In 2022 Tax Tips

Australian Taxation Law For Small Businesses

In Australia, the taxation law for small businesses is complex. Therefore, business owners need to be aware of the requirements and regulations to ensure they are compliant with the law. 

This article provides an overview of the main taxation concepts that small businesses should be familiar with. We will discuss key issues such as income tax, GST, depreciation and capital allowances. By understanding these concepts, business owners can make informed decisions about their business operations and structure. 

Small businesses in Australia have to adhere to a complex web of taxation laws and regulations. While it can be daunting, it’s important to understand the basics so you can make the most of your business. 

This post will give an overview of the key taxation concepts small businesses need to know. We’ll also provide some handy tips on how to stay compliant. So if you’re looking for a primer on Australian tax law, keep reading!

Doing business in Australia can be a complex undertaking, particularly when it comes to tax. However, there are a few key things small businesses need to know to make the process as smooth sailing as possible. This post will outline some of the most important Australian taxation laws governing small businesses.

If you’re running a small business in Australia, it’s important to understand the tax laws that apply to you. This article will give you an overview of the most important things you need to know. We’ll cover topics like income tax, GST, and depreciation. By understanding the basics of Australian taxation law, you can ensure that you’re operating your business in compliance with the law.

There’s a lot to take in when it comes to Australian taxation law for small businesses. But don’t worry, this guide is here to help! We’ll outline everything you need to know about business taxes in Australia, including which forms to fill out and when you need to submit them. 

We’ll also touch on some common deductions small businesses can claim. So whether you’re just starting out or you’ve been operating your business for a while, this guide will have you covered.  

There are a lot of small businesses in Australia, and many of them are unaware of the Australian taxation law that applies to them. 

This blog post will introduce you to the basics of Australian small business taxation so that you can be better equipped to manage your finances and stay compliant with the law. We’ll cover topics like income tax, GST, deductions and exemptions, and more. So whether you’re a new business owner or just wanting to brush up on your knowledge, read on for helpful tips!

You need to be aware of the Australian taxation law that applies to you. This article will provide an overview of the most important aspects of the law that you need to know. 

We’ll cover income tax, Goods and Services Tax (GST), and company tax, as well as some other taxes that may apply to your business. So whether you’re just starting out or you’re already running a small business, read on for information that could help save you money!

Small businesses in Australia have to deal with a lot of bureaucracy, but thankfully, taxation law is one fairly specific area. This article will give you an overview of the basics of Australian tax law as it applies to small businesses. 

We’ll go over what you need to do to keep on the right side of the taxman and how to make the most of your business’ tax deductions. So whether you’re just starting out or you’ve been running your business for a while, read on for essential tips on Australian small business taxation.

Let’s get started!

Tax Essentials For Small Businesses

The taxes you must register for depending on the type of business you’re operating. Some apply to all businesses, and others might be compulsory depending on the business’s size, type, and turnover. 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.

1. 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 per year or 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 workers, such as contractors, and you enter into voluntary agreements to withhold amounts 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)

2. 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’ve received
  • Expenses related to payments you’ve 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

3. 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

Several expenses you can’t claim 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’re planning significant expenditure, consult your tax adviser before committing to the expenditure to understand any tax implications

4. 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’re paying for will be completed within 12 months 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

5. 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

Why Superannuation Is Important For Your Small Business 

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When you are operating as a sole trader business, you are not only ensuring it is successful, but you’re also in charge of making sure you are well looked after in retirement.a

If you haven’t been giving your superannuation as much attention as it deserves, you may find yourself short of having the funds to retire comfortably. 

One of the biggest mistakes small business operators, particularly sole traders, make is not treating themselves as employees entitled to the same benefits they would be working for someone else. 

Thankfully, it’s never too late to start thinking about the future.

Here are the top reasons why contributing to your superannuation account makes good business sense:

1. Having the confidence to retire comfortably

You’re not legally obliged to contribute to your superannuation as a sole trader business. However, if you aren’t thinking about the future you want now, achieving your business and personal financial goals isn’t going to be easy. 

So, while the option is yours as a sole trader, regularly contributing to your superannuation is highly recommended if you want to keep up with your cost of living when you retire.

According to the Association of Superannuation Funds of Australia (ASFA’s) Retirement Standard, single people will need an average annual budget of $43,601 per year to live comfortably in retirement. Couples will need $61,522 in annual retirement savings.

