In 2021 Tax Tips

Business Tax Basics In Australia

If you’re a business owner in Australia, it’s important to be aware of your tax obligations. This article will provide an overview of the basics of business taxation in Australia. We’ll also discuss some common deductions and credits that you may be able to claim. So if you’re looking for a brief introduction to Australian business tax, keep reading!

There are many things to think about when starting a business, and tax is one of them. In Australia, businesses need to be aware of different types of taxes, and it can be tricky figuring out what you need to do. 

This blog post will provide an overview of the different business taxes in Australia and explain how to file your taxes. So if you’re starting a business in Australia, make sure you read this post!

As a business owner in Australia, it’s important to understand the basics of the country’s business tax system. This article will provide an overview of key concepts such as taxable income, deductions and credits. By understanding how business tax works in Australia, you can ensure that you’re paying the right amount and taking advantage of all available benefits.

Are you a business owner in Australia? If so, it’s important to know about the various types of taxes you may be liable for. This article will provide an overview of the most common business taxes in Australia. 

We’ll also discuss how to register for and pay these taxes. So whether you’re just starting or you’re looking for more information, read on for everything you need to know about business tax in Australia.

When it comes to taxes, there are many things that people don’t know, and often, they are afraid to ask questions. This blog post is designed to provide some basic information about business taxes in Australia for those starting a business or who are new to the tax system. 

We will go over what you need to do to file your business taxes and some of the common deductions that you can claim. We hope this information will help clear up any confusion and make the tax process a little less daunting.

Did you know that in Australia, businesses are taxed on their profits? This means that as a business owner, you need to keep track of your earnings and expenses to report your taxable income accurately. 

In this post, we’ll provide an overview of the business tax system in Australia, including the different types of taxes businesses are liable for. We’ll also provide some tips for reducing your business tax bill. 

When running a small business in Australia, it’s important to stay up-to-date on the latest tax laws and regulations. This can be tricky, especially if you’re not familiar with all the ins and outs of business taxation. 

In this blog post, we’ll provide a basic overview of the Australian business tax system, so you can ensure that you’re meeting your obligations and taking full advantage of all the available deductions and credits.

It’s important to understand the business tax landscape in this country. This post will provide an overview of business taxes in Australia, including information on income tax rates and deductions. 

We’ll also discuss some common misconceptions about business taxation in Australia. By understanding the basics of Australian business taxation, you can make informed decisions about your financial planning and operations. 

So, if you’re new to Australian business taxation, read on!

Tax Basics

Managing your tax affairs and obligations is an integral part of your business, particularly employees. Your business’s tax requirements will vary according to the type of business you run, the number of employees you have, and your business’s legal structure. 

Tax is a complex area. Outsourcing your tax to a professional or employing an experienced accountant can help you avoid legal and financial problems.

Getting the basics right has never been more important – good record keeping, substantiation, correct account codes, properly accounting for private use and declaring all cash transactions are essential to assuring yourself, your tax agent and the ATO that your tax affairs are in order.

Small businesses must ensure their bookkeeping and lodgments are correct and updated. The onus is on business owners to correctly report their income, claim their expenses and have the appropriate records.

When keeping your records, make sure to:

  • record cash income and expenses
  • account for personal drawings and use of company money or assets
  • record goods for your use
  • separate private expenses from business expenses
  • keep valid tax invoices for creditable acquisitions when registered for GST
  • keep adequate stock records
  • keep adequate records to substantiate motor vehicle claims.

The ATO is getting smarter with its data, and business owners are increasingly contacting their income and expense claims.

The ATO will look for discrepancies in returns when compared against pre-fill data or business benchmarks and has increased resources to deal with the cash economy.

Contact the ATO to rectify any errors or mistakes. If you make a voluntary disclosure, you can generally expect a reduction in the administrative penalties and interest charges that would normally apply.

Your tax agent is required to take reasonable care when preparing your return, which means they may ask you detailed questions about your cash flow, business performance, personal use of assets and records.

Registering For Tax

You should register your business for taxes through the Australian Government Business Registration Service.

Income

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1. JobKeeper

JobKeeper payments are assessable as ordinary income. However, you can claim deductions for the wage payments you made to employees, including amounts subsidised by JobKeeper.

Ensure that your reporting and documentation are correct. You must keep this information for five years after the payment was made.

2. Cash flow boost

Check that you have correctly received cash flow boost amounts. Cash flow boost payments are classified as non-assessable, non-exempt income so that no tax will be payable.

