Which part of my online business income is or isn't taxable?
I currently started my own online business , mainly focusing on men's fashion. I'am very new to online businesses and especially the accounting side, i would like to ask what is taxable and what isnt? should i set aside money for when tax time comes ?
Pam Pitt Partner at Bookkeepers 4 u
When you say, what is taxable and what isn't...do you mean which things that you buy and sell have GST tax on them? Or do you mean what things do you declare to the ATO for your annual profit?
I will assume that you mean what goes into calculating your profit and loss. Your profit is the business income less the business expenses. The ATO will assess your income tax on the amount of profit that your business earns.
Any earnings from a business are incomes and are declared. So if the business earns interest, charges out rent to a tenant, earns dividends from share holdings, sells stock, sells labour - all of these are incomes and part of your profit.
The business costs are the expenses. Generally, anything that the business uses to earn an income that gets used up in the course of a year are the expenses. So examples of costs are rents charged to the business by a landlord, bank charges, costs of stationery, running costs of motor vehicles used by a business, the cost of stock sold, wages paid to employees, superannuation and so on.
Some of my clients think that loan repayments are costs - no they are not. Loans are amounts that you owe or liabilities. The repayment of loans are reductions in liabilities. Only the interest charged on the loan is an expense.
Payments of GST are not expenses. When you collect the GST, you owe it to the government - it is not part of your earnings (eg if you charge $1100, $1000 is your earnings and $100 is owed to the government). So when you pay GST, you are reducing your liabilities.
When you buy something that is going to bring long term benefits to the business, you are investing in assets. Assets include motor vehicles, buildings, the amount of stock you are holding at the end of a financial period, debtors, cash, office equipment.
Anything that is your private expenses does not go into your profit and loss. If you use business money to pay for private expenses, then you have to call it drawings (assuming that you are a sole trader) and record it, but it does not affect your profit and loss. From the income tax point of view, you and your business are separate entities, so you need to record any dealings between you and the business. So if you put cash or other assets into the business, you record that as CAPITAL contributed, and if you take cash or other assets out, as I said, you record it as DRAWINGS.
You need to speak to your accountant for further help on this. He/she will be able to explain further when purchase is an asset and when it is an expense. There is another discussion on this website about "Does every small business need an accountant". In this case you do.
As to your question about putting money aside - yes, I think it is a very good idea until you build up your business cash flow. You should keep a track of how much GST you owe, and keep that money in an interest earning account. Your accountant can give you a better idea of what % of sales you should keep to pay your income tax and can tell you when you will need to pay your income tax.
Pam Pitt Partner at Bookkeepers 4 u
Feel free to ask some more direct questions, if my answer was too general...
Johnny Li Director at Naive and Young
Thank you so much,
you have answered more than i asked, I have a clear understanding of what my profit and loss will be