You’re either thinking about being your own boss or you’ve recently started your own business. That’s a massive step towards meeting your goals.
Way to go!
There are some key things to understand before you start or when you’ve just started your own business when it comes to tax, employing staff or contractors and being properly registered within the Australian system.
Is Your Business Really A Business?
The Australian Taxation Office will ask this question, even if the answer is one hundred precent yes. There are differences between opening a business and running a hobby though. To run a business, you’ll have to engage in regular and repeated activities (selling goods or providing services) with the aim to make a profit. If you think earning an income is only cash, you’d better think again. Bartering is considered legal tender in Australia and should be converted into Australian dollars when you declare your earnings.
You’re not regarded as being in business if the transaction is once-off, is done by an employee, is a hobby where you don’t seek to make a profit or is an investment such as passively holding shares.
Pro Tax Tip: You may still need to declare income even if you do run a hobby. This is income from rent or providing services, the marketing value in Australian dollars of the barter you’ve engaged in and dividends from your shares.
The most common business type for new businesses is being a sole trader. Opening a sole trader business is the cheapest and easiest form of business structure. Other business structures are companies, trusts and partnerships. Each operate slightly differently and have different tax and reporting obligations.
Sole trader – As a business owner, you operate and run your own business. You’re legally responsible for all aspects of the business, including debts and losses you may incur.
As a sole trader, you use your own Tax File Number (TFN) when lodging your income tax return. You’ll still need to register an Australian Business Number (ABN) which you’ll need to use for all business activities. If your business earns over $75,000 per annum, you’ll need to register to collect the Goods and Services Tax (GST) and lodge your Business Activity Statement (BAS).
The tax you’ll be obligated to pay will be from your own income (the income you generate from your business and other sources) and it is based on your individual tax rate. You can claim a deduction for personal super contributions you make (after you notify the fund) and you can also hire workers as long as you meet employer and super obligations.
Pro Tax Tip: A sole trader can claim tax deductions for salary, wages and allowances paid to workers when you lodge your annual tax return.
Partnership – similar to a sole trader, a partnership divides the business income, tax, gains and losses between partners.
It’s important to have a written agreement before opening a partnership because although it may seem like nothing may happen when you first start, disagreements do occur over time. Your agreement should state how business income and losses are to be shared and how the business is to be managed.
Pro Tax Tip: Without a written agreement, business gains and losses are spread equally between partners.
Each partner must have their own TFN and must lodge their own annual tax return with their share of business gains, losses and tax deductions. The Partnership must have its’ own ABN for business activities and is also required to lodge a tax return however it will not pay income tax itself. The individual partners pay on their share. If the business earns over the GST threshold it should apply for and pay GST in BAS returns.
Company – a company is a separate legal entity with its own tax and super obligations. It’s run by directors and owned by shareholders.
A company owns its assets and earns its own income. Profits are typically divided between shareholders through dividends. Directors are usually paid salaries or wages.
Pro Tax Tip: A franking credit may be applied to dividends which allow shareholders to receive a tax credit for tax already paid by the company on its profits.
A company should have its own TFN and ABN. It must register for and pay GST when relevant, and be required to lodge a BAS and PAYG if it has employee obligations. The company owns the money it earns and must lodge its own tax return and pay its own tax, which is calculated at the company tax rate.
Pro Tax Tip: From the 2021–22 income year, companies that are base rate entities must apply the 25% company tax rate. The rate was previously 27.5% from the 2017–18 to 2019–20 income years and 26% in the 2020–21 income year.
Trust- A beneficiary manages the trust on behalf of beneficiaries.
A trust has its own TFN and must lodge its own annual trust tax return, which includes a statement of how the income was distributed between beneficiaries. A trust should have its own ABN and register for GST if its turnover will exceed the GST threshold. Generally, the beneficiaries will be responsible for paying tax on the trust net income distributed to them. There are different types of trusts to cover different situations.
Registrations and Insurances
Businesses of every business type will need to register themselves to trade. Firstly, you’ll need an ABN. This means:
- You’re registered to provide goods and services to customers
- You’re entitled to source your own customers through marketing efforts
- You can quote and invoice
- Have a separate bank account and your own business insurance such as public liability and WorkCover
- Lodge and report all business income
- You’ll need an ABN to register for GST and lodge your BAS
- You meet other federal, state and territory regulatory obligations such as payroll tax, worker’s compensation, and operating licences.
It’s best to protect yourself with the right insurance. Nothing in life is permanent, and life can change in the blink of an eye. Businesses face litigation from various sources. It’s a good idea to work out which insurances you’ll need in your industry so you’re covered.
Pro Tax Tip: Sole traders are particularly vulnerable when it comes to litigation. Insurance is a must to ensure you don’t lose everything because you’re personally liable for your business.
There are compulsory forms of insurance required by law if you employ staff, which includes Workers’ compensation, third party injury insurance if you own a motor car and public liability insurance that covers you for third party death or injury.
Pro Tax Tip: Sole traders can’t cover themselves as an employee with workers compensation insurance. Consider your own personal death, illness and disability insurance.
Other insurances cover you for personal or loss of income, stock, products and asset protection, accident and liability insurance, product liability insurance, professional indemnity insurance, public liability insurance, technology and cybercrime insurance.
ITP Tax Accountants are here to help. With over 50 years in the industry, there’s not a lot they don’t know about new and mature businesses. They can help with tax savings and planning, setting new business up, bookkeeping and other accounting needs to keep you on track. Phone 1800 367 487 and chat with a friendly professional today to discuss your unique needs.