The cash flow boost is not subject to GST, and you are still entitled to a deduction for PAYG withholding paid.

Suppose you distribute the cash flow boost from the business to another entity (for example, making a trust distribution or paying a dividend to shareholders). In that case, there may be tax consequences for the recipient.

3. Covid-19 and disaster payments

Many businesses received COVID-19 or other disaster-related support from the government during the year.

Unless there is a specific exception, government payments to assist a business in operating are assessable. This includes assistance provided as a one-off lump sum or a series of payments.

The ATO has published information on the tax treatment of a range of federal, state, territory and local government assistance packages. You should also check the tax treatment of disaster assistance payments.

If you use an assistance payment to purchase items for your business, the normal conditions for deductibility apply. The fact that money from a relief fund is used to purchase an item doesn’t affect the deductibility of that item.

4. Personal services income rules

Personal services income (PSI) is income produced mainly from your skills or efforts as an individual. It commonly includes medical practitioners, construction workers, financial professionals and IT consultants.

The PSI rules are designed to ensure you can’t reduce or defer your income tax by diverting income received from your services by using companies, partnerships or trusts.

You need to check whether the PSI rules apply or whether you’re running a personal services business (PSB). If more than one individual is generating PSI through an entity such as a company, partnership or trust, you’ll need to work through the steps separately for each individual.

Once you determine the PSI rules apply, you’ll need to attribute PSI to each individual who produced the income and ensure that you are correctly withholding.

Many businesses make mistakes with the PSI rules. This is hardly surprising given their complexity, and their applicability can change from contract to contract.

5. Crowdfunding

The tax consequences of crowdfunding vary depending on the nature of the arrangement, your role (i.e. promoter, intermediary or contributor) and the circumstances.

The tax laws that apply to investment and financial activity undertaken conventionally (for example, buying goods and services, buying shares, lending money) apply in the same way to investment and financial activity conducted under crowdfunding.

Deductions

1. Optimise depreciation deductions

There are several ways you can depreciate your assets. The Federal Government introduced and has extended the instant asset write-off, temporary full expensing and backing business investment measures as part of its COVID-19 economic stimulus packages.

The ATO provides information on the interaction of the various tax depreciation incentives introduced by the government to help businesses.

Many businesses use the simplified depreciation rules, including the instant asset write-off and the general small business pool. 

Under temporary full expensing, you deduct the small business pool balance at the end of the income years ending between 6 October 2020 and 30 June 2022. The methods are discussed in more detail below.

The instant asset write-off and temporary full expensing deduction methods are unavailable for all assets. In such cases, the asset will be allocated to the general small business pool and depreciated at the appropriate rate, depending on if it is eligible for accelerated depreciation.

Where a balancing adjustment occurs during the year, the asset’s termination value must be deducted from the pool.

If you purchase a car for your business, the depreciation amount is limited to the business portion of the car limit of $59,136 for the 2020–21 income tax year. You cannot claim the excess cost of the car under any other depreciation rules.

2. Instant asset write-off

The instant asset write-off is available for:

  • assets first used or installed ready for use from 12 March 2020 until 30 June 2021 and purchased by 31 December 2020
  • assets costing up to $150,000 (up from $30,000)
  • businesses with an aggregated turnover of less than $500 million (up from $50 million).

The instant asset write-off can be used for multiple assets if the cost of each individual asset is less than the relevant threshold and new and second-hand assets.

3. Temporary full expensing

Eligible businesses with an aggregated turnover of less than $5 billion can immediately deduct the business portion of the cost of eligible (not excluded assets) new depreciating assets.

The eligible assets must be first held and first used or installed ready for use for a taxable purpose, between 7.30 pm AEDT on 6 October 2020 and 30 June 2022.

Businesses can also immediately deduct the business portion of the cost of improvements to eligible depreciating assets (and to assets acquired before 7.30 pm AEDT on 6 October 2020 that would otherwise be eligible assets) if those costs are incurred between 7.30 pm AEDT on 6 October 2020 and 30 June 2022.

You can opt-out of temporary full expensing for an income year on an asset-by-asset basis if you are not using the simplified depreciation rules.

If you are a small business that chooses to use the simplified depreciation rules, you apply the temporary full expensing rules with some modifications. This includes deducting the balance of your small business pool at the end of an income year ending between 6 October 2020 and 30 June 2022.

