The Basics of Small Business Taxes in Australia That You Should Know

Aspiring business owners who set up a small shop in Australia often deal with the biggest impacts on the country’s economy. While it seems like your small business still has a long way to go before reaching sustainable success, know that it plays a pivotal role in contributing to the growth of your community as a whole. 

The process to reaching sustainable success involves many steps, but besides persevering for your budding company’s growth, one of the first steps to protecting your business is to learn all about the associated taxes you need to address to stay compliant. 

On top of the usual corporate taxes and income taxes, being a self-employed individual has its own set of tax-related responsibilities, which is why you need to understand the Australian small business tax bracket to avoid any surprises.

A Basic Overview of Small Business Taxes in Australia

According to the Australian Taxation Office (ATO), a small business is officially considered as a business entity with an annual turnover of less than $10 million. If your small business has its own Australian Business Number (ABN), you can conduct business transactions such as issuing invoices, accepting payments through Australia Post, creating a bank account and even applying for a business loan.

After the initial sign-up for an ABN, when you decide to make your company’s growth official and incorporate it as a registered company, you will need to apply for a company tax number or an ABN. 

It’s a common misconception to assume that an ABN is the same as a Tax File Number (TFN). While the Australian Taxation Office issues both, your ABN is exclusively replicated in the Australian Business Register (ABR), which means that it’s the one that’s utilised in all your business transactions.

On the other hand, a Tax File Number (TFN) is issued by the ATO, and it’s kept with your personal records. Among other things, the purpose of a TFN is to report your income and tax.

What are the Critical Business Tax Terms You Need to Know?

When it comes to small businesses, it’s important to understand the tax-related terms that come along with it. Of the numerous small business taxes in Australia, you will hear the following terms over and over again:

• Capital Gains Tax (CGT) — In the eyes of the Australian Tax Office, a CGT is a profit you make from selling your capital assets such as a business or a property. In other words, it’s the gain or loss that you make when you sell or transfer your business, properties or shares. 

The 50 percent discount rule will apply when certain conditions are met. On top of the 50 percent discount rule,  there are 4 small business CGT concessions. You may apply these concessions to a further 50 percent discount when the concessional requirements are met. 

• Goods and Services Tax (GST) — The ATO defines the GST as a value-added tax, which means that you must pay a 10 percent tax rate on taxable goods and services to the ATO if your turnover is above the annual threshold of $75k.
  
  A GST-registered business must charge its customers GST on taxable goods and services it provides but is entitled to a credit for any GST it has paid for its expenditures on these goods and services as well as capital purchases (called input tax credits). Therefore the GST component should be calculated as the Total Price / 11 for fully taxable goods and services.
  
  A registered business must periodically lodge Business Activity Statements (BAS) (monthly, quarterly or annually), and at the same time pay the net amount of GST owed to the tax office (if more GST is paid than collected, a refund is paid by the tax office instead).

• Income Tax — Australian income tax applies marginal tax rates per the below table on an individual’s taxable income. A company is taxed at 25 percent from 2022. However, we have to retain the company’s earnings after tax within the company before distributing them to the directors and shareholders.
  
  The Taxation Office implements a franking credit system to credit the 25 percent company tax back to shareholders when dividends are paid. Your accountant will take up these franking credits into your tax return. A trust does not usually pay tax. Instead, it will distribute all its profit to beneficiaries including an associated company.     

• PAYG Withholding Tax and PAYG Instalment Tax — These are some prepaid tax systems that the ATO is ruling. PAYG Withholding Tax is the tax the ATO requires businesses to withhold from a portion of employees’ wages and to be paid to the ATO by every quarter.
  
  The employees will then lodge their annual tax return to claim a tax refund if the actual tax would have been lower than the total withheld tax. If it is higher, then you will end up paying the shortfall to the ATO. 

The Bottom Line: Understanding the Basics of Small Business Taxes in Australia

If you haven’t been paying any taxes on your small business so far, it’s important to understand that you should start as soon as possible. The sooner you plan your taxes ahead, the better you will be with your cash flow later on. Overspending your tax dollar could end up dragging you into a big financial problem. 

If you want to maximise your small business’s growth potential, it’s recommended that you consult an experienced accountant about the business analysis, tax rules and regulations that come along with it. From GST to CGT, you will find that there are many small business taxes in Australia that you need to address. 

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