Introduction to business taxes
The business tax world is like an intermingled web and trying to navigate your way through can be difficult. But let’s give it a try.
There are four basic business entities, and you may already have yours. They are:
Sole trader: Taxed as an individual in your own name, at the marginal tax rates.
Partnership: Net profit is split and taxed on an applicable entities tax rate. It could be individuals, trusts or companies in partnership or a combination of these entities.
Company: The end of year profit is taxed at 27.5 per cent for companies with an aggregated turnover of less than $25 million. This rate will drop to 25 per cent by 2022 for all companies with a turnover of less than $50m.
Discretionary Trust: All income is distributed to beneficiaries as per the trust resolution and is taxed at the beneficiary’s tax rate.
So, the types of tax a business may encounter are:
Pay As You Go (PAYG): Applicable to sole traders, companies and partners in a partnership who are individuals or companies. Most businesses pay PAYG after the first year of trading, based on the previous year’s taxable income as reported in their income tax return. Depending on the amount, you can pay it at once, or in quarterly instalments, as assessed by the ATO.
The amount can be varied based on your prediction of what you’ll earn the following year. If you earn more than your prediction, the balance of what is owed in tax is added to the final amount you pay once the tax return is lodged.
If you have a bad year and earn less, then you are refunded as the PAYG instalments would have been overpaid. Taxpayers new to the PAYG system need to carefully plan their cashflow and obtain advice because they may be required to pay tax in relation to three financial years in the space of several months.
Withholding Tax: If you pay employees, you need to withhold their tax payable on each payment and remit it to the ATO on either a monthly or quarterly basis.
Fringe Benefits Tax (FBT): This is the percentage of money employers pay to the ATO which is based on the total cost of benefits they give to employees that is not salary or wages. A vehicle is one of the most common fringe benefits, but there can be other things like gym memberships for example.
Goods and Services Tax (GST): Once any business reaches over $75,000 of turnover a year, you must register for GST. This means you report your company’s GST intake and also the GST accumulated in your company’s spending.
You pay the difference to the tax office or you are refunded the difference by the tax office. In most cases people do it quarterly but some businesses do it monthly or annually.
Stamp Duty: A percentage of the sale amount in a property transaction. The amount is tiered and changes depending on the price of the property and it also varies from state to state.
Capital Gains Tax: This is paid if you make a profit on a sale of property or assets. It is not a separate tax, it is a calculation that is included in your end of year business profits.
Individuals can get a capital gains discount of 50 per cent if the property has been held for 12 months or more, and this can apply when the money is distributed to the individuals in a trust or partnership.
Assets where the Capital Gains Tax does not apply are ones that were owned by the entity before September 20, 1985.
Small Business Tax Concessions: There are various tax concessions available to some small businesses, but the rules surrounding them can be quite complicated.
It is worth asking your accountant what concessions you may be eligible for BEFORE you make any capital gains transactions, as careful tax planning and advice can save you significant tax if done correctly