When you run your own business, you don’t have to answer to anyone except
the tax man. Here’s some essential information to help keep you out of
trouble.
As a small business owner, your tax obligations are extensive and potentially
complex. The Australian Taxation Office (ATO) has worked to help support
business owners by giving them information they need in straightforward
language. You’ll find small business guides on the ATO website.
Your obligations will depend on your business and circumstances, so it pays
to get professional advice. Here’s a summary of some of the issues you’ll need
to deal with.
In addition to the information your tax advisors give you, the Australian
Taxation Office provides a number of useful resources on each of the above
areas and more. Many of these resources are available from the ATO
website at www.ato.gov.au.
Registering your
business for tax
The tax registrations you’re most likely to need are:
-
A tax file number (TFN). For sole traders, this will be your
personal TFN. For partnerships, companies and trusts, you’ll need a separate
TFN.
-
An Australian business number (ABN). An ABN makes it easier to
register for GST and PAYG withholding. Put your ABN on your business
stationery, especially invoices. If you don’t provide an ABN to businesses that
you are billing, they will withhold 46.5% of any payments they make to
you.
-
Goods and services tax (GST). You must register for GST if your
current or projected turnover is $75,000 a year or more, you provide taxi
travel or want to claim fuel tax credits. If turnover is below this amount you
can choose whether to register but keep a close eye on turnover — once it
reaches $75,000 or more, you have only 21 days to register.
-
Pay as you go (PAYG) withholding. If your business pays salary or
wages, makes payments to contractors or directors, or withholds 46.5% from
suppliers who do not provide an ABN, you need to register for PAYG withholding.
Money you draw as a sole trader or partner is not a wage, so in that case you
don’t need to register unless the other reasons apply.
You may also need to register for fringe benefits tax (if you provide fringe
benefits to employees) or fuel tax credits (if you use eligible fuel in your
business).
(Top of page)
Keeping records
Good record keeping is required by tax law. You generally need to keep most
records for five years after the date you last relied upon the record, for
instance, if a document was created in 2003 that was used in the 2009 tax
return you will need to keep that document for 5 years after the 2009 tax
return is lodged, including:
- Income and sales records.
- Expense or purchase records.
- Bank records.
- Asset purchase records.
- Contracts and agreements.
- Year-end records.
- Minor deductible expenses — if you can’t get receipts for all of these,
keep a diary or logbook.
- GST records, plus a record of any suppliers who have not quoted their
ABN.
- Employee and contractor records, such as payments, super, copies of TFN
declarations and any contracts.
- Vehicle records.
- Stocktake records.
- Fuel tax credit records (for claims of over $300) to show that you bought
the fuel, used it in your business and applied the correct rate to calculate
your claim amount.
Deductions
You can claim a tax deduction for expenses incurred in carrying on a
business, but you must have spent or committed to spend the money, and the
expense must be clearly related to your business. What you can claim depends on
your business so talk to your tax adviser.
It’s important to know what you can’t claim, including:
- Private and domestic expenses.
- Most capital expenses - expenses you incur when expanding, replacing or
improving your business.
- Most expenses incurred before you started the business.
- A GST deduction if you can claim GST credits - claim these on your activity
statement.
- The super guarantee charge - the amount you pay if you don’t contribute the
right amount of super for employees or if your contribution is late.
Where you have incurred expenditure in or on your business but are uncertain
as to its treatment for tax, you should retain as much detail in respect of the
expenditure as you can and discuss the implications with your tax
advisor. If you are planning significant expenditure you may want to
consult your tax advisor before committing to the expenditure to understand the
tax implications.
(Top of page)
Tax
concessions for small business
There are tax concessions for small businesses with an aggregated turnover
of less than $2 million. These include::
-
A 25% entrepreneur’s tax offset for business owners with a total
turnover of $75,000 or less.
-
Simplified depreciation rules, including an immediate write-off of
depreciating assets costing $1000 or less.
-
Immediate deductions for prepaid expenses, where the service you are
paying for will be completed within a 12-month period ending in the next
financial year.
-
Simplified trading stock rules that could remove the need for a
tax-time stock-take if your trading stock has not increased or decreased by
more than $5,000 over the year.
-
Capital gains tax concessions for eligible businesses, including
paying tax on 50% of the capital gains from sales of business assets.
-
Exemption from fringe benefits tax (FBT) for employee parking,
subject to eligibility rules.
-
Pay As You Go (PAYG) instalments based on GDP, Some companies will
be eligible to pay PAYG instalments based on GDP-adjusted notional tax.
GST and activity
statements
If your business is registered for GST, you need to collect it on every
taxable sale you make and pay this to the ATO.
When you purchase supplies for your business, you can generally claim the GST
part of the purchase price as a GST credit. At the end of each period, send the
ATO the GST you’ve collected, minus any GST credits.
You account for your GST on your regular activity statement, which is also
where you report and pay PAYG installments and withholding, fuel tax credits
and fringe benefits tax installments.
Small business entities (those with annual turnover less than $2million) can
elect to lodge GST returns annually and remit GST in quarterly
installments.
(Top of page)
Your staff
Before you can work out the tax obligations involved in managing your staff,
you need to determine whether they are employees or contractors. The answer may
not be as obvious as you think. This ATO checklist can help.
For employees, you need to:
- Register for PAYG withholding before you withhold any amounts.
- Withhold PAYG from amounts you pay to employees, including wages,
commission, hourly rates. The ATO provides tables telling you how much to
withhold.
- Report and pay those withheld amounts when you submit your activity
statement.
- Give annual payment summaries to your employees and the ATO.
For contractors:
- You don’t have to withhold amounts unless the contractor specifically asks
you to.
- To create a voluntary agreement, the contractor must have an ABN and
you must both complete a voluntary agreement form.
- If you don’t withhold tax, the contractor must manage their own tax
liability.
(Top of page)
Getting help
When it comes to tax, there’s nothing like professional advice from someone
who knows you and your business inside out. That’s why a good accountant is the
number one tax essential.
Where to find out more
(Top of page)
