Tax can be one of the trickiest things to get your head round when running or starting a new business. But it is especially important to understand your tax responsibilities as a small business, as well as budgeting for tax you owe. Whether you’re starting out of have been in the game for a few years, it’s a good idea to take a refresher on how to prepare taxes for small business, it’ll help you know how much tax a small business needs to pay in Australia.
But why is it important to plan and prepare? For a start, gathering all necessary documents for lodging your taxes allows you to plan your finances accordingly and avoid incurring unwanted penalties. In this article we’re going to take a look at how to prepare taxes for small businesses and make the process as efficient as possible.
But before we get started let’s take a quick look at the very basics of tax.
How Business Tax Works
The amount of tax your business has to pay depends on your business’s taxable income. It’s calculated from your assessable income less any deductions.
- Assessable income is generally income your business earns. It includes all gross income (before tax) from your everyday business activities (sales etc.) as well as other income that is not part of your day-to-day business activities, for example, capital gains. It does not include GST payable on sales you make, or GST credits.
- Deductions are amounts you can claim for expenses involved in running your business.
You must lodge an income tax return for any year you run your business. You need to do this even when you don’t expect you’ll owe tax.
Key business taxes in Australia
These are the main business tax categories you need to be aware of so you know how to prepare taxes for small business. We’ll touch on these in more depth later in this article.
Company (income) tax
The tax imposed on all registered companies in Australia. It includes resident and non-resident companies, corporate unit trusts, and public trading trusts.
Capital gains tax (CGT)
The tax on the profit you’ve made by selling an asset.
Goods and services tax (GST)
The tax levied on goods and services.
Payroll tax
The employer withholds the required amount from the employees’ wages and pays it to the government on behalf of the employee.
Other taxes you may need to lodge include:
- Fuel tax credit (FTC)
- Fringe benefits tax (FBT)
- Land tax
Tax preparation checklist: how to prepare taxes for small business
Ok so now we’ve outlined the basics, let’s dive into how to prepare taxes for small business. Below are our six key tax preparation steps:
- Get familiar with tax time dates and reporting requirements
- Learn about the taxes you’ll pay
- Gather your financial records
- Find out what deductions you can claim
- Check for tax concession eligibility
- Lodge your tax return and submit payment
1. Get familiar with tax time dates and reporting requirements
In accordance with the Australian Taxation Office (ATO), the due dates for tax returns are determined by client type, the lodgement due date, and the date the return is lodged. To make sure you’re on track, check out the ATO’s website for a list of due dates for lodging and paying.
Payroll reporting
As of 1 July 2019, small businesses with fewer than 20 employees are required to lodge reports with the ATO using Single Touch Payroll software.
Monthly or quarterly business activity (BAS) and instalment activity statements (IAS)
The ATO requires businesses to submit a business activity statement (BAS) monthly, quarterly, or annually (annual GST return, if eligible).
These are used to report and pay 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 must lodge a BAS before the due date.
An instalment activity statement (IAS) is similar to the BAS but without GST and some other taxes. Businesses that are not registered for GST would submit an IAS to pay PAYG instalments.
Online BAS Lodgements
Get in touch today to start lodging your Business Activity Statements or call 1300 180 630 to speak to one of our consultants for a no-obligation consultation.
Financial year reporting
In Australia, the financial year for tax purposes runs from 1 July to 30 June. Businesses are required to lodge an income tax return for this period. If you operate your business as a sole trader, you can declare your business income as part of your income tax return.
Reporting JobKeeper payments
JobKeeper payments are taxable and need to be included in tax returns.
If you’re a sole trader who has received JobKeeper payments, you need to include the payments as business income in your individual tax return.
If your business is a partnership or trust, you will report JobKeeper payments as business income in your partnership or trust tax return. Furthermore, if your business is a company, you will report it as income in your company tax return.
Your employees won’t need to do anything different as the payments will be included as salary and wages, or an allowance, in the regular income statement, or payment summary, you provide as an employer.
Reporting Cash Flow Boost payments
You don’t pay tax on Cash Flow Boost credits, as they are non-assessable non-exempt income. How this credit is reported in your return or your financial statements will be different depending on your business structure.
2. Learn about the taxes you'll pay
How much tax does a small business pay in Australia? It really depends on your business structure, activities, and income. For a start, there are four main categories of business taxes you need to be aware of.
Company Tax
Company tax, or income tax, is a tax imposed on all registered businesses in Australia.