4. Employee bonuses

If you pay staff bonuses and want to bring expenses into the 2020–21 year, ensure they are quantified and documented in a properly authorised resolution (e.g. in board minutes).

This must be done before year-end to incur a deduction for employee bonuses where such amounts are not paid or credited until the subsequent year.

5. Trading stock

Many small businesses use the simpler trading stock rules as the value of their trading stock doesn’t vary by more than $5,000 a year. 

However, COVID-19 affected the sales last year. Consequently, some businesses’ inventory levels reduced significantly, and the market selling value or replacement value basis may be more tax-effective.

Where COVID-19 has materially reduced the market value of trading stock below its cost, such as for obsolete stock, this may result in your closing stock being valued at an amount less than cost and will generate an allowable deduction.

6. Write off bad debts

Businesses can claim a deduction for bad debts when various conditions are met. Examples include where the debtor cannot be traced, the debtor is in liquidation or receivership, there are insufficient funds or assets to satisfy the debt, or there is little or no likelihood of the debt being recovered.

A deduction will only be available if the debt still exists when it is written off. If the debt is forgiven or compromised before it is written off as bad in the accounts, no deduction will be available.

Certain additional requirements must be met where the creditor is either a company or trust. In addition, special rules apply for private companies with debts related to shareholders or an associate of a shareholder.

Help With Your Tax

1. Seek professional advice

Seek tax advice from the ATO or a tax professional. The ATO administers Australia’s tax laws and applies these laws to all types of businesses.

You may be tempted to manage your business’s tax yourself to keep costs down, but this can be risky. Outsourcing your tax to a professional or employing an accountant can help things run smoothly and possibly save you money (and potential financial penalties) in the long run.

They can explain tax considerations such as:

  • legal structure and the need for a tax file number (for businesses other than sole traders)
  • Australian business number (ABN)
  • goods and services tax (GST)
  • business activity stream (BAS)
  • pay as you go (PAYG)—withholding and instalments
  • superannuation
  • fringe benefits tax (FBT)
  • payroll tax.

2. Check that your adviser is legitimate

  • Professional tax or BAS agents should be registered with the Tax Practitioners Board.
  • Financial advisers are registered with the Australian Securities and Investments Commission’s financial advisers register and require an Australian Financial Services Licence.

Taxes If You Employ People

As an employer, you must know your tax obligations when paying staff, including PAYG withholding tax and superannuation. In addition, depending on the size of your business, you may also need to pay payroll tax.

The ATO provides tax information for employers about paying staff, including:

  • tax rates
  • paying superannuation
  • employee termination payments
  • redundancy pay
  • paying contractors
  • forms, calculators and tools to ensure you withhold the correct amount of tax.

Payroll Tax

Legal information

In Queensland, your business becomes liable for payroll tax once your wage bill reaches $1.3 million a year (current 2019–20 threshold). If you employ people and pay taxable wages in Queensland. you must register for payroll tax within seven days after the end of the month when you:

  • pay more than $25,000 a week in Australian taxable wages
  • or
  • Become a group member that pays more than $25,000 a week in Australian taxable wages.

You must register even if you think you will pay less than $1.3 million in Australian taxable wages in a year.

Payroll tax is imposed by each state and territory, not the ATO.

Tax Payable

1. Company tax rate

Most companies with an aggregated annual turnover of less than $50 million will pay tax at 26 per cent in 2020–21. However, some companies with a turnover below $50 million will continue to pay tax at 30 per cent, especially companies that earn nearly all their income from passive investments, such as rental income or interest income.

These differential rates create several complexities for companies.

To qualify for the lower (base rate entity) tax rate:

  • a company must have an aggregated turnover of less than $50 million, where aggregated turnover is the sum of the company’s ordinary income and the ordinary income of any connected affiliate or entity, and
  • no more than 80 per cent of their assessable income is base rate entity passive income.

The full company tax rate of 30 per cent applies to all companies that are not eligible for the lower company tax rate.

In line with the changes to company tax rates, there have also been changes to the franking rules, which affects the allocation of franking credits.

2. Loss carry-back tax offset

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Eligible companies with a taxable loss may claim the loss carry-back tax offset.

In particular, eligible companies that find themselves in a taxable loss position due to the instant asset write off or temporary full expensing rules could use the loss carry-back tax offset instead of carrying forward the losses to future years.

The offset effectively represents the tax an eligible company would save if it could deduct the loss in the earlier year using the loss year tax rate.

