarcasm anyone?), it’s absolutely mandatory and must be lodged monthly, quarterly or annually, depending on when tax payments are due. Companies are also required to prepare and lodge financial reports to the Australian Securities and Investments Commission (ASIC). Though some businesses may be exempt from financial reporting these annual reports will be audited by ASIC. This is another reason to keep your business record keeping in top shape for tax time. If your business is listed on the Australian Securities Exchange (ASX), ongoing and periodic disclosure rules may apply. To determine your ASX reporting requirements, visit the official listings page.
When you’re looking for ways to best record and manage these records, the Australian Accounting Standards Board (AASB) is a fail-safe and best place to start. As an independent Australian Government agency, their job is to create rules on how records should be collected, sorted and circulated for everyone – these rules are called the Australian Accounting Standards. To keep it brief, some of these rules include the calculation and storage of information regarding share-based payments, business combinations, fair value management, statement of cash flows and even leases. The AASB Board are busy people – creating hundreds of business reporting obligations. What’s important here though, is understanding those that apply to your business, which can be found here.
Ask for help if you need it
Whether your business is thriving or in need of a little helping hand, it is worthwhile considering the positives of welcoming an accountant or a bookkeeper to your team. Like a ray of sunshine, these diligent professionals clean up the murky sky and provide clarity on what needs to be done. Whether this is applying for GST through the ATO, calculating the payroll tax or wading through the AASB Standards to ensure company compliance, accountants are often money well spent for the longevity of your business. If your business is still growing and you are looking to keep costs down, a contracted bookkeeper may be a worthwhile option. They’ll prepare financial documentation, organise records and can complete your tax returns – all in a few hours per month. An easy win!
Tackling tax the right way
Australian Business Tax may well be a multifaceted beast of a system, but don’t let it overwhelm you. If you own a business, you’re legally required to pay tax – period. The good news is you can avoid paying too much (or too little) by doing some quick research on the taxes that apply for your business. There are only four that may apply; company (income) tax, goods and services tax, capital gains tax and payroll tax. Remember to lodge your BAS, and ensure your financial reports are in line with the AASB Standards. If you need a helping hand, don’t be afraid to reach out to an accountant or bookkeeper. Often these tax and record-keeping gurus are worth their weight in gold! Good tax management is nothing more than good business. You’ve got this!