As a business owner, paying the appropriate taxes is simply a part of life if you want to continue trading in Australia - so what do you need to know?
While we are fortunate enough to have access to world class healthcare, quality education and a wide variety of community facilities here in the Land Down Under, it’s our taxation system that pays for it, and everyone is expected to contribute.
In order to avoid the wrath of the Australian Tax Office, it’s crucial for businesses big and small to first identify their tax obligations, and in turn pay accordingly. Failure to do so could expose yourself, brand or business to hefty fines and even jail time. After all, there’s only two things certain in this life: death and taxes. In fact, when asked about his company's tax-minimisation schemes, the late media mogul Kerry Packer once famously retorted with the following -
"Of course I am minimising my tax. If anybody in this country doesn't minimise their tax, they want their heads read, because as a government - I can tell you you're not spending it that well that we should be donating extra!"
Australia's individual income tax regime is considered to be progressive when compared with other countries. Although we have relatively low average and marginal tax rates at low income levels, the tax brackets do increase dramatically with high income levels. As the saying goes, the more you earn, the more you pay - so if you want to have a hope in grasping legal tax minimisation methods, you’ll first need to understand your tax obligations as a business entity.
Eight Common Business Taxes In Australia
If you’re working for an Australian business as an employee, navigating the taxation system is pretty simple - your boss withholds an amount from your gross pay each week for tax purposes, you get the balance. From there, all you need to do is lodge a tax return every financial year.
For business owners however, it’s a little more complex. The type of taxes you’re required to pay - and how much - is often linked to the type of business structure you’re trading under, and of course, the amount that your business is turning over. Understanding your tax obligations is the first port of call in order to stay on top of them and avoid any potential headaches, so where do you start?
Income Tax
Everyone who earns an income in Australia has to pay income tax. The amount of income tax your business has to pay, depends on your taxable income, which is calculated from your assessable income minus any deductions. How your business is structured will usually dictate the base income tax you’re required to pay, and although a number of concessions are available, some companies are required to pay as much as 30% tax on their income.
Assessable income includes all gross income (before tax) from your everyday business activities (such as sales), along with any other income that is not part of your everyday business activities, such as example capital gains. It does not include GST payable on sales you make, or GST credits. Just like regular employees, businesses are required to lodge a tax return every financial year. Deductions can be made from your assessable income, and are amounts you can claim for expenses involved in running your business.
PAYG Instalments
The Pay As You Go (PAYG) tax instalment system is a program of pre-paying tax instalments towards your expected tax liability on your business and investment income. Designed to minimise the risk of businesses having a hefty tax bill to pay every financial year, it usually applies to brands and businesses turning over a significant amount of income. It is not to be confused with Pay As You Go (PAYG) Withholding which is related to wages and salaries.
Businesses are required to comply with PAYG instalments if they meet the following:
In your last tax return you reported gross business and/or investment income (excluding any net capital gains) of $4,000 or more
Your adjusted balance of assessment on your last assessed tax return was more than $1,000
Your “notional tax” is more than $500
You are not entitled to the seniors and pensioners tax offset
The company will begin to pay PAYG instalments following the lodgement of an Income Tax Return, where the business or investment income exceeds the relevant threshold. In turn, the ATO will make contact, and will then issue you with quarterly (or in some cases, annual) instalment notices. If you’re already lodging Business Activity Statements (BASs), a new label for PAYG instalments will be included on your quarterly BASs.
PAYG Withholding
Pay As You Go (PAYG) withholding is a system of withholding income tax from an employee, contractor's salary, or wages. Instead of the recipient of the income paying tax directly to the ATO, the process is “simplified” by the payer of the income withholding the taxable amount, and in turn paying it directly to the ATO on behalf of the employee or contractor.
This system was designed to stop everyday Australian workers facing a hefty tax bill every financial year, and instead have their obligations handled every pay packet before it even hits their bank account. As an employer, a few key insights to remember about PAYG include:
Businesses must register for PAYG withholding before you are first required to make a payment that is subject to withholding. Even if you don't withhold an amount from a payment made, this is still required.
If you cease to be an employer, you should cancel your PAYG withholding registration.
Before you enter into a work agreement or contract, you need to check that the worker is legally allowed to work in Australia.
PAYG withholding differs from payroll tax, which is a state tax.
Goods And Services Tax
The Australian Goods and Services Tax (GST) was passed as legislation in June 1999, and came into effect on 1 July 2000. The primary goal was to simplify and overhaul the existing sales tax system with other state and territory taxes with a single 10% flat rate tax. Businesses are required to register and pay GST if their gross annual business turnover is $75,000 or more ($150,000 or more for a non-profit organisation), or they provide taxi or limousine services (regardless of gross annual turnover).
