Tax

Tax

Tax can seem complicated and overwhelming, especially for startups. As a business owner, it’s important to have a good understanding of your tax obligations and how to handle them.

We’ve broken down the key information to get a better grasp of how to manage your taxes and to minimise any unwanted fees when it comes to tax returns.

Let’s get into it.

What are the different business structures in Australia?

There are four types of business structures in Australia:

1. Sole trader
2. Partnership
3. Company 
4. Trust

Businesses are classified differently for tax purposes, as we explain below.

How is a sole trader taxed?

A sole trader files their tax as part of their personal income tax return. You control the income and expenditure in your business and you are legally liable for all aspects of your business.

How much tax does a sole trader pay?

The amount of tax you need to pay will depend on how much taxable income you take home. The individual tax-free threshold of $18,200 also applies to sole traders.

See the table provided by the ATO below for individual and sole trader tax brackets in the 2020/21 financial year: 

How is a company taxed?

There are many more tax obligations for company business structures with tax on profits, capital gains, goods and services, fringe benefits and payroll. 

The current tax rate for companies is 30% and there is no income tax-free threshold. 

How is a partnership taxed?

A partnership is not classified as a taxable entity. Each partner must lodge a tax return at the end of the financial year and will be taxed on their share of the overall profits. 

What is an eligible small business for tax purposes?

For the purpose of tax, a sole trader, company, partnership or trust is usually defined as a “small business entity” when it has an annual aggregated turnover of less than $10 million.

Aggregated income refers to gross income (excluding GST) that is generated from the business itself and every affiliated business. 

What do small businesses need to know about tax?

When you run a small business, there are some basic concepts you need to understand to ensure you file your tax returns correctly. 

• Tax deadlines
• How to file a tax return
• How to calculate your income tax
• Understanding Goods and Services Tax (GST)
• Completing Business Activity Statements (BAS)
• Making Pay as You Go (PAYG) instalments 

The Australian Taxation Office (ATO) issues penalties for false or incorrect information.

Don’t worry, we'll cover each of the above topics in more detail later on.

What are the main types of tax for sole traders?

There are various types of tax for sole traders and those that apply will depend on your business structure, business activities and income.

Here are the main types of tax you need to understand as a sole trader:

• Income tax: The amount of tax you pay the government based on the earnings you take home from the sale of your products or services (excluding GST), less your business expenses. Sole traders pay the same tax rates as employees in a regular job.
• Goods and services tax (GST): This is a 10% tax applied to most goods and services sold in Australia. If your annual revenue is over $75,000 per year or you provide a taxi service to paying customers, you must register your business for GST.
• Capital gains tax (CGT): This is the tax you pay on capital gains such as selling shares, real estate or capital assets. You need to report on any capital gains or losses in your income tax return. There are some concessions for small businesses (we’ll touch on that later on).
• Fringe benefits tax (FBT): Employers pay this tax on different types of benefits they provide to their employees or their associates as part of their employment. If you pay FBT, you can usually claim a deduction on your income tax.
• Payroll tax: If the total amount of Australian wages you pay is over the tax-free threshold in the state or territory you reside, you need to register to pay payroll tax.
• Land tax: If your business buys or owns property, you will likely need to pay land tax based on the value of the taxable property. This doesn’t usually include your home property.
• Stamp duty: If your business buys a property, you may have to pay tax on certain documents and transactions such as insurance policies and hire purchase agreements. Stamp duty concessions and exemptions vary by state.

What small business tax breaks are available?

Small businesses are the bread and butter of the Australian economy. In fact, small businesses account for 34% of the gross domestic profit (ASBFEO, 2019).

For this reason, the Australian government gives a range of tax breaks and incentives on a various tax matters.