As it is a refundable tax offset, it may result in a cash refund, a reduced tax liability or a reduction of a debt owing to the ATO. In addition, the eligible company does not need to amend the earlier income years to claim the offset.

The tax offset available is limited to your franking account surplus on the last day of the income year for which you claim it. The ATO will be checking franking accounts to ensure the offset is claimed correctly.

3. Losses

Businesses may find themselves in a taxable loss position or seek to use prior-year losses when their business performance changes.

Different loss rules apply depending on the business structure. For example, partnerships distribute the loss proportionately to each partner, while trust losses can’t be distributed to beneficiaries.

Companies are subject to rules such as same majority ownership and control, same business test or similar business test.

We recommend seeking professional advice on issues like the loss tests, loss carry-back tax offset, the effect of capital injections on continuity of ownership tests and unrealised losses from reductions in asset values.

4. CGT concessions

In addition to the more widely available CGT concessions, small businesses can access the following specific concessions:

  • 15 year-exemption
  • 50 per cent active asset reduction
  • retirement exemption
  • rollover
  • restructure rollover.

You can apply as many concessions as you’re entitled to until the capital gain is reduced to nil. There are rules about the order in which you apply the concessions, any current year or prior year capital losses, and the CGT discount.

The rules are complex, and getting it wrong can be costly, so we recommend seeking advice before restructuring or disposing assets and ensuring your business structure is designed to take advantage of the available concessions.

5. PAYG instalment indexation suspended

The government suspended the indexation of PAYG, and GST instalment amounts for small businesses in 2020–21 and the ATO allowed taxpayers to vary their quarterly instalments without penalty.

Some businesses that reduce their instalment amounts during the year may receive a larger than the expected tax bill. The ATO offers a range of payment plans to assist.

Superannuation Guarantee Obligations

As an employer, you can either pay a set minimum level of superannuation for each of your eligible employees or pay a charge to the ATO.

You must use SuperStream to pay employee superannuation guarantee contributions to super funds. Therefore, all employers should be SuperStream compliant.

If you have 19 or fewer employees, use the ATO’s Small Business Superannuation Clearing House—a free online superannuation payments service that helps small businesses meet their superannuation obligations.

Record Keeping For Tax

Legal information

By law, when you operate a business, you must keep certain records to explain your transactions for tax purposes. These records should include all documents that you use to determine your income and expenditure. Your accountant can help you to set up a good record-keeping system.

You must keep the following records for five years:

  • receipts for supplies, including

                 -records of supplies

                 -cash register (till) tapes/totals

                 -deposit books and bank statements

  • acquisition and other expenses, including

                 -expense payment records

                 -invoices and statements for acquisitions

                 -receipts from small cash acquisitions

                 -cheque butts

                 -logbooks for car expenses

  • wages records, including

                 -worker payment records

                 -employment declarations

                 -PAYG withholding

                 -employers’ payment book and superannuation records.

You must keep other receipts for supplies, including credit card dockets (merchant’s copy) and cash register tapes, for one month if reconciled with actual sales or five years if not reconciled.

Use the ATO’s record-keeping evaluation tool to work out what you need to keep and how to improve your record keeping.

An accountant can also help you set up a record-keeping system.

Tax FAQs

1. When does the financial year start and end?

The financial year starts from 1 July and ends on 30 June.

2. What is the due date for filing an income tax return?

The due date for filing Australian tax returns is 31St October after the end of the tax year. And if 31 October falls on the weekend, then the due date will be the next business day after 31 October. However, if a registered agent lodges the return, the return can be lodged after 31 October.

3. What are the consequences of not filing a return within the due date?

Late lodgement penalty amounting to $180 for the first 28 days after the lodgement date, which further increases by $180 after each subsequent 28 days period, up to a maximum of$900is levied and included prosecution in extreme circumstances.

4. What are the various types of taxes levied?

The various types of taxes levied are:

  • Personal income taxes
  • Goods and Services taxes
  • Capital Gains tax
  • Corporate taxes
  • Trustees liability taxes
  • Excise taxes includes Luxury Car Tax, Fuel Taxes
  • Property Taxes
  • Custom duties
  • Payroll Taxes
  • Passenger Movement Charge
  • Fringe Benefits tax
  • Superannuation taxes
  • Inheritance tax

5. What is the name of the office which deals with tax in Australia?

Australian Taxation Office deals with taxes in Australia.

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