Businesses are required to collect the Goods and Services Tax (GST) and complete a monthly, quarterly or yearly Business Activity Statement (BAS) and lodge it to the Australian Taxation Office (ATO). A part of your obligations as a business is to charge an additional 10% on your invoice to your customers on the goods and services you sell, which you then collect on behalf of the ATO. To try and claim as much of this tax back as you can, be sure to understand GST credits. Also referred to as Input Tax Credits, the Australian Taxation Office will allow you to claim back the GST credits you have incurred as part of your expenses to provide your goods or service.
Fringe Benefits Tax
Fringe benefits tax is paid by employers on certain benefits that they provide to their employees, employee’s families, or any other associates. Even if the benefit is provided by a third party under an arrangement with the employer, FBT still applies. Employers can usually claim an income tax deduction for the cost of providing fringe benefits, plus for the associated tax that they are required to pay on the benefit. Employers can also generally claim GST credits for items provided as fringe benefits.
Common examples of fringe benefits provided by an employer can include:
Allowing an employee to use a work car for private purposes
Giving an employee a discounted loan
Paying an employee's gym membership
Providing entertainment by way of free tickets to concerts
Reimbursing an expense incurred by an employee, such as school fees
Giving benefits under a salary sacrifice arrangement with an employee
However, there are a number of items or benefits that do not require payment via a fringe benefit tax. Some of these include salaries, shares, superannuation contributions, and termination payments.
Capital Gains Tax
A capital gains tax is a tax on the profit from the sale of a non-inventory asset. The most common capital gains are from the sale of stocks, bonds, precious metals, real estate, and property. In Australia, businesses need to report capital gains and losses in their income tax return, and pay tax on your capital gains. Although it's referred to as capital gains tax (CGT), this is actually part of your overall income tax, not a separate tax.
When businesses make a capital gain, it is added to the assessable income and may significantly increase the taxable amount due to the ATO. As tax is not withheld for capital gains, you may want to work out how much tax you will owe and set aside sufficient funds to cover the relevant amount.
If you’re an Australian resident, CGT applies to your assets anywhere in the world. The capital gains tax legislation was introduced on September 20, 1985. Unless specifically excluded, all assets your brand or business have acquired since that date are subject to capital gains tax. If you’re an Australian resident, CGT applies to your assets anywhere in the world, so it’s important not to miscalculate your business assets when it’s tax time each financial year.
Payroll Tax
Once your brand or business starts exceeding $25, 000 per week in staff wages paid, or $1.3 million annually, you need to register for payroll tax. As it’s a state based tax, the exact laws and legislation vary depending on the state or territory that your business is trading in.
For example, in Queensland the payroll tax rate is:
4.75% for employers or groups of employers who pay $6.5 million or less in Australian taxable wages or;
4.95% for employers or groups of employers who pay more than $6.5 million in Australian taxable wages
Some companies are eligible for deductions, concessions and exemptions, with regional employers being eligible for a 1% discount on the rate until 30 June 2023 if they’re able to meet the designated criteria.
Property Tax
If your business owns or buys property, you will be required to address a medley of applicable property taxes such as stamp duty, rates and land taxes. Although the exact amount varies depending on your local council, state or territory, it’s something that business owners should think about before purchasing property in the name of their brand or business.
If your business buys a property, you’ll have to pay stamp duty to your state or territory government. Stamp duty (also called transfer duty or duty) is a tax on certain documents and transactions such as property transfers. In comparison, rates are taxes that local governments charge on properties in their area. If your business owns property, then your local council is likely to send you a rates bill. They’ll usually charge rates every quarter.
Finally, the amount of land tax you may be required to pay depends on the combined unimproved value of your taxable property. Applicable in every Australian state bar the Northern Territory, land tax generally doesn’t apply to permanent residential homes.
Navigating Business Taxes With The Professionals
Whether you’re starting a business, purchasing an existing one, or even reevaluating where your current enterprise stands - all require some form of financial know-how if you hope to successfully navigate your legal tax requirements as well as hitting your business goals.
However, if understanding the legalities that surround your business or finances isn’t your strong point, then it may be reassuring to know that you’re not alone. In fact, many businesses (big and small) enlist the services of an accountant in order to free up their time while knowing that their financial obligations are already taken care of by the professionals.
Ultimately, the team at Muro believe that every business owner is an entrepreneur. However, accounting does not discriminate - finances break down barriers and are not territorial. If you would like to take a deeper look into your finances, please get in touch with us at Muro today to ensure that you’re on the right path for success.