With so many things to think about when starting your own business, thinking about your superannuation doesn’t always take precedence. But with the high cost of retirement living, it’s important to set time aside to get your superannuation straight as part of your business plan. 

Talking to your accountant or financial advisor to get the guidance and business support you need to get your superannuation contributions in order could be the difference between a happy retirement or otherwise.

2. Superannuation contributions are a small business tax write off 

If you find it hard to save, or you’ve been investing the profits of your small business back into supporting your business growth, you may not have much of a superannuation nest egg to sing about.

However, there are incentives associated with contributing to your superannuation fund in Australia. For example, when filing your business tax return, superannuation payments can be a tax-effective way to save for your future than simply putting the same funds into a business savings account. 

Your contributions may only incur the concessional contribution tax rate of 15%, subject to certain contributions caps. This is often significantly lower than your normal small business tax rate. 

As well as being taxed at a lower rate, your super contributions will be stored away until your retirement, helping you save while you are still working.

3. Receive small business government assistance on top of your own contributions

You may also be eligible for small business government assistance and incentives as a sole trader business. If you are a low-to-middle income earner, you may still be eligible for the super co-contribution payment scheme. 

This means that if you earn under a certain threshold and make after-tax contributions to your superannuation, the Government will also contribute up to a maximum value of $500. 

For example, if you earn $44,564 and contribute $600 in the FY21 tax year, you can receive $300 in co-contribution into your super fund from the Government after you lodge your tax return. This could be a significant incentive when you factor in that this might be available to you every year.

Small Business Expenses

1. What is a Business Expense?

It can be defined as the necessary and ordinary expense for running a business. Ordinary means that other traders in the same business also pay for the same things, while necessary means the expense helps run the business. The business owner would not be able to carry out their business tasks without it.

Here are some of the common business expenses that small businesses may be familiar with.

2. Types of Business Expenses

Startup Expenses

These include all the costs that you incur while setting up a business, such as:

  • license fees
  • advertising costs
  • legal fees
  • office supplies
  • market research expenses
  • accounting fees

They also consist of all the operating expenses you acquire before the business starts operating, such as the cost of employee training and those that you use to carry out your research.

Operating Expenses

These are day-to-day costs that a company requires to remain in business. They are put into two categories; general and selling expenses. 

The former is all the expenditure you incur in managing and supervising the business. At the same time, the latter include any costs related to the marketing of the business, salaries, supplies, rent, utilities, maintenance, repair, car and fuel expenses and all other operating expenses.

Capital Expenses

This is the cost you incur buying assets with a useful life of over a year. They include machinery, vehicles, patents, books, equipment and furniture.

Inventory Costs

These are all the direct and indirect costs associated with keeping inventory. In addition, they include taxes, storage costs, insurance and shortage costs. Inventory is divided into three categories; raw materials, work in progress and the finished product.

3. What Small Business Expenses Are Deductible?

Any expense that meets the criteria of ordinary and necessary for running a business is tax-deductible. Although some business expenses are fully deductible, others are just partially deductible. 

This means that only a percentage of the total cost can be claimed for tax purposes. Here is a list of some fully claimable expenses for small businesses:

  • Accounting fees
  • Subscriptions to publications
  • Employee benefit programs
  • Advertising and marketing costs
  • Membership Dues
  • Legal fees
  • Insurance expenses
  • Wages paid to all contract workers
  • Interest paid
  • Continuing training and education expenses
  • Laundry charges
  • Equipment rentals
  • Office supplies and expenses
  • Printing expenses
  • Office space rent
  • Repair and maintenance costs
  • Utility expenses

Normally, business expenditure should be separated from personal and capital expenses and all the overheads used in figuring the cost of goods sold. 

Business owners can also claim immediate deductions for capital assets like computers, plants and equipment, and vehicles that cost them less than $20,000 each.

4. Partially Deductible Expenses

Some business expenses are not fully deductible and can include:

  • Meals and Entertainment- This is because you also benefit from the entertainment and meal. Only 50% of the expense is deductible.
  • Gifts– if you choose to offer your client a gift, you can spend as much as you want.

However, you can only deduct 25% on each gift. Instead, you should consider making a charitable donation in the client’s name, as this might be fully deductible.

5. What You Need In Order to Take Deductions

When filling out your returns, you are entitled to claim some deductions on various expenses. For example, you are free to claim the deduction for those expenses you incur while running your business, provided that they are directly related to how you earn assessable income.