Both resident and non-resident companies, corporate unit trusts, and public trading trusts pay company tax at a rate provided by the Australian government.
There are two types of company tax rate, the full company tax rate, and the lower company tax rate.
- The full company tax rate is 30%. Companies subject to this are the ones who are not eligible for the lower company tax rate.
- The lower company tax rate is 26% for the income year 2020-2021. This rate will drop to 25% in the 2021-2022 income year.
Capital Gains Tax
Capital Gains Tax (CGT) is the tax you need to pay if you made a profit from selling an asset. It falls into your company’s assessable income and follows the same rates used when calculating company tax.
In most cases, you can determine your capital gain by subtracting the initial cost of your CGT asset from the amount you get after selling it.
There are two methods available to work out your capital gains. You can use any of the two to lower the amount of your capital gains — and ultimately, your taxes.
- Indexation method – for assets you owned for more than 12 months.
- Other method – for assets you owned for less than 12 months.
Goods and Services Tax
Goods and Services Tax (GST) is a 10% tax added on consumer goods and services in Australia. This means that consumers are the ones who shoulder the cost.
You should register your business with GST if it falls to any of the following:
- Your business has more than $75,000 GST turnover
- Your non-profit organisation has more than $150,000 GST turnover
- You have plans to claim fuel tax credits for your business.
- Your business provides taxi, limousine, or ride-sourcing services
Failure to do so can lead to costly consequences. The government may require you to pay the total GST due on all sales you’ve made starting on the day you’re mandated to register. Moreover, you may also need to pay penalties and interest.
Payroll Tax
Each state or territory follows a certain threshold and tax rate in relation to payroll tax. See the list below to determine how much payroll tax a small business needs to pay in Australia. You’ll be able to determine whether your business is liable or exempt from the payroll tax.
Australian Capital Territory (ACT)
- Annual threshold: $2,000,000
- Tax rate: 6.85%
Northern Territory (NT)
- Annual threshold: $1,500,000
- Tax rate: 5.5%
New South Wales (NSW)
- Annual threshold: $1.2 million
- Tax rate: 4.85%
Victoria
- Annual threshold: $650,000
- Tax rate: 4.85%
- The tax rate for regional Victorian employers*: 2.02%
*The state of Victoria will further lower the tax rates for regional Victorian employers:
- 2021-2022 income year: 1.62%.
- 2022-2023 income year: 1.2125%
Queensland
Tax rates and thresholds:
- 75% for employers who pay $1.3 million to $6.5 million in Australian taxable wages. For regional employers, the tax rate is 3.75%.
- 95% for employers who pay over $6.5 million in Australian taxable wages. For regional employers, the tax rate is 3.95%
The regional rates are valid until 30 June 2023.
South Australia
Tax rates and thresholds:
- Variable between 0% to 4.95% for businesses who pay $1.5 to $1.7 million in Australian taxable wages
- 95% for a business that pays more than $1.7 million in Australian taxable wages
Tasmania
Tax rates and thresholds:
- 4% for businesses who pay $1.25 million to 2 million in Australian taxable wages
- 1% for businesses who pay more than 2 million in Australian taxable wages
Western Australia
Tax rates and thresholds:
- 5% diminishing for businesses who pay $100 million in Australian taxable wages
- 6% for businesses who pay $100 million to $1.5 billion in Australian taxable wages
- 5% for businesses who pay more than $1.5 billion in Australian taxable wages
Tax for Sole Traders
As the most common form of business structure in Australia, you may be wondering how much tax do sole trader small businesses have to pay in Australia.
Sole traders a people who runs and manages their entire business. Under this arrangement, sole traders can simply follow the individual income rate when filing taxes instead of the company tax rate.
For both CGT and GST, the same rules apply as for companies. Sole traders can also apply for small business tax concessions as long as they meet the requirements.
3. Gather your financial records
Before lodging your taxes, make sure your financial records are readily accessible. These include, but are not limited to:
- Income statement
- Balance sheet
- Receipts
- Bank and credit card statements
- Business tax return from the last income year
- Estimated tax payments
- Asset purchase details
- Accounting documents
- Partnership agreements
- Depreciation schedules
Keeping good records makes tax preparation easier. We recommend using accounting software to store and generate these records. Doing so will not only save you time but will also secure your documents from getting lost or damaged. For tax purposes, you have to keep your important records for five years.
