This guide covers some key points on taxation for small businesses.
All Australian businesses are required to lodge a tax return with the Australian Tax Office (ATO) even they have not earned any income. While the tax rules can be complex, you need to keep in step with tax legislation, deadlines, and requirements to avoid penalties. This allows businesses to maintain smooth operations, maximise eligible tax deductions, and improve your business’s financial position.
To maintain tax compliance you need to have an understanding of key tax matters — including how the ATO calculates your assessable income, which taxes apply to your business, and how to file your tax returns as well as pay your tax obligations on time.
In this guide, we’ll cover some key topics that relate to taxation for small business. So read on.
Getting Started – Registering Your Small Business for Tax Purposes
Before you start operating a small business, you’ll need to register an ABN, at this time you can also register a Tax File Number as well as register for GST and a business name.
Tax File Number (TFN) and Its Importance
If you’re going to operate your business as a sole trader, your individual TFN is used for both your business and personal dealings with the ATO. A Tax File Number (TFN) is an identifier provided by the ATO, you’ll need this to file your tax returns. Applying for a TFN via the ATO is simple, all businesses must have a TFN. If you plan on running your business as a partnership, company or trust, you’ll need to get a separate TFN for the business.
Australian Business Number (ABN)
An Australian Business Number (ABN) is a unique 11-digit identifier that facilitates interactions between businesses and the government. It is essential for operating within the GST system, claiming GST credits, avoiding PAYG tax on received payments, confirming business identity for orders and invoices, accessing government online services via myGovID, and obtaining endorsements for gift-deductible recipients or income tax-exempt charities. You can apply for, cancel, or reissue an ABN online through the Australian Business Register or via a registered tax or BAS agent.
Goods and Services Tax (GST)
Businesses with annual turnover exceeding $75,000 must register for Goods and Services Tax (GST). This applies not only if you’ve already crossed that threshold but also if you’re starting a new venture and anticipate reaching it within your first year. Failing to register when required could mean paying GST on past sales, even if you didn’t include it in your pricing.
Registered businesses are also eligible to claim GST credits on purchases related to business operations. Not registering when required can result in ATO penalties, especially if turnover exceeds the threshold.
Pay as You Go (PAYG) Withholding
Pay As You Go Withholding requires businesses to withhold tax on employee wages, company directors’ fees, and certain contractor payments. These withheld amounts must be remitted monthly or quarterly, depending on the business’s reporting schedule.
Types of Taxes for Small Businesses
What are some of the different taxes applicable to small businesses? Here’s an overview of the most common taxes most, if not all, small businesses may need to pay:
1) Income Tax
Small business owners, tradies, and other enterprise owners are required to pay income tax on the taxable income generated from services and product sales. The Australian Taxation Office (ATO) administers these taxes based on the business structure. Sole traders are taxed at individual rates, whereas companies are subject to corporate tax rates. It’s important to accurately report your income and claim eligible deductions to determine your assessable income.
2) Payroll Tax
Payroll tax is a tax imposed by state or territory governments, calculated based on the total wages you pay each month. This tax is collected by the state or territory where your employees are located. Not all businesses are required to pay payroll tax; you only pay if your total wages exceed the tax-free threshold specific to your state or territory. These thresholds and tax rates differ across states and territories. You can learn more about payroll in this guide.
3) Fringe Benefits Tax (FBT)
Fringe Benefits Tax (FBT) is a tax that employers pay on specific benefits provided to their employees, as well as to their employees’ family members or other associates. FBT is distinct from income tax and is calculated based on the taxable value of the fringe benefits. As an employer, you are responsible for self-assessing your FBT liability for the FBT year, which runs from April 1 to March 31. If you have an FBT liability, you must submit an FBT return and pay any tax owed.
4) Capital Gains Tax (CGT)
You may be liable for Capital Gains Tax (CGT) on profits made from the disposal of assets such as property, stocks, or even a business. If you are selling a business, eligible businesses may access small business concessions based on their aggregated turnover. These concessions apply to sole traders, partnerships, companies, and trusts, but the specific business structure can influence their application. Given the complexity of small business concessions in tax legislation, it is crucial to seek professional advice.
Are There Tax Deductions for Small Businesses?
Yes, small businesses can avail of tax deductions that will lower your small business’s tax obligation. Here are common deductions:
- Operating Expenses
- Depreciation
- Home Office Deductions
- Motor Vehicle Expenses
- Occupancy Expenses
- Business-related Supplies
- Travel Expenses
For a more comprehensive list of small business tax deductions, check out this article next.
How to Lodge and Pay Taxes
How do you lodge and pay taxes? Here’s what you need to know.
Business Activity Statements (BAS)
Lodging and paying starts with preparing your Business Activity Statements (BAS). These are reports that help businesses stay compliant by reporting GST, PAYG, and other tax obligations. BAS needs to be lodged monthly for businesses with a GST turnover above $20 million or quarterly (and in some cases annually) for those below this threshold.
BAS submissions may include the following tax obligations depending on the nature of your business.
- Goods and services tax (GST)
- Pay as you go (PAYG) income tax instalment
- Pay as you go (PAYG) tax withheld
- Fringe benefits tax (FBT) instalment
- Luxury car tax (LCT)
- Wine equalisation tax (WET)
- Fuel tax credits
Failing to lodge BAS on time may result in Failure to Lodge (FTL) Penalties and interest charges. These charges vary based on business size and delay length. Hence, you need to submit on time to avoid penalties and ensure your business maintains steady cash flow.
Using a Tax Agent vs. Do-it-yourself Tax Return
Choosing an accountant or tax agent to assist you with your tax compliance obligations is a great decision for small businesses. However, it’s important to know the benefits to determine if hiring one aligns with your business needs. Here are some you should keep in mind.
