Complying with tax lodgements can be a headache for small business owners, especially if there hasn’t been a lot of organisation during the year with bookkeeping. While it might seem like an advanced step, accurate bookkeeping is the basis for staying on top of finances and ensuring that a business is profitable while making sure small businesses comply with tax regulations in Australia.
In this blog post, we’ll give you a breakdown of the tax system in Australia, discuss the types of taxes applicable to small businesses and provide guidance on calculating tax, tax deductions and preparing and lodging tax returns.
How does the Australian taxation system work?
The taxation system in Australia is complex so we can only provide a very brief overview here.
At its core, all small businesses in Australia are required to pay income tax of some kind. This is calculated using the business’s taxable income which is lodged annually shortly along with other financial information after the end of the business financial year – June 30. All records of finances need to be up to date and lodged on time to the Australian Tax Office (ATO).
There are different tax rates that can be applied, depending on the business structure. Sole traders and partnerships will use an individual tax lodgement which is different and much simpler than companies and trusts. Small businesses may also be required to pay GST, payroll tax, and FBT, depending on the nature of their business and how much income is earned annually.
In Australia, many tax obligations are self-regulating, which means business owners are responsible for keeping track of their finances and knowing which income and payments they need to declare, including income tax, goods and services tax (GST), fringe benefits tax (FBT), and others. A qualified bookkeeper will be able to tailor a system to record the financial data you need come tax time.
Not every business will need to know and understand all the different taxes or include every section in their tax lodgement. It’s important that you get advice on what aspects are applicable to your business to reduce the bookkeeping workload and remain compliant.
Which business structures pay the most tax in Australia?
Small businesses in Australia can choose from various business structures that come with different tax obligations. Some business structures offer more tax benefits than others.
It’s important to understand the tax obligations for different structures before registering your business to set up the right financial data recording systems in advance. Keep in mind that you may need to change reporting and tax payments as your business scales.
Some of the different types of business structures are:
Sole trader: an individual who is responsible for the day-to-day operations of the business. They are personally liable for any business debts. A sole trader is required to pay income tax on their business profits – at their individual tax rate.
Partnership: where two or more people set up an arrangement that shares the responsibility of running the business. Each partner is responsible for the business’s profits and losses and is required to pay income tax on their share of the business’s profits (at their individual tax rate).
Company: a separate legal entity from its owners and shareholders. It is responsible for its debts and obligations. A company is required to pay income tax on its profits at a flat rate of 30%. Concessions are available for eligible companies with lower earnings.
Trust: A trust is an arrangement where one person (the trustee) holds assets on behalf of another person (the beneficiary). The trust is responsible for paying income tax on the trust’s profits at the trustee’s individual tax rate.
Tax obligations for each business structure vary quite a bit, with some structures offering more tax benefits than others.
Sole traders and partnerships are not required to pay company tax, which can be as much as 30% of annual profits, instead, these business types lodge an individual tax return. While the tax rate for individuals can be higher than company tax, as much as 37%, there are certain tax deductions available to sole traders and partnerships that companies are not eligible for.
What are the Tax deductions for small businesses?
Small businesses in Australia are eligible for various tax deductions which can reduce their taxable income and overall tax liability. Some of the most common tax deductions for small businesses include:
In order to be eligible for tax deductions, the expenses and depreciations listed must be directly related to creating assessable income. The range and scope for this are influenced heavily by the industry the business operates in and the resources required to produce revenue.
Companies with employees can also have certain expenses calculated separately under Fringe Benefits Tax concessions. This applies if the expenses directly relate to equipment for employee-required use, meals that are not included as part of travel expenses, and well-being activities.
Knowing what to list as deductions on your tax return comes down to experience and a detailed understanding of what concessions are acceptable. It’s also important that a copy of expense transactions are kept.
Bookkeeping and tax compliance
In order to keep accurate records of expenses and income it is vital that bookkeeping is part of the everyday business structure. This is important for informed budgeting, asset allocation as well as tax compliance for small businesses.
Proper bookkeeping ensures that businesses maintain accurate records of their financial transactions and are able to report their income and expenses correctly.
Detailed bookkeeping, where every single expense and asset is divided into correct categories with codes, also helps reduce stress come tax time. This allows any discrepancies, either with invoices or reconciliations to be identified and corrected in real-time, creating a much simpler and more straightforward tax lodgement, giving business owners confidence that everything necessary has been covered off. This is especially important as there are timeframes for when tax forms need to be lodged by.
The consequences of non-compliance can be severe. Small businesses that fail to comply with tax regulations may be subject to fines and penalties, which can have a significant impact on their bottom line. Additionally, non-compliance can result in legal action, which can be costly and time-consuming. The benefits of prioritising bookkeeping in small businesses therefore far outweigh the cost of installing and maintaining quality bookkeeping services.
Preparing and lodging tax returns
Business owners are responsible for preparing and lodging tax returns correctly for tax compliance. Preparing a tax return involves gathering all relevant financial information to show the business year’s income and expenses, which will be used to calculate the taxable income.
Tax returns must be lodged with the Australian Taxation Office (ATO) by the relevant deadline, generally, the due date is 31 October, giving businesses approximately four months from the end of the financial year. Deadlines for tax submissions may be extended if businesses use a registered tax agent.
It is important for small businesses to keep track of the lodgements and deadlines to avoid any fines and penalties.
Paying tax as a small business owner
Small business owners have several payment options for their tax liabilities, including electronic payment, credit card payment and direct debit. A more flexible option is PAYG, which enables incremental payments to be made towards tax throughout the year to decrease the impact of a large lump sum payment.
As well as penalties for late tax lodgements, there are also fines applied if tax payments are late. Penalties for late payment can be significant, including fines and interest charges. To avoid additional charges any small business owner who is unable to pay their tax liabilities by the deadline can contact the ATO and set up affordable payment instalments.
Tax compliance is an essential part of running a successful small business in Australia. In order to meet regulations and comply with ATO standards business owners need to understand the tax regulations applicable to their business structure.
To avoid a last-minute tax panic and possible fines for late or inaccurate lodgement it’s essential that every business maintain accurate financial records through a standardised bookkeeping system. This will keep all accounts in order to help meet the relevant deadlines for preparing, lodging and paying tax with minimal fuss and stress.
Having accounts in order and ready to go at tax time can also help avoid fines, penalties, and legal action that can result in late or inaccurate tax lodgements. The key to achieving this is making sure your bookkeeping system is correctly set up to capture the financial data relevant to your specific business.