Here are some of the main tax benefits:

• Instant asset write-off: Businesses can buy important capital assets needed to build and grow a business while reducing taxable profits. Instant asset write-off includes things such as business vehicles, equipment and machinery, software and electronic devices.
• GST: Small businesses can claim concessions on accounting for GST on a cash basis, annual division of input tax credits and GST instalment payments.
• Prepaid expenses: Small businesses can get immediate tax relief on a variety of prepaid business expenses that occur before the end of the financial year.
• Income tax concessions: There is an income tax offset for small businesses with a turnover of less than $5 million and other income tax concessions for businesses with a turnover of less than $10 million.
• Fringe benefits tax (FBT) concession: Small businesses can usually claim an income tax deduction for paying their employee fringe benefits.
• Discount on capital gains tax (CGT): There are four CGT concessions available for small businesses - the 15 year exemption, 50% asset reduction, returnment exemption and rollover.
• Professional expenses for startups: There are a range of deductible startup expenses small business entities can claim such as legal and accounting advice and government fees, taxes or charges.

You can see other business concessions in this table provided by the ATO.

You can find the most up to date information relating to all Australian tax matters on the ATO’s website.

What are sole trader tax deductions?

Expenses are a key part of running a business, and in order to make money, you need to spend it. 

The ATO recognises a wide range of expenses that small businesses can take advantage of to lessen your tax bill.

Here are some of the tax deductions you may be eligible to claim:

• Insurance
• Maintenance and repair work
• Working from home expenses
• Business travel
• Car expenses
• Advertising
• Borrowed money
• Fringe benefits
• Accounting expenses
• Superannuation contributions

The above list is far from exhaustive, so be sure to check out the full range of small business and sole trader tax allowances to maximise your tax return.

How do I estimate my income as a sole trader?

The ATO has a great income tax offset calculator to work out the ‘net small business’ amount you need to input on your tax return.

The income tax offset can lower the tax bill on your small business income by up to $1,000.

What are some small business tax tips? 

Here are some top tips to help you with your taxes:

• Keep records and create regular backups of important files 
• Consider professional tax accountant services
• Understand and apply the relevant tax concessions to reduce costs where possible 
• Write off bad debts if possible
• Plan ahead and don't leave things to the last minute 

What records do I need to keep for tax purposes?

The tax law stipulates that business owners must keep financial records for the previous five years. 

Make sure you store and backup the following records:

• Bank statements
• Invoices
• Sales receipts
• Employee documents, e.g. payslips, contracts and tax declarations
• Asset purchases
• Debtor and creditor records
• Vehicle records
• Credit card statements

Good record keeping is extremely important as it covers your tracks and details your cashflow. These records will be your evidence in case you are audited by the ATO.

How do I lodge a tax return?

Just like individual income tax, every business must lodge a tax return each year. 

There is also the option to use pay as you go (PAYG) instalments which can help you maintain a steady cashflow and prevents having to pay a large tax bill.

Sole traders need to lodge an individual tax return with an additional business schedule.

Small businesses that are registered for GST are also required to complete business activity statements (BAS). If you are registered for GST, the ATO will automatically send you a BAS form every quarter when it’s time to lodge.

How do I pay my taxes?

During your first year in business, you can prepare for your first tax return by setting aside money each month or voluntarily entering into PAYG instalments

The ATO accepts various ways to pay your tax bill, including:

• BPAY or credit/debit card
• Electronic transfer
• In person at an Australian Post office
• Transfer from an overseas bank account
• Mail (cheques/payment slip)

How do I do tax as a sole trader?

You are solely responsible for your own taxes as a sole trader. 

For this reason, you must ensure that:

• You submit a tax return every financial year and report all of your individual and business income/expenses 
• You provide your ABN for all business matters, e.g. invoicing
• You register for GST if it applies to you 
• You set aside a sufficient amount of money to pay your income tax bill or pay quarterly PAYG instalments 

Businesses typically rely on the advice and services of both bookkeepers and accountants to ensure that they are meeting their taxation and reporting obligations. 

In larger organisations, tax demands can be time consuming and they may require a full-time accountant. 

Learn more about hiring a tax accountant and how their services can help you prepare and manage your taxes more effectively.