In 2021 Tax Tips

Tax Basics For Businesses In Australia

If you’re a business owner in Australia, it’s important to familiarise yourself with the different aspects of taxation. This includes knowing which taxes apply to your business, how to register for tax and what deductions you’re eligible for. 

This blog post will provide an overview of the most important tax basics for businesses in Australia. So if you’re starting a new business or would like to know more about Australian tax laws, keep reading!

In Australia, businesses are subject to income tax and Goods and Services Tax (GST). The income tax rate for businesses is 27.5%, which is lower than the personal income tax rate. 

GST is a value-added tax that applies at 10% on most goods and services sold in Australia. However, some items are exempt from GST, such as fresh food, prescription medication, educational courses and exports.

Starting a business in Australia can be a very rewarding experience, but it’s important to understand the various tax requirements and regulations that apply. 

This article provides an overview of the key taxes businesses need to be aware of, including income tax, GST, Pay As You Go (PAYG) withholding and FBT. It also explains how to register for these taxes and make tax payments.

If you’re new to running a business in this country, it’s important to understand the basics of taxation so that you can stay compliant and avoid any costly fines or penalties. This guide outlines the key concepts you need to know, from GST and income tax to PAYG and depreciation. 

So whether you’re just starting or you’ve been trading for a while and want to make sure you’re doing everything by the book, read on for essential information about Australian business taxes.

It’s important to understand the basics of Australian taxation. This will help you ensure that you’re compliant with tax laws and that you’re taking full advantage of all the tax deductions and concessions available to you. 

This blog post will provide an overview of key Australian tax concepts for businesses. We’ll also outline some important deadlines for business owners to consider. So, if you’re looking for a primer on Australian business tax, be sure to read on!

Do you know what type of entity you are and what tax bracket you fall into? This article will provide an overview of the Australian tax system for businesses so that you can be better informed about your tax responsibilities. We’ll cover the different types of entities and explain how to register for GST or QST.

When it comes to your taxes, there are many things to think about as a business owner in Australia. But, unfortunately, it can be tricky to make sure you’re compliant with all the regulations and even trickier to understand what those regulations are in the first place! 

This blog post is designed to provide some basic information about tax basics for businesses in Australia. We’ll go over some of the most important points so that you can have a better understanding of what you need to do come tax time

No matter what business you’re in, it’s important to understand tax basics. There are a few key things to know when it comes to paying taxes on your business income in Australia. 

This article will give you an overview of the main rules and regulations that apply to businesses in this country. By understanding the basics, you can be sure that you’re meeting your obligations and avoiding any costly fines or penalties.

We hope this information is helpful!​

Taxes On Corporate Income

Companies that are residents of Australia are subject to Australian income tax on their worldwide income. Generally, non-resident companies are subject to Australian income tax on Australian-sourced income only. 

However, where a company is a resident in a country, Australia has concluded a double taxation agreement (DTA); Australia’s right to tax business profits is generally limited to profits attributable to a permanent establishment (PE) in Australia.

All companies are subject to a federal tax rate of 30% on their taxable income, except for ‘small or medium business’ companies, which are subject to a reduced tax rate of 25% for the 2021/22 income year (26% for the 2020/21 income year). 

The reduced tax rate applies only to those companies that, together with certain ‘connected’ entities, fall below the aggregated turnover threshold of AUD 50 million.

Integrity measures also ensure that a company will not qualify for the reduced rate unless the specifically defined passive income (including, among other things, interest, rents, and net capital gains) that it derives represents no more than 80% of its total assessable income for the year. 

Private Use Of Company Money Or Assets

There are rules around taking money out of your business or using its money or assets for yourself and your family. This is often done by:

  • payments of salary, wages or directors’ fees – withholding, superannuation and payroll reporting requirements for the company
  • provision of fringe benefits – the company pays fringe benefits tax
  • repayments of a loan to the company
  • dividends – a profit distribution that may include franking credits
  • company loans.

The private use of company money or assets is a focus area for the ATO, and the consequences of getting it wrong can be costly.

Division 7A

A payment or other benefit provided by a private company to a shareholder or their associate can be treated as a dividend for income tax purposes under Division 7A.

The income tax laws may treat the following as an unfranked deemed dividend for a taxpayer unless an exemption applies:

  • a payment or a loan by a private company to a shareholder or an associate (like a family member)
  • the forgiveness of a shareholder’s or associate’s debt
  • the use of a company asset by a shareholder or their associate, or
  • the transfer of a company asset to a shareholder or their associate.

