Taxation affecting your business
Understanding your taxation obligations is important when starting up a new business.
If you were employed before you started your business, you'll find that your tax affairs now become a lot more complicated.
Various federal, state and local government taxes and rates can apply, depending on the size and location of your business.
While you pay tax on your income, you can claim legitimate business expenses. These are costs necessarily incurred in running your business and include such items as advertising, bank charges, computer supplies, insurance premiums, postage, printing and stationery, staff training expenses, sub-contracting costs, technical journals, telephone and other communication costs, and travel.
You'll need to keep records relating to all transactions for at least five years.
Your professional advisers will help you set up an accounting system that is appropriate for the nature and scale of your business.
You will be required to submit a business activity statement (BAS) to the Australian Tax Office (ATO). This is a tax reporting requirement for businesses issued by the ATO on either a monthly or quarterly basis. It's used for reporting and paying goods and services tax (GST), pay as you go (PAYG) instalments, PAYG withholding tax and other tax obligations.
When you register for an Australian business number (ABN) and GST, the ATO will automatically send you a BAS when it is time to lodge. All businesses registered for GST are required to lodge a BAS by the due date.
Some of the taxes that apply when you are in business include the following:
Pay As You Go (PAYG) instalments
PAYG is a system for businesses to pay instalments of their expected tax liability on their business and investment income during the financial year. PAYG instalments are usually paid quarterly. For further information visit the Australian Tax Office (ATO) PAYG instalments webpage.
Pay As You Go (PAYG) withholding tax
If you're an employer, PAYG withholding is your legal requirement to keep a portion of payments made to your employees and other businesses, which you then pay to the Australian Taxation Office (ATO) at regular intervals. This is called Pay As You Go (PAYG) withholding.
You'll have withholding obligations if any of the following apply:
- you have employees
- you have other workers, such as contractors, and you enter into voluntary agreements to withhold amounts from your payments to them
- you make payments to businesses that don't quote their Australian business number (ABN).
If you make payments subject to withholding, you must:
- register for PAYG withholding with the ATO as soon as you know you need to withhold
- withhold amounts from wages and other payments
- lodge activity statements and pay the withheld amounts to the ATO
- provide payment summaries to all employees and other payees by 14 July
- provide a PAYG withholding payment summary annual report to the ATO by 14 August.
For further information visit the ATO PAYG withholding webpage.
Goods and Services Tax (GST)
Registration for GST is compulsory if your business has an annual or projected turnover of $75,000 or more. Where a business is registered, GST at the rate of 10 per cent must be added to the invoiced price of taxable supplies. There is an easy to use GST calculator on Asic's Money Smart website to help you. The supplier collects GST from the customer. Only businesses registered for GST purposes can collect GST.
As a supplier, you may also be paying GST on purchases made to run your business. This can be claimed by way of what are known as input tax credits. You can account for GST on either a cash basis (when payment is received from customers) or an accruals basis (when customers are invoiced).
At the end of the period (monthly and quarterly options are available), your business will need to account for GST collected on taxable supplies and input tax credits which are being claimed. The difference between the two will determine the net GST to be paid or refunded. Reporting on this takes the form of a Business Activity Statement (BAS).
Every business needs to have an Australian Business Number (ABN). Businesses registered for GST are automatically given an ABN.
If you do not have an ABN, other businesses may be unwilling to deal with you because they may not be able to claim their GST input tax credits. Where an ABN cannot be quoted, other businesses will be required to withhold tax from payments made to you.
For further information visit the ATO GST webpage.
Capital Gains Tax (CGT)
CGT is a tax imposed on any gains made on the disposal of an asset.
There are special provisions for relief from CGT where the disposal of an asset occurs as the result of restructuring a business into a company. There are also special concessional provisions that relate to the disposal of a small business.
Before you purchase or sell an asset or a business, it is wise to seek professional advice to see if you qualify for any relief provisions. Professional advice can also help you plan ahead and manage your taxation responsibilities.
Your accountant or tax adviser will help you determine any other taxes that might affect you, including:
- Debits tax
- Financial institutions duty (FID)
- Fringe benefits tax
- Income tax
- Land tax
- Payroll tax
- Stamp duty
- Superannuation guarantee levy.
For further information visit the ATO CGT webpage.