Tax basics for small businesses
Depending on your business structure, you will have certain responsibilities that you must consider, however everyone must account for income tax.
Income tax is levied on the taxable income of a business or individual. Taxable income is calculated by taking the assessable income and subtracting any allowable deductions.
This is the total income earned by your business, less any GST. For individuals, assessable income includes any income earned from the business and any other source, such as other employment.
These are defined as deductions for certain expenses incurred in the normal running of the business, not including GST paid. Businesses with motor vehicles, those that use diesel fuel and home-based businesses can all claim specific deductions to reduce their tax liability.
Income tax is self-assessed and any information provided to the tax office will be accepted as true. However, you may be asked to prove your claims at any time, so keep all records for five years.
Sole Traders and Partnerships both record income tax on an individual basis and, as such, the business itself does not pay tax on its income. Companies are treated as a distinct legal entity and consequently are required to file their own separate income tax return.
Pay as you go (PAYG) instalments are a way for taxpayers to regularly contribute to their expected tax liability for the current financial year. This can assist in minimising any amount due at the end of the financial year.
GST and related taxes
GST (goods and services tax) applies to the sale of most goods and services in Australia. If your business has an annual turnover of $75,000 or more ($150,000 for non-profit organisations) you must be registered for GST. Businesses providing taxi travel must be registered regardless of the annual turnover.
If you are registered for GST, credits can generally be claimed for any GST you pay on purchases made for the business.
GST brings its own obligations to business owners, including correct invoicing of goods and services sold and regular reporting to the tax office. Small businesses will generally report quarterly by completing a Business Activity Statement (BAS) and forwarding it with their payment to the ATO.
If your business is registered for GST and you make taxable sales of greater than $50, you must provide an invoice to your customer on request. To claim a credit on your activity statement you must have a tax invoice for the purchase made. If the purchase is less then $50, you do not need a tax invoice, however you will need other supporting documentation such as a receipt.
Employees and other workers
The status of the workers in your business determines what tax obligations you may have towards them. The first question you must answer is whether your worker is an employee or a contractor.
If you have employees you are legally required to withhold amounts from their pay and send it to the tax office each time you submit your activity statement. The amount withheld depends upon how much your employee is paid and their personal circumstances.
You will also be required to provide your employee with an annual payment summary, sometimes called a group certificate, detailing how much tax has been withheld from their pay during the previous financial year.
Contractors can either provide for their own tax liability or enter into an optional agreement with the business owner to have instalments withheld from any invoiced amount. This is then submitted to the tax office as usual.
All employers must provide for at least 9% superannuation to be paid to employees. Most employees are covered however there are some exceptions.
Superannuation must be paid by the cut off date each quarter otherwise you will be liable for additional fees and charges levied by the tax office. By making sufficient contributions by the due date, those contributions are generally deductible.
Fringe benefits tax
If you provide benefits to your employees in place of, or in addition to, their salary you may have to pay fringe benefits tax. Benefits which attract FBT include:
- company cars used for private use;
- employer-funded health insurance;
- employer-funded entertainment; or
- cheap loans.
Tax paid for an FBT year (1 April – 31 March) must be reported on an employee’s group certificate for the corresponding financial year (1 July – 30 June).
For more information regarding record keeping, reporting and any other taxation issues contact the Australian Taxation Office on 13 28 66 or visit their website at www.ato.gov.au.