The most common exemption is to enter into a written loan agreement requiring minimum interest and principal repayments over a specified loan term. This may be seven or 25 years, depending on whether the loan is secured.

There are various things a private company can do before its 2020–21 income tax return needs to be lodged to minimise the risk of a shareholder or an associate deriving a deemed dividend.

Division 7A also applies to certain benefits provided to shareholders or their associates from trusts where a private company has a present unpaid entitlement (UPE) to the trust’s profits.

Goods and Services Tax (GST)

The Federal Government levies GST at a rate of 10% and distributes the revenue to state governments. The GST is a value-added tax (VAT) applied at each manufacturing and marketing chain level. It applies to most goods and services, with registered suppliers getting credits for GST on inputs acquired to make taxable supplies.

Food, with some significant exceptions; exports; most health, medical, and educational supplies; and some other supplies are ‘GST-free’ (the equivalent of ‘zero-rated’ in other VAT jurisdictions) and so not subject to GST. As a result, a registered supplier of a GST-free supply can recover relevant input tax credits, although the supply is not taxable.

Residential rents, the second or later supply of residential premises, most financial supplies, and some other supplies are ‘input-taxed’ (‘exempt’ in other VAT jurisdictions) and are not subject to GST. However, the supplier cannot recover relevant input tax credits, except that financial suppliers may obtain a reduced input tax credit of 75% of the GST to acquire certain services.

Health insurance is GST-free. Life insurance is input-taxed. General insurance is taxed. Reverse charges may apply to services or rights supplied from offshore. The recipient is registered or required to be registered and uses the supply solely or partly for a non-creditable supply.

GST applies to cross-border supplies of digital products and services imported by Australian consumers. This measure ensures that foreign entities’ digital products and other imported services supplied to Australian consumers are subject to the GST. Non-resident suppliers must register, collect, and remit GST on the digital products and services they provide to Australian consumers.

The way Australia’s GST rules apply to all cross-border supplies that involve non-resident entities operate to ensure that non-resident businesses do not have to engage in Australia’s GST system unnecessarily. This includes switching off the GST liability for certain supplies between non-residents and extending the GST-free rules to certain supplies made to non-residents.

There is no double taxation of digital currencies by ensuring that supplies of digital currency receive equal GST treatment to supplies of money.

GST is payable on certain low-value goods (valued at AUD 1,000 or less) purchased by consumers and imported into Australia.

Wine Equalisation Tax (WET)

The Federal Government levies WET at the wholesale level at a rate of 29%, in addition to 10% GST, which is calculated on the price including the WET, and it applies to wine from grapes, fruit and certain vegetables, mead, and sake. 

Retailers do not receive an input tax credit for WET. However, a rebate is available to a wine producer of 29% of the wholesale price (excluding WET or GST) for wholesale sales and 29% of the notional wholesale selling price for retail sales and applications for own use (up to a maximum rebate of AUD 350,000).

Luxury Car Tax

The Federal Government levies the luxury car tax at the rate of 33% of the value of the car that exceeds the luxury car tax threshold (AUD 79,659 [77,565] for fuel-efficient vehicles and AUD 69,152 [68,740] for other vehicles in 2021/22 [2020/21] financial year) and is payable on the GST-exclusive value above the threshold. No input tax credit is available for luxury car tax, regardless of whether the car is used for business or private purposes.

Trusts

accounting notes

1. Prepare trust resolutions by 30 June

Trustees of discretionary trusts are always required to prepare and document resolutions on how trust income should be distributed to beneficiaries for the 2020–21 financial year by 30 June.

Suppose a proper resolution is not executed by 30 June. In that case, any default beneficiaries under the deed will become presently entitled to trust income and subject to tax (even where they do not receive any cash distribution).

Alternatively, the trustee will be assessed at the highest marginal tax rate on any taxable income derived but not distributed by the trust.

A trustee must show how an effective resolution was made through minutes, file notes or an exchange of correspondence documented before year-end. However, the trust’s accounts do not need to be prepared by 30 June.

As a corporate trustee may need time to notify its directors that a meeting must be convened to pass and record a resolution, such a notice should be sent out well before the 30 June deadline.

