Looking to set up your own small business? With so much to plan and coordinate to get your business off the ground, tax could be one of the last things on your mind. While it may not be at the top of your to-do list, understanding your tax obligations is a great way to set yourself up on the right foot for a successful small business and fewer tax-time surprises. Learn more about taxes for small business, some of the different types of business taxes in Australia, tax deductions and more in our handy guide.
What taxes does a small business pay?
Businesses of all sizes, including small businesses, are required to pay tax in Australia. On the most part, the taxes paid by small businesses are quite similar to those paid by larger companies, but there are some variations in tax rates, tax-free thresholds and other features.
What are some taxes a small business should be aware of?
In Australia, there are many different types of taxes that apply to small businesses. Some of the most common include company tax, the Goods and Services Tax, payroll tax and Pay As You Go withholding. Learn more about what each type of tax involves below:
Company Tax
Companies residing in Australia, as well as international companies generating an income in Australia, are required to pay company tax. Company tax rates vary depending on the type of business and annual turnover, but the full company tax rate is 30%. This rate can vary from financial year to financial year, so it’s best to consult the Australian Tax Office (ATO) website for the latest information. Depending on your business’s revenue, a lower tax rate may apply to your business, which can also vary between financial years.Goods and Services Tax (GST)
In Australia, GST is a form of tax that applies to most goods and services sold. It is a flat-rate tax of 10% and it is the business’s responsibility to collect GST from its customers. The GST collected is then passed on to the ATO when business activity statements are submitted. If your business has a turnover of $75,000 or more, or you would like to claim GST credits, you will need to register for GST.Payroll Tax
Payroll tax is a form of self-assessed tax that is calculated based on the total wages that a business pays every month. As well as standard wages, it generally also includes superannuation contributions and fringe benefits that have been made available to staff. This tax may be paid monthly, quarterly or annually, and, unlike other forms of tax in Australia, the thresholds and rates of payroll tax do vary from state to state. The State or Territory where your employees live will collect this tax.Pay As You Go (PAYG)
Although this isn’t a tax on the business itself, it’s an important requirement to be aware of if you have employees. If your small business pays employees and contractors or is required to make payments to a company that does not supply an ABN, you must collect Pay As You Go (PAYG) withholding. The amount that you collect must be sent to the ATO at regular intervals, helping to ensure that your employees and other payees can meet all applicable tax liabilities when it’s time for them to lodge their tax returns. If you are required to collect PAYG withholding, your business must register to do so.How do you file small business tax?
There are two main ways that a small business may choose to pay tax: on its own or through an accountant or tax agent. The way that you choose to manage your small business tax affairs depends on the size and type of business that you operate and your knowledge of tax rules and regulations.
Paying taxes yourself
If you are a sole trader or simply don’t have many deductions or offsets to claim, you might choose to pay your taxes yourself. Most modern accounting software is quite easy to use, helping you to manage your tax obligations, but it’s important to stay up to date with the latest tax information and tax-free thresholds to ensure you’re paying all the right rates. When tax time rolls around, you can submit your tax return online.Having an accountant or tax agent manage your taxes
Although consulting with an accountant or tax agent will be more expensive than managing your taxes on your own, there are some benefits in having someone else manage your finances. Not only will they have a more comprehensive knowledge of how the tax system works, but they will also be able to help you manage any deductions and offsets that may apply to your business. In some cases, they may also be able to identify deductions that you may have missed or additional offsets that may be relevant.How do tax deductions work?
For your business to operate and attract an income, there will likely be several different costs involved, from the cost of marketing your business to the equipment used to produce goods and services. In most cases, you can claim some of these expenses as tax deductions. You can claim tax deductions when filing your tax return, with any appropriate deductions helping to reduce your total assessable income.
A wide range of expenses can generally be claimed as tax deductions, with some of the most common including:
- Business travel, including airfares, accommodation, taxi fares and more
- Business vehicles and their running costs, including petrol, repairs and maintenance, registration fees and more
- Home-based business expenses such as electricity, phone bills and relevant occupancy expenses
- Advertising and sponsorship costs
- Some business-related insurance premiums
- Education and professional qualification expenses
- The costs of lodging your tax returns and business activity statements
- Fringe benefits provided to employees
It’s important to remember, however, that any deductions that you do choose to make must:
- Relate to the activities performed by your business
- Be solely for business use, or, if they have also been used for personal purposes, only an appropriate portion is claimed
- Be substantiated using records such as receipts
It can be useful to have records of your deductible work expenses, such as receipts and bills, on hand when you’re working on your tax return, but you shouldn’t part with them once your tax return has been filed. You need to hold on to your records for a minimum of five years in case your business is audited by the ATO. You’ll need to justify any deductions you’ve claimed, and having your records handy will help to eliminate some of the guesswork.
Can your small business avoid paying taxes?
If you operate a small business in Australia, you will need to pay taxes. Although paying taxes is unavoidable, you may be able to reduce your total tax liability with relevant tax deductions (expenses that relate directly to your work). You must be able to prove that the expenses were directly related to the activities performed to earn your income and you must have spent the money yourself.
How do you calculate the small business income tax offset?
If you are currently operating as a sole trader with an aggregated turnover of less than $5 million, you may be eligible for the Australian Government’s small business income tax offset. This offset is calculated based on your income tax return and the proportion of tax payable that relates to your net small business income.
To calculate your small business income tax offset, you’ll first need to divide your total net small business income for the financial year by your taxable income. Once you have calculated this number, multiply it by your basic income tax liability for the financial year.
To receive this tax relief for small businesses, there are no applications involved. The ATO will use the information submitted in your tax return to assess your eligibility. The maximum offset that you may receive is $1,000.
How much will your small business have to pay in tax?
As every small business is different, it can be difficult to know how much tax you will need to pay. Your income, the tax deductions that you claim, the size of your workforce, your eligibility for different tax offsets and a range of other factors can all influence the amount of tax that you owe. From time to time, additional small business tax concessions and offsets may also be introduced or repealed, impacting how much tax your business will need to pay.
If you would like a rough idea of how much you will need to pay, some small business accounting software, a variety of online tax calculators developed by the ATO, and your accountant or tax agent can all help you understand your tax obligations and provide an idea of how much your small business will owe.
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