Understanding taxation is crucial to any business owner. Small business owners should know the tax laws to avoid penalties and ensure compliance. Upon business registration, business owners need to understand the tax types to determine the deductions applicable and taxes to register. Of course, knowing the basics of business tax can help business owners complete their tax returns.
In this article, you’ll learn the basics of business tax for small businesses, particularly in Australia.
What Is Business Tax?
Local, state, and federal governments impose taxes to businesses, which are called business tax. Business owners often seek professional help when handling business tax because of its complexity and compliance. The latter is a strict requirement for the Australian Tax Office (ATO), which is equivalent to the United States’ Internal Revenue Service or IRS.
In Australia, the taxes that businesses should comply paying include company or income tax, the Goods and Services Tax or GST, and Capital Gains Tax or CGT. You can make tax payments monthly, quarterly, or yearly.
Importance Of Taxation Assistance
Taxes are crucial in managing your small business finances. If you want to have peace of mind when handling business taxes, you should consider seeking taxation assistance from a professional accountant or accounting firm.
Here are the good reasons why you should hire professional accounting services:
- Up-To-Date Taxes: Working with a professional team can help you ensure your taxes are always up to date. Your business books must be correct and up to date including all invoices, supplier payments, and other payments.
- Accurate Tax Calculation: A dedicated team of experienced accountants calculate your taxes accurately to avoid any penalty.
- Maximised Deductions: Expert accountants know the deductions your small business can file on your tax return. They can help you on how to minimise your business tax so, you can add the money to your business capital.
- Professional Management Of Tax Returns: Professional accountants can help small businesses comply with tax return completion and tax law compliance.
- Expert Tax Consulting: Professional taxation can help business owners know what’s expected from their business to help set their financial goals.
Types Of Business Taxes
The different types of taxes that can apply to small businesses include the following:
1. Income Tax
Sales tax is separate from income tax when operating a small business. Sales tax refers to the charge imposed by local governments or state on products and services purchases. The amount of sales tax is often expressed by percentage of the total cost of merchandise, which depends on the product type and the state.
On the other hand, income tax refers to the amount you pay on the total income from your business to the state and federal government. Small businesses calculate business loss or profit for income tax purposes, and this information is included on the business owners’ personal tax returns.
At the retail level, small businesses apply sales tax at the time of purchase. The government can impose taxes on various small business transactions. The tax rate changes depending on the location of the sales transaction or the registration address of the company that sells the goods.
In Australia, the average company or income tax for base rate entities is 27.5% as of 2019 to 2020. The company tax rate for small business entity is lower at 27.5% than bigger companies with 30% company tax rate. The lower tax rate would apply to your small business if you have an accumulated turnover less than AUD$10 million and you’re operating on a business mostly all throughout the year.
2. Goods and Services Tax
This tax is the national, broad-based tax in Australia, which is known as the consumer tax or tax applied (10%) on goods and services. Most businesses, including small businesses, must register for Goods and Services Tax with the Australian Taxation Office (ATO). Businesses that paid for business supplies with GST can claim an equivalent tax credit. In addition, certain businesses in Australia may be eligible for concessions.
3. Excise Tax
Excise tax is imposed on harmful, unhealthy, or luxury goods and services, such as alcohol, tobacco, vapes, firearms and ammunition, gaming, sports betting, and luxury cars. It’s taxed higher than non-harmful commodities to help decrease their consumption. This type of business tax includes local, state, and federal excise taxes.
In Australia, the main fuel tax is considered an excise tax, added as a Goods and Services Tax, imposed by the federal government. The GST tax in Australia is 10%, which is applied on top of the excise tax for fuel.
Because of the possible ill effects of certain products and services, governments impose excise tax, which is also known as ‘sin tax.’ These products generate billions of dollars in state and federal revenue each year, which are set aside as trust funds or used to promote improvements and positive citizen behaviours.
4. Payroll Taxes
If your small business has employees, then you must collect and pay employment or payroll taxes according to their salary. Small businesses must pay a certain percentage of their employees’ gross payroll. Even if you don’t employ individuals but your small business is incorporated, your own pay checks are also subject to payroll taxes.
Not all businesses in Australia need to pay payroll tax. A business owner only pays when the total Australian salary are more than the tax-free threshold of the territory or state. Tax rates and thresholds differ between territories and states. You need to check the threshold with the territory or state where you have existing employees, which is available in the area’s revenue office website.
5. Capital Gains Taxes
Taxes also apply on the sale or investments of your assets, which are called capital gains taxes, in which you pay as a part of your income tax. You need to keep records when you acquire assets because they may be subject to capital gain tax in the future.
Capital gains taxes or events also apply when you give your asset to someone, when it gets destroyed or lost, when shares are cancelled or redeemed, when you get payment from a company, or when your Australian residency stopped.
Capital gains concessions for a small business may apply, reducing capital gains on assets. A small business owner can apply concessions by meeting certain conditions. Here are the possible capital gains concessions that small businesses in Australia can take advantage of:
- Small Business 15-year Exemption: A small business owner won’t incur capital gain if the business owner is 55 years or older, permanently incapacitated or retiring, or you owned the asset for a minimum of 15 continuous years.
- Asset Reduction: A small business owner can reduce capital gains on active business assets owned for at least the past 12 months by 50%.
- Retirement Exemption: A small business owner can sell an asset to exempt the capital gain. The lifetime limit for selling an asset is AUD$500,000. For business owners below 55 years old, they must pay the exempt amount via compliance with superannuation fund (compulsory placing a percentage of income to a retirement fund) or a retirement savings account.
- Small Business Rollover: Selling active asset can defer a part or all capital gains for two years or even longer if there’s a replacement asset. This rule also applies if you incur expense on improving your existing asset.
6. Property Tax
If you own a land or a building, property taxes apply; the rate differs depending on your state or territory. This is an annual tax paid across all the states and territories except the Northern Territory. Money remitted for land tax are applied towards many community services including parks and libraries.
7. Dividend Tax
Dividends that result from investments made by your small business are also a form of income, which are taxed based on your tax bracket or company’s structure.
Possible Deductions For Small Businesses
You can reduce the amount of taxes you need to pay to the ATO by identifying the possible business expenses that can be deducted to your business taxes. Here’s a quick list of business expense that can be considered as deductible in a small business:
- Business phone bills
- Car expenses
- Office expenses like utilities and rent
- Health insurance premiums
- Home office supplies
- Office supplies such as computers and printers
- Continuing education courses
- Business insurance
- Work-related expenses
- Bank fees
- Professional service fees like accounting and bookkeeping services
Small businesses deal with different types of taxes. If you’re planning to start a small business in Australia, you need to know that the types of taxes you need to pay are more likely similar to US taxes with varying names and rates. It’s crucial to comply with the requirements of the Australian Revenue Office (ATO) to ensure a smooth sailing business operation all year round.
Expert accounting services are important so business owners won’t fall behind in complying with all tax and financial requirements. While consumers pay sales tax when purchasing products or receiving services, small businesses pay income tax, excise tax, employment taxes, capital gains taxes, and other forms of business taxes.