2. Streaming capital gains and franked dividends

The streaming rules are complex but, generally, the trustees of discretionary trusts can stream capital gains and franked dividends to different beneficiaries if the trust deed allows the trustee to make a beneficiary “specifically entitled” to those amounts.

The trustee must document this resolution before 30 June, and the beneficiary receives or is entitled to receive an amount equal to the net financial benefit of that gain or dividend.

3. Prevent deemed dividends

An unpaid distribution owed by a trust to a related private company beneficiary that arises on or after 1 July 2016 will be treated as a loan if the same family group controls the trustee and the company.

In these circumstances, the associated trust may be taken to have derived a deemed dividend for the unpaid trust distribution in 2020–21.

However, a deemed dividend may be prevented if the unpaid distribution is paid out or a complying loan agreement is entered into before the company’s 2020–21 income tax return needs to be lodged.

Alternatively, a deemed dividend will not arise if the amount is held in a suitable sub-trust arrangement for the sole benefit of the private company and other conditions are satisfied.

4. Reimbursement agreements

Suppose a beneficiary’s entitlement arises out of a reimbursement agreement. In that case, the net income that would otherwise have been assessed to the beneficiary (or trustee on their behalf) is instead assessed at the top marginal tax rate.

The exception is where the agreement is part of an ordinary family or commercial dealing. The beneficiary is under a legal disability (e.g. a minor), so make sure that any reimbursement agreements satisfy legal requirements.

Customs Duties

Under the Australian Customs Tariff, imports into Australia are subject to duties unless an exemption applies. The top duty rate is 5%.

Australia currently has comprehensive free trade agreements with Chile, China, Hong Kong, Japan, Indonesia, Korea, Malaysia, New Zealand, Peru, Singapore, Thailand, and the United States. 

In addition, there is an ASEAN-Australia-New Zealand Free Trade Area (AANZFTA) between ASEAN Member States (Brunei Darussalam, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam), Australia and New Zealand and a Comprehensive and Progressive Agreement for Trans-Pacific Partnership (TPP-11) between Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam. 

A regional comprehensive economic partnership free trade agreement that enters into force on 1 January 2022 between Australia, New Zealand, and Southeast Asian nations (Brunei Darussalam, Cambodia, China, Japan, Laos,  Malaysia, Myanmar, Philippines, Republic of Korea, Singapore, Thailand and Vietnam) that progressively eliminates all barriers to trade in goods, services, and investments. 

A Pacific Agreement on Closer Economic Relations Plus is a regional development-centred trade agreement between Australia, New Zealand, and nine Pacific island countries (Cook Islands, Kiribati, Nauru, Niue, Samoa, Solomon Islands) Tonga, Tuvalu, and Vanuatu), also applies. 

An agreement in principle has been reached in negotiations for a free trade agreement with the United Kingdom. Negotiations are also underway with India and the European Union.

Excise Duties

Excise duties are imposed at high levels on beer, spirits, liqueurs, tobacco, cigarettes, and petroleum products. Excise rates for tobacco, alcohol and fuel are indexed bi-annually based on movements in the consumer price index (CPI). Some examples of current excise rates include:

  • Beer not exceeding 3% by volume of alcohol packaged in an individual container not exceeding 48 litres: AUD 45.07 per litre of alcohol calculated on that alcohol content. The percentage by volume of alcohol of the goods exceeds 1.15.
  • Tobacco in stick form not exceeding 0.8 grams per stick of actual tobacco content: AUD 1.11905 per stick.
  • Petroleum condensate, crude petroleum oil, and diesel: AUD 0.433 per litre.
  • Liquefied petroleum gas (LPG), other than LPG exempted from excise duty: AUD 0.141 per litre.

A fuel tax credit system provides a credit for fuel tax (excise or customs duty) that is included in the price of taxable fuel. Broadly, credits are available to entities using fuel in their business and households using fuel for domestic electricity generation and heating.

Land Tax

All states and territories (except the Northern Territory) impose a tax based on the unimproved capital value of the land. However, the principal place of residence and land used for primary production are generally exempt from land tax.

Many states also have a land tax surcharge regime for foreign/absentee owners. The state of Victoria also imposes an annual 1% vacant residential land tax on the capital improved value of certain vacant land.

The state of Victoria has a windfall gains tax which applies to the increase in value of land in Victoria resulting from a rezoning that takes effect on or after 1 July 2023, subject to certain transitional arrangements. 