6. Work-related Expenses

For you to claim a work-related deduction:

  • You must have personally used the money and not reimbursed it
  • You must have proof in the form of records
  • The expense must be directly related to earning your income

Any work expense that your employer reimburses is not considered deductible as it has to be work-related only. However, employees can claim work-related expenses of the particular financial year they incurred them.

Preparing Your Business Activity Statement

Once you’ve registered your business for goods and services tax (GST), you’ll need to complete your business activity statement (BAS) monthly, quarterly, or annually to meet your tax obligations.

Here are some ways to help you complete your BAS correctly and on time.

1. Prepare your information

Make sure your numbers are spot-on to help you report your BAS correctly the first time.

  • Double-check you’ve included all your transactions
  • Make sure they’re all business expenses
  • Ensure your sales and expenses are for the same dates as your BAS reporting period
  • If you’re using accounting software, make sure you’ve coded items correctly

2. Complete your BAS

Once you have your numbers ready, you can complete your BAS online or using a paper form. The Australian Tax Office (ATO) has detailed instructions to help you complete the GST section of your BAS.

Some things to remember are to:

  • Enter whole dollars in the boxes
  • Leave boxes blank if they don’t apply to you
  • You’ll only be able to enter positive values in your BAS form

3. Lodge and pay on time

Submit and pay your completed BAS by the due date to avoid paying any interest or penalties. There are several ways to do both, so choose what suits you – for instance, you can submit your BAS online, by mail or through a registered tax or BAS agent. The ATO website provides more detail on each of these options. 

4. Keep your records

Once you’re done with your BAS, you’ll need to keep a copy of it and the supporting documents for several years to meet the ATO’s record-keeping requirements.

FAQs

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1. I run my own business and want to know how I can minimise my annual tax bill?

If your turnover is less than 50 million dollars, you would be able to access several small business concessions, including:

  • income tax concessions
  • excise concessions
  • Goods and Services Tax (GST) concessions
  • Pay As You Go (PAYG) instalment concessions and
  • Fringe Benefits Tax (FBT) concessions.

The $50 million turnover threshold applies to most concessions, except for:

  • the small business income tax offset – which has a $5 million turnover threshold
  • the capital gains tax (CGT) concessions have a $2 million turnover threshold.

2. I have started my own business and wonder if I need to register for GST.

Australian businesses with an annual turnover of $75,000 or more must register for GST. 

If your business has a lower turnover, you are not required to register, but you may do so if you wish. You will only be required to charge your customers GST if you are registered. Your local office can assist you with your application to register for GST.

3. I keep a room set aside for a home office and would like to claim some expenses.

If a taxpayer carries out all or part of their employment activities from home and has an office set aside to do the work, some of the running expenses can be deducted. A diary should be kept for a minimum of 4 weeks stating the hours the office was used for work-related purposes.

From 1 July 2014, the Commissioner’s rate of 45 cents per hour (increased from 34 cents per hour allowed in the 2014 year) can be claimed for the home office’s hours. 

Only running expenses (electricity, heating and depreciation of office equipment) can be claimed for home office unless the home is being used as a place of business.

Where a home is a place of business (and is easily identified as such – for example, a separate entrance, signage, clients/customers coming to set area of your home etc.), deductions can be claimed on occupancy and running expenses, including:

  • mortgage interest
  • rent
  • house insurance
  • council rates
  • insurance
  • repairs
  • cleaning
  • pest control
  • maintenance
  • decorating
  • telephone
  • heating
  • lighting.

4. I am self-employed and have paid personal superannuation contributions all year. What can I claim?

Provided that you satisfy the eligibility criteria, you will be able to claim a deduction for the superannuation contributions you have made to a complying superannuation fund or retirement savings account.

To do so, you must be fully self-employed, or no more than 10% of your assessable income (including Reportable Fringe Benefits and Reportable Superannuation Contributions) is from an employer. You must also have first notified your superannuation fund of your intention to make a claim and received a confirmation.

5. I have heard that self-employed people can claim superannuation co-contribution from the Government. Am I eligible because I paid money into my super this year and run my own business?

You may be eligible for the superannuation co-contribution if more than 10% of your total assessable income is from running that business, eligible employment or a combination of the two.

Investment income is not eligible income. If you claim any of your superannuation contributions as a tax deduction, only the amount you do not claim will be eligible for the co-contribution.

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