Benefits of Hiring a Tax Agent
- Expert Knowledge and Compliance – Tax agents have up-to-date expertise on the tax laws administered by the Australian Taxation Office (ATO), which can be valuable in ensuring your business meets all tax obligations and avoids any penalties for missed deadlines.
- Hit deadlines without the pressure – Looming deadlines can create significant stress for business owners. Partnering with an accounting and tax professional can help ease this pressure, as they can assist in completing all necessary obligations on time.
- Time Savings – Managing taxes in-house can be time-consuming, especially if you’re a small business owner wearing multiple hates with your business (which is normally the case for most small businesses). A tax agent takes the time needed for reporting, lodgements, and compliance tasks.
- Maximising Deductions and Credits – Tax agents are trained to identify tax deductions and credits that a business may overlook, potentially saving you more money than you’d spend on their services.
- Assistance with Complex Situations – Many businesses have multiple employees, complicated payroll systems, and significant assets to manage. A tax agent’s expertise can simplify handling GST, PAYG withholding, and capital gains tax obligations.
Thinking of Doing It Yourself?
These are a few tips if you plan to file and pay taxes yourself.
- Choose the Right Software – Look for platforms that meet your business’s needs, like tracking GST, handling PAYG withholding, and preparing BAS. Programs like Xero, MYOB, or QuickBooks offer STP integration and automated BAS reports.
- Automate Record-Keeping – Many software options allow automated bank feeds, categorising transactions and expenses to make record-keeping consistent and accurate. This helps ensure all tax-deductible expenses are correctly recorded and simplifies quarterly or monthly BAS preparation.
- Stay on Top of BAS Deadlines – Set reminders in your software to notify you of BAS and PAYG due dates, helping to avoid penalties. Most platforms also have a lodgement feature for submitting BAS directly to the Australian Taxation Office (ATO).
- Generate Regular Reports – Monthly or quarterly reports on revenue, expenses, and tax obligations can keep you updated and ready for each BAS period. These reports also offer insights into cash flow, aiding in planning for tax payments and reducing year-end surprises.
- Consult Support Resources – Accounting software usually offers tutorials, customer support, and help sections on tax-related functions, which can clarify usage and troubleshoot common issues.
Effectively using the right accounting software with these tips can help small business owners manage tax obligations confidently and remain compliant with ATO requirements.
Planning for Tax Payments
Setting aside tax funds throughout the year can help prevent a cash flow crises. Many financial commentators recommend creating a dedicated tax account to help reduce financial stress when tax bills are due. Good cash flow management supports tax obligations, as regular tracking helps avoid unexpected tax bills.
Record-Keeping for Tax Purposes
Maintaining accurate records is essential for compliance and helps streamline tax reporting. Key documents to keep include income and expense records, Business Activity Statements (BAS) and payroll data, as well as invoices and receipts related to business operations.
Following ATO guidelines, most business records must be retained for at least five years from the date of lodgement, which is crucial for verifying transactions and ensuring compliance in the event of an audit. Comprehensive record-keeping also assists when claiming deductions and effectively tracking financial performance.
Some digital record-keeping tools you should check out include:
3 Common Tax Mistakes Small Businesses Should Avoid
When handling taxes, these are the mistakes you should try to avoid:
1) Not Registering for GST on Time
One common mistake is failing to register for GST on time, especially for businesses reaching the $75,000 threshold.
2) Incorrectly Claiming Deductions
Over-claiming or making invalid tax deductions can trigger audits that can cost you time and money. So accuracy should be a top priority. That includes correctly categorising expenses in your accounting software, ensuring you keep records for any deductions you wish to claim.
3) Failure to Set Aside Funds for Taxes
Poor planning can strain cash flow, especially around tax season. We highly recommend that you set aside funds regularly to prevent tax bill surprises. Your accountant can assist with forecasting tax debts and obligations before they fall due.
Additional Resources for Small Business Taxation
Navigating the complexities of small business taxation can be challenging. However, a range of online resources provided by the ATO and other government agencies, as well as the help of professional advisors can ensure you manage your tax obligations more effectively and avoid costly errors.
Government Tools and Support Services
Various government agencies provide a multitude of resources to help small business owners stay informed and compliant with tax regulations. Here are some valuable tools:
- Australian Taxation Office (ATO) Website: The ATO’s official website (www.ato.gov.au) offers comprehensive information on tax obligations for small businesses, covering topics like income tax, PAYG, GST, and deductions. It also includes guides on how to lodge business activity statements and manage payroll through single-touch payroll (STP)-enabled software.
- Tax Calculators: The ATO provides calculators to estimate liabilities and entitlements, including GST credits and PAYG withholding. These tools help small businesses plan for their obligations and manage cash flow accordingly.
- Small Business Support Programs: Various government initiatives provide free or subsidised support for small businesses. For example, the Small Business Advisory Services (SBAS) and Business.gov.au offer grants, financial planning assistance, and educational programs. These services aim to support business owners and to help them understand tax obligations and available tax concessions such as the instant asset write-off for eligible purchases.
Final Thoughts
Navigating taxation for small businesses doesn’t have to be overwhelming. You can focus on the key actions and leverage the available resources shared above. Following these practices can help simplify your business tax obligations, avoid costly tax consequences, and ensure your business is prepared when the end each month, quarter or financial year comes around.
If you want to file and pay tax returns without all the added work and hassle, you should highly consider working with a trained tax professional. As a business owner, your top priority should be growing your business. The intricacies of tax obligations could rob you of the time and headspace you need to do that to your full potential.
If you’re looking for a reliable tax agent to help you with your obligations, we’re more than happy to help. Talk to us today and we’ll provide you with a free initial meeting to discuss your tax obligaitons to see how you can simplify your tax returns, optimise tax payments, and maximise deductions.