When the taxable value uplift of all land owned by an owner or group resulting from the same rezoning is between AUD 100,000 and AUD 500,000, the tax is calculated at a rate of 62.5% on the uplift over AUD 100,000. For taxable value uplifts exceeding AUD 500,000, the tax is calculated at a rate of 50% on the whole uplift.

Stamp Duty

All states and territories impose stamp duty on a wide variety of transactions at different rates. For example, all jurisdictions impose stamp duty on real estate conveyances, but most exempt conveyances of goods (not associated with other property) from stamp duty

The imposition of duty on share transfers involving unlisted entities differs from state to state. Corporate reconstruction exemptions are available.

The New South Wales government will reimburse the stamp duty on purchases of new or used battery-electric and hydrogen fuel cell vehicles that cost up to AUD 78,000 (dutiable value) for eligible registered vehicles from 1 September 2021.

Advice from a stamp duty specialist should usually be obtained where substantial stamp duty may be imposed because the amount of duty may depend on the form of the transaction.

Environmental Taxes

Australia does not impose a tax on carbon emissions or have an emissions trading scheme. However, the Clean Energy Regulator can issue Australian Carbon Credit Units (ACCUs) for greenhouse gas abatement activities undertaken as part of the Australian government’s Emissions Reduction Fund. Each ACCU represents one tonne of carbon dioxide equivalent net abatement (through emissions reductions or carbon sequestration) achieved by eligible activities. ACCUs that have not been surrendered, cancelled, or relinquished can be traded. 

Some states and local government agencies in Australia may impose waste levies. For example, since 1 July 2021, the state of Victoria has had a road-user charge which applies to Victorian registered zero and low emission vehicles.

Australia imposes Federal excise duty on several fuels and petroleum products with a fuel tax credit system in place.

Discrete tax concessions related to environmental matters have been enacted. For example, a concessional WHT rate of 15% can apply to distributions from a managed investment trust (MIT) that holds only ‘clean buildings’ (see the Withholding Taxes section for further details).

Fringe Benefits Tax (FBT)

The Federal Government levies FBT on employers at the rate of 47% on the ‘grossed-up value’ of non-salary and wages fringe benefits provided to employees (and the employee’s associates) by the employer or associates. 

The grossing-up of the value ensures tax neutrality between providing benefits and cash remuneration. Accordingly, FBT generally is deductible for income tax purposes. 

Some exemptions from FBT include some minor benefits, remote area housing in certain circumstances and specified relocation costs. In addition, there are some concessional valuation rules, particularly for motor vehicles and certain living-away-from-home benefits.

Payroll Tax

finance and accounting concept. business woman working on desk

States and territories tax employers’ payroll (broadly defined). The various jurisdictions have harmonised their payroll tax legislation. Still, some differences remain, particularly tax rates and the thresholds for exempting employers whose annual payroll is below a certain level after considering grouping rules. 

For example, in New South Wales, the rate for the year ended 30 June 2022 is 4.85%, with an annual exemption threshold of AUD 1,200,000. 

In Victoria, the general rate for the year ended 30 June 2022 is 4.85% (except for regional Victorian employers, where it is 1.2125%), and the annual exemption threshold is AUD 700,000. A variety of rates and thresholds apply in other state and territory jurisdictions. 

Superannuation Guarantee Levy

Legislation requires employers to contribute a certain percentage of an employee’s earnings base, subject to limited exceptions, to a registered superannuation fund or retirement savings account on behalf of the employee. 

Failure to make these contributions will result in the employer being liable for a non-deductible superannuation guarantee (SG) charge.

The current SG percentage is 10% until 30 June 2022 (up until 30 June 2021, the rate was 9.5%) and will progressively increase up to 12% from 1 July 2025.

No level of Australian government imposes a social security levy.

Major Bank Levy

Australia has implemented a levy (known as the Major Bank Levy) on Australian authorised deposit-taking institutions (ADIs) with total liabilities of greater than AUD 100 billion. The levy is imposed at a rate of 0.015% on certain liabilities of the ADI that are reported to the regulator on a quarterly basis under a reporting standard.

Insurance Tax

States impose taxes on insurance premiums, which may be substantial.