4. Find out what deductions you can claim
Claiming your eligible business tax deductions is one of the most important things you’ll want to be aware of when learning how to prepare taxes for small business. Our friends at the ATO have put together a video series that highlights key deductions that you may be entitled to receive when running a business. Key points to consider here include:
- Remember the deductions you’re planning to claim should be directly connected to the assessable income you earn.
- Keep in mind when your business started, including the time you’ve spent working on it before it officially opened, as this may enable you to qualify for further deductions.
- There are two methods used to account for your transactions: accrual accounting and cash accounting.
- Accrual accounting lets you claim the expense in the income year you made the expense.
- While cash accounting lets you claim the expense when you pay the bill.
Clamining all your deductions is an important step in minimising how much tax your small business pays in Australia.
Your expenses should be categorised into three main groups:
Expenses you can claim within the same income year
Day-to-day expenses – Advertising, bank fees, education and training expenses, electricity, insurance, motor vehicle expenses, phone calls, repairs and maintenance, and tax preparation costs.
Home office expenses – Occupancy expenses (mortgage interest, house insurance, council rates, rent) and running expenses (electricity, official business phone calls, lighting and cleaning expenses, cooling, depreciation of office furniture and equipment).
Travel expenses – Business-related travel expenses
Expenses you can claim over a number of years
Capital expenses which are the investments your business makes to improve or maintain your regular operations. Examples include buildings, vehicles, computers, and equipment
Expenses you can't claim
Private or domestic expenses such as private travel or private use of your car. Also, you won’t be able to claim:
- Expenses you have incurred before your business started operating (except for some legal costs in establishing the company and costs of licenses and permits).
- The non-taxable income of your staff
- Non-deductible expenses (e.g., parking fines)
- A deduction for GST credits if you’re qualified to pay these separately on your activity statement
5. Check for further tax concession eligibility
There are several tax concessions available for businesses in Australia like income tax concessions, small business CGT concessions, and GST and excise concessions. Like your allowable deductions, finding out which concessions your business qualifies for will allow you to lower how much tax your small business pays in Australia.
6. Lodge your tax return and submit payment
If you’ve followed our guide so far, you should now know how to prepare taxes for small business. Depending on how complex your business and taxes are, you may want to lodge your own return or get a professional to lodge it for you.
You can lodge your tax return:
- With a registered tax agent
- Online with myTax if you’re a sole trader
- With standard business reporting enabled software if you’re a company, trust, or partnership
- By paper.
- By mail.
If you use a tax or BAS agent, make sure they’re registered with the Tax Practitioners Board (TPB).
Business Tax Returns
Whether you’re operating as a sole trader, trust, partnership or company, our Chartered Accountants are here to get your business the best tax outcome. Enquire now or call 1300 180 630 for a no-obligation consultation and FREE quote.
When it comes time to pay your tax the ATO has a range of self-service tools and online services to help you manage payments.
- You can pay with BPAY or a credit/debit card.
- Online payment – using ATO’s Business Portal or myGov account
- Electronic transfer
- Pay by phone
- Pay by mail
- In person at Australia Post
- Transfer from an overseas bank account
Ensure all your details are correct and complete before making payment to avoid inconveniences.
At this point, the most vital information is your payment reference number (PRN) which is also called an EFT code. This unique number guarantees that your payment is credited to the correct account.
Take note that different types of tax require different PRN, so make sure to use the right PRN for the tax you’re paying for.
Thriday is the ideal software for maintaining control over taxes and business financial health. With its intuitive features, it empowers users to efficiently manage tax-related tasks, ensuring accuracy and compliance. Thriday’s capabilities provide businesses with the tools needed to stay organised, make informed financial decisions, and maintain a robust and healthy financial foundation. It’s a reliable partner for businesses seeking control and clarity in their tax and financial management processes.
Need business tax assistance? Book a tax planning session!
POP Business provide crucial services including expert help and advice on business tax returns. Contact the team today on 1300 180 630 to find out more about how our experts can help save you time and money.
Get a head start on this year’s business taxes with a tax planning session – we’ll help you optimise your business structure and processes to make sure you’re minimising how much tax your small business pays in Australia by maximising your deductions.
We can also provide you with assistance via consultation if you require assistance with how to prepare taxes for small business yourself, or we can lodge your returns for you. Get in touch today!
Tax Planning
You’ve worked hard to build your business and you should reap the rewards. Book a Tax Planning session with POP Business to optimise your business ahead of tax time or call 1300 180 630.
