You may be running a new business or just starting up. You’ve got your accounts set up but you really don’t know what needs to be done when it comes to tax. When do you need to lodge? What do you need to do? These are all valid questions, especially since you may never have had to think about tax for your business before. So let’s answer some of the questions for the newbies out there.
Do I Need To Pay Tax?
Every Australian and Australian business will need to pay Tax. You might be interested to know that you may need to lodge a tax return for your business even if you haven’t earned any income yet! There’s no threshold for business income, so even if you’ve only earned $1, you’ll need to lodge, however what and how you lodge depends on your business type.
There are four business types:
- Sole trader
Trading as a sole trader is the most common form of business type in Australia. When it comes to tax, you’ll only need to lodge one tax return that will cover both you and your business. All income you earn through your business is considered to be your personal assessable income.
All income, including your salary and wage, dividends, rental income, foreign income, cash and gifts, government payments, pensions, income from the shared economy, some insurance pay outs are considered to be assessable income. Once you start paying tax, you may have to start paying Pay-As-You-Go (PAYG) instalments during the year, but the ATO will notify you if you need to do that.
The deadline to lodge your tax return is the 31 October, although if you use a tax agent you may have until 15 May to lodge. You must be registered with a tax agent to take advantage of the extra time.
You can lodge your tax return through the ATO or with a registered tax agent.
Pro Tax Tip: Make sure you register your business for an Australian Business Number (ABN) before you start trading.
A partnership is similar in style to that of a sole trader, but income will be spread between partners. Tax returns need to be lodged by the 31 October, or if you want extra time, by the 15 May if registered with a tax agent.
The partnership itself doesn’t pay tax in its income. Assessable income and deductions are spread amongst partners. Each partner lodges their own tax return and will pay tax on their share of the income.
A company is regarded as a separate entity and as such has a different tax treatment. There is no tax-free threshold for a company. Tax is paid on every dollar the company earns.
The full company tax rate is 30% instead of the marginal tax rate for individual Australians. Different company tax rates apply to companies that are base rate entities.
The company tax return needs to be lodged every year and must show your company’s income and less deductions, financials and the income tax the company is liable to pay. A director and employee of the company must then lodge their own individual tax return.
Pro Tax Tip: Make sure you protect yourself with insurance no matter what your business type is
Tax is paid by the beneficiaries of the trust or the trustee. Beneficiaries pay tax on their share of the trust’s income. For example, if the beneficiary has a 50% share of the trust’s income, they are assessed on a 50% share of the trust’s net income. This is referred to as the proportionate approach. The tax rate is either the individual marginal tax rate, or a flat rate of 30% for corporate beneficiaries.
Type of Business Taxation
There are different types of taxes that businesses will attract and will depend on numerous factors such as goods and services traded, income earned and the types of goods and services provided. These include:
- Income tax for business
- Capital gains tax (CGT)
- Fringe benefits tax (FBT)
- Pay as you go (PAYG) withholding
- Pay as you go (PAYG) instalments
- Goods and Services Tax (GST)
- Fuel tax credits
- Wine equalisation tax
- Luxury car tax- extern site
- Payroll tax
- Land tax
Pro Tax Tip: When your business earns over $75,000 annually you’ll need to register for and start paying GST. This also means you can claim back GST credits on expenses when you lodge your Business Activity Statement (BAS)
All income regardless of business structure will need to be declared. This includes:
- Employment income – salary and wages, cash, allowances and fringe benefits and super contributions
- Super pensions and annuities – paid as a super income stream or annuities that should be declared as assessable income
- Government payments and allowances – some payments are taxed and some are tax-free. These include grants, pensions, allowances. You’ll need to declare most of these allowance in your tax return
- Investment income – interest, dividends, rental income or capital gains
- Business, partnership and trust income – income earned as a sole trader, partner or through a trust
- Foreign and worldwide income – any income from overseas will need to be declared and tax paid
- Other income – compensations, insurance payouts, discounted ESS shares, prizes and awards
- Crowdfunding – money raised through the support of a project or venture
- Shared economy – income earned through assets or services for a free through a digital platform
- Personal service income – income earned through personal efforts or skills such as a construction worker or medical practitioner
There is some income that you don’t need to pay tax on, however it still might need to be declared with you lodge your tax return. This income includes:
- Certain Government pensions paid by Centrelink
- Certain Government allowances and payment such as carer allowance and the child care subsidy
- Australian defence Force and Federal Police payments and allowances
- Australian Government educational payments
- Some scholarships, bursaries, grants and awards
- Non-assessable, non-exempt income
A business earns an income, and as such spends money to earn that income. Costs incurred during the course of running a business can be claimed as a tax deduction. All tax deductions are subtracted from your overall business income to reduce the amount of tax you’ll be obligated to pay.
To claim a tax deduction:
- You must have spent the money
- The expense must be directly related to earning that income and be the business portion only
- You must have the records to prove your expense
Tax deductions will depend on your business, but there are common costs that most business incur. These are:
- Car and travel – petrol, car hire, leases, parking, maintenance, travel tickets
- Clothing and laundry – clothing that identifies you for your job or profession, out of pocket uniform expenses, cleaning and maintenance, safety gear
- Self-education – course fees, stationery, computer, laptops and consumable
- Tools and equipment – tools of your trade and capital assets
- Working from home – electricity, gas, phone, internet and office furniture
- Other deductions – union fees, cost of managing your tax affairs, income protection insurance, personal super contributions, gifts and donations
- Investment expenses – interest charged on money borrowed, investment property expenses, magazines and subscriptions, money paid for investment advice
Our blogs are a great source for more detailed information. If you’d like more hassle-free advice tailored to your situation, our tax agents will be able to help with any business need. Phone 1800 367 487 and chat with a friendly professional today.