Petroleum Resource Rent Tax (PRRT)

PRRT currently applies to all petroleum projects in Australian offshore areas (or Commonwealth adjacent areas) other than production licences derived from the Joint Petroleum Development Area in the Timor Sea. It also applies to all Australian offshore oil and gas projects, other than the Joint Petroleum Development Area in the Timor Sea.

PRRT is applied to a ‘project’ or ‘production licence area’ at a rate of 40% of the taxable profits derived from the recovery of all petroleum in the project, including:

  • crude oil
  • shale oil
  • condensate
  • sales gas
  • natural gas
  • LPG, and
  • ethane

The taxable profit of a project is calculated as follows:

Taxable profit = Assessable receipts – Deductible expenditure

Deductible expenditure broadly includes exploration, project development, and operating expenditures.

PRRT is self-assessed by the relevant taxpayer. The taxpayer is, in most cases, required to give the Commissioner of Taxation a PRRT return for each PRRT year. PRRT is generally payable by quarterly instalments.

PRRT applies in addition to normal income tax. PRRT payments (including instalments) are deductible for income tax purposes.

Local Municipal Taxes

Local taxes, including water, sewerage, and drainage charges, are levied based on the unimproved capital value of land and include a charge for usage (e.g. water usage).

Additional Tips

1. Single Touch Payroll

Employers need to make a finalisation declaration by 14 July 2021 so that employees can access their tax-ready income statements.

Before finalising, ensure the STP information is correct and apply for a deferral if you need more time.

2. Superannuation guarantee

Ensure superannuation guarantee payments for employees are up-to-date. Employers can claim deductions for superannuation contributions made on their employees in the financial year the nominated super funds receive them by 30 June.

Report and rectify any missed payments to the ATO. If you do not pay an employee’s super guarantee on time and to the right fund, you must lodge a superannuation guarantee charge (SGC) statement and pay the SGC to the ATO.

The ATO has limited discretion concerning overpayments, which can be exercised in certain circumstances.

The SGC is not tax-deductible, and there are significant administrative charges, fees and penalties. It’s therefore important to ensure that you’re paying superannuation guarantee correctly throughout the year.

3. Taxable payments reporting system

Does your business earn income from building and construction, cleaning, courier, road freight, IT, security, investigation or surveillance services? If so, you may need to lodge a taxable payments annual report by 30 August 2021 to report payments made to contractors.

The details you need to report are generally contained in the contractors’ invoices and include ABN, name, address and total amounts paid for the financial year.

4. GST adjustments

When you do a tax return for your business, your tax agent will often do a reconciliation against your GST accounts. This can identify misclassified transactions or unclaimed credits which will need to be fixed.

Many mistakes relating to GST and fuel tax credit can be corrected in your next BAS. However, if you can’t correct your mistake in your next BAS, you need to lodge a revision.

It’s also an opportunity to ensure that your accounting software correctly records your GST transactions.

The ATO has worksheets to assist in calculating GST adjustments for sales, purchases, bad debts, creditable purpose and adjustments summary.

5. Businesses in financial distress

COVID-19 has left many businesses facing cash flow difficulties or severe financial distress. Therefore, it’s important to create a budget and seek to improve the financial position of your business.

There are tax obligations to consider when deregistering a company, and the ATO provides information for businesses in financial difficulty.

Individuals facing serious financial hardship can apply for release from their tax debts.

If you think your business is in financial difficulty, getting proper accounting and legal advice as early as possible is critical.

Primary Production

1. Farm management deposits (FMDS)

One of the best tax planning measures available to primary producers is utilising the farm management deposits scheme (FMDs). They are an effective business and cash flow planning tool.

Primary producers can deposit up to $800,000 in an FMD account and have early access to their FMD account during times of drought. They may offset the interest costs on primary production business debt.

2. Income averaging

Tax averaging enables primary producers to even out their income and tax payable over a maximum of five years to allow for good and bad years.

This ensures that farmers don’t pay more tax over time than taxpayers on comparable but steady incomes.

3. Other primary producer tax concessions

Other tax concessions you may be entitled to as a primary producer include:

  • the uncapped immediate write-off for capital expenditure on water facilities and fencing assets
  • the deduction for the full cost of a fodder storage asset if the expense was incurred or it was first used or installed ready for use on or after 19 August 2018
  • the outright deduction for capital expenditure for land care operations and carbon sink forests
  • the accelerated write-off for horticultural plants and grapevines.
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