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Tax essentials for small businesses

Tax essentials for small businesses

Whether you are just starting out, or have been running a small business for years, it’s essential to know details about your taxation requirements.

The taxes you must register for depend on the type of business you’re operating. Some apply to all business and others might be compulsory depending on the size, type and turnover of the business. Some are optional, but might make tax time more manageable.

Find out how to register your business for tax, what records you need to keep, deductions you might be able to consider, goods and services tax, business activity statements and your tax obligations to staff.

What you need to register your business for tax

Tax File Number (TFN)

  • Sole traders can use their individual TFN
  • Partnerships, Companies and Trusts require a separate TFN

Australian Business Number (ABN)

  • Used for various tax and other business purposes
  • Required when invoicing business. If you don’t provide an ABN tax is withheld at the top marginal tax rate from any payments

Goods and Services Tax (GST) registration

  • Compulsory if your current or projected turnover is $75,000 a year of more
  • You provide taxi travel for passengers in exchange for a fare as part of your business, regardless of your GST turnover

Pay as you go (PAYG) withholding

  • Required if you have employees
  • Required if you have other works, such as contractors, and you enter into voluntary agreements to withhold amount from your payments to them
  • Required if you make payments to businesses that don’t quote their ABN

Fringe benefits tax (FBT)

  • Is payable by employers for benefits paid to an employee (or an employee's associate e.g. a family member) in place of salary or wages
  • Only required if you provide fringe benefits to your employees

Payroll Tax

  • You are only liable for payroll tax if your total Australian wages exceed the tax-free threshold that applies in your state or territory - tax-free thresholds vary between states and territories.

For more detailed information, you can see the latest updates from the Australian Taxation Office (ATO) business taxation website.

Keeping records

Under taxation law, you must keep written evidence for five years from the date you  lodge your tax return.

Some of the documents you should keep include:

  • Payments you have received
  • Expenses related to payments you have received
  • Asset purchase records  - such as shares or an investment property
  • Details of any gifts, donations or contributions that may be tax deductible
  • Employee and contractor records, such as payments, super, copies of TFN declarations and any contracts

For a detailed list of the types of records you are required to keep please refer to https://www.ato.gov.au/Individuals/Income-and-deductions/In-detail/Keeping-your-tax-records/

Deductions

  • You can claim for most expenses incurred in carrying on a business
  • You must have spent or committed to spend the money
  • The expense must be clearly related to your business

A number of expenses you can’t claim for include:

  • Private and domestic expenses
  • Most capital expenses, which are incurred when expanding, replacing or improving a business
  • Most expenses incurred before starting the business
  • If you are planning significant expenditure, consult your tax adviser before committing to the expenditure to understand any tax implications

Tax concessions for small business

  • Available for small businesses with an aggregated turnover of less than $10m
  • Simplified depreciation rules, including an immediate write-off of depreciating assets costing $20,000 or less
  • Immediate deductions for prepaid expenses if the service you are paying for will be completed within a 12-month period ending in the next financial year
  • Simplified trading stock and record keeping rules 
  • Capital gains tax (CGT) concessions on assets used to conduct business for eligible businesses
  • Exemption from fringe benefits tax (FBT) for employee parking, subject to eligibility rules
  • PAYG instalment concession 
  • Eligible to claim the Small Business Income Tax Offset

Please refer to www.ato.gov.au for further details

GST and BAS

  • If your business is registered for GST, you must collect it on every taxable sale you make and pay it to the ATO
  • When you purchase supplies for your business, you can generally claim back the GST that has been included in the purchase price
  • At the end of each Business Activity Statement (BAS) period, send the GST you’ve collected, minus any GST credits, to the ATO
  • Use the BAS to account for your GST, PAYG instalments, withholding, and FBT instalments
  • For small business entities GST reporting and payment will be on a quarterly or annual basis, depending on GST turnover

Tax obligations in relation to staff

You can use the ATO’s employee/contractor decision tool to work out if your worker is an employee or contractor for tax and superannuation purposes.

Getting help

Tax can be complicated, so consider talking to your accountant or a professional tax adviser.

This article is intended to provide general information of an educational nature only. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product advice. Taxation considerations are general and based on present taxation laws and may be subject to change. You should seek independent, professional tax advice before making any decision based on this information. Commonwealth Bank is also not a registered tax (financial) adviser under the Tax Agent Services Act 2009 and you should seek tax advice from a registered tax agent or a registered tax (financial) adviser if you intend to rely on this information to satisfy the liabilities or obligations or claim entitlements that arise, or could arise, under a taxation law.