The different types of business taxes in Australia
Unlike income tax which is relatively straightforward for employees, tax for businesses is a much more complicated world to navigate. As a small business owner in Australia, you must ensure these tax obligations are met.
Accounting
Unlike income tax which is relatively straightforward for employees, tax for businesses is a much more complicated world to navigate. As a small business owner in Australia, you must ensure these tax obligations are met.
Whilst you should always hire an accountant to help with your business finances, it’s still essential to understand and plan for the different taxes that will affect your business.
This article will give you a comprehensive guide to business tax in Australia, including eight significant types of tax that will affect your small businesses.
An overview of business taxes in Australia
The Australian Tax Office (ATO) administers and collects most business taxes, with state governments in charge of a few exceptions.
If a business fails to meet its tax obligations, it may face significant penalties from the ATO.
Without proper tax planning practices and strategies, small businesses risk facing nasty tax bills that can severely disrupt cash flow. This is why we recommend that all businesses sweep revenue aside into a separate tax account throughout the year. Whether you pay your tax monthly, quarterly, or annually, a separate tax account will ensure you have the funds to cover your next tax bill.
What are the types of business taxes that I should know about?
Goods and Services Tax (GST)
GST is a broad-based tax of 10% on most goods and services sold or used in Australia.
Businesses with an annual turnover greater than $75,000 ($150,000 for non-profit organisations) are required to register and include GST as part of their Business Activity Statements. The cost of GST is typically included in the price of a good or service, with businesses collecting this cost on behalf of the ATO.
However, businesses can claim back GST through credits. Any expense associated with the running of your business can be claimed as a GST credit as long as:
You intend to use your purchase solely or partly for your business
The purchase price includes GST
You provide or are liable to provide payment for the item you purchased
You have a tax invoice from your supplier
Due to substantial GST costs that can be claimed back, it’s critical to keep track of your expenses and understand the rules surrounding GST. Your accountant will be able to help through this process.
Company tax
Australian companies are subject to a company tax on their profits sourced in Australia.
For companies that qualify as a ‘base rate entity’, the company tax rate is 25%. However, all other companies are subject to a company tax rate of 30%.
To qualify as a base rate entity, your company needs to meet the following criteria:
Have an aggregated turnover of less than $50 million
Have less than 80% of its earnings coming through passive income sources (i.e., rent, capital gains)
Businesses not under a company structure are not considered separate legal entities, and your earnings will instead be taxed under your income tax rate.
Income Tax
Everyone is subject to income tax. However, your income level and business structure will dictate what income tax rate you must pay.
As explained above, if you operate as a company, your income will be taxed under the appropriate company tax rate. However, for other business structures (such as a sole trader or distributional trust), your income is instead subject to personal income tax.
Keep an accurate record of all the expenses you use to operate your business, as these may be eligible to be deducted from your taxable income. You can find out what items are tax deductible on this page of the ATO website.
You can also find the current personal income tax rates below, or calculate your income tax using our income tax calculator.
Payroll Tax
Payroll tax is a government tax on the wages an employer pays their employees.
As of the 2022-23 financial year, the payroll tax rate in Victoria is 4.85%, except for regional businesses.
In Victoria, a payroll tax exemption applies for businesses that do not exceed the monthly threshold of $58,333 in Australian wages. This threshold, however, varies between the different states and territories.
Capital Gains Tax is a federal tax on any capital gains a business makes from selling a non-inventory asset.
‘Capital gains’ refers to the profit a business makes if an asset is sold for a greater value than it was bought. This commonly applies to the sale of assets such as property, real estate, bonds, stocks, and precious metals.
In this case, businesses must report their capital gains and losses on their income tax returns, where the capital gains are included as part of their taxable income. Businesses are required to record the purchase of any asset that may be subject to CGT in the future, including assets bought anywhere in the world.
To avoid getting caught out by CGT costs at tax time, businesses should set aside appropriate funds after receiving capital gains from the sale of an asset.
Fringe & Benefits Tax
Fringe & Benefits Tax (FBT) is a tax paid by employers on certain benefits or incentives they provide for employees outside their salary or wages. This can include items such as a company car, memberships, discounted loans or a salary sacrifice arrangement.
FBT is separate from income tax and calculated on a fringe benefit's value.
Pay As You Go (PAYG) Withholding is not a tax on businesses but instead income tax that a business pays on behalf of the employees. To help workers avoid facing a hefty bill every tax time, employers are required to withhold their employee’s income tax and instead pay this directly to the ATO. This tax is paid through your Business Activity Statements.
PAYG Withholding may also apply for payments made to contractors and external businesses that haven’t quoted your ABN to you.
Please note that businesses must register for PAYG Withholding before making a payment that is subject to withholding.
PAYG Instalments
If you reported business or investment income exceeding $4,000 in your last tax return, you must comply with the Pay As You Go tax instalment system. PAYG Instalments is a program designed to spread your tax liability across the financial year and mitigate your risk of being caught by a large tax bill at tax time.
After lodging a tax return that exceeds the threshold, the ATO will place you in the PAYG Instalment system. This will break up the tax you expect to pay into instalments, which are included in your Business Activity Statements on a quarterly or annual basis.
Get an accountant to help with your business taxes
Navigating your tax obligations can be one of the most stressful and complicated parts of being a business owner. This is why choosing the right business tax accountant can be one of the most important decisions you make.
An experienced accountant will help you take of these obligations for you and identify and implement tax planning strategies that can effectively minimise your next tax bill.
If you have any questions about your business tax requirements or want to get in touch with one of our business accountants, book a free consultation.
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