Do you run a small business in Australia and are curious about the legality and taxes of your business?
Taxes in Australia for a small business are well-defined and not way out of the ordinary. This article will allow you to gather enough knowledge before consulting your accountant.
Major Taxes For Small Businesses
In a gist, there are three main types of taxes that businesses have to pay and they are; Company or income tax, Capital gains tax (CGT), and Goods and Services Tax (GST). These have a stable rate, which changes ever so slightly based on several economic factors.
But overall, managing business taxes in the country is a fair game. However, Australia is not a ‘tax haven’ country, so many businesses may find the tax rates higher than they prefer. But being a business-friendly country, you can find your way around easily.
So let’s explore each of these main types in depth. In the end, we’ll also explore some of the lesser-known taxes that also play a role in regulating business in the country.
Company Tax (or Income Tax)
If you’re a company that’s based in the country, you’ll have to pay company tax, and the rate is determined by the Australian government.
Now, if your company isn’t based in the country but earns income from Australian sources, you’ll still be taxed at the same rate as a resident company. However, there are some specific situations, like the type of industry you’re in or how your business is structured, where your taxable income and the tax rate might differ slightly.
Eligibility & Rates For Company Tax:
Company tax rates apply to entities that include the following:
- corporate unit trusts
- public trading trusts.
Starting from the 2017-18 income year and going forward, it’s not enough to just be a small business anymore if you want to qualify for the lower tax rate. Now, you need to meet the criteria of being a ‘base rate entity’ to get that reduced tax rate.
Regular Tax Rate: If your company doesn’t qualify for the lower tax rate, you’ll pay the standard 30% company tax rate.
Eligibility for Lower Rate: Whether you get the lower tax rate depends on whether your company is considered a “base rate entity” starting from the 2017-18 income year onward.
You can track the current company tax rates for more accurate details.
Capital Gains Tax (CGT)
Capital Gains Tax Rates (source: Australian Taxation Office (ATO))
The above chart shows the tax rates for capital gains for individuals (or freelancers/digital nomads), companies, and capital funds. The rates have been the same since its last modifications in 2020. You can use the official CGT calculator by the Australian Taxation Office (ATO) to accurately calculate your tax relating to capital gains.
In simple terms, Capital Gains Tax (CGT) is what you owe the government when you make money by selling stuff like property or investments. It’s a part of your income tax.
If you’re a foreign company doing business in the country and you buy things that you use for your business, you might have to pay CGT when you sell those things. You need to be careful and keep good records when you buy stuff that could be hit with CGT later on.
And here’s some good news: if you’re a small business, some special rules might help you pay less CGT, but they only apply in certain situations.
What do you pay capital gains taxes on, and how much?
If you’ve sold some stuff like property or shares this year, you’ve got to figure out whether you made money or lost money on each thing you sold.
If you sold something for more money than you forked out to buy it, that’s a capital gain – a win in your pocket. But, if you sold something for less cash than you originally shelled out, that’s a capital loss – a bit of a financial setback.
The tax you owe is based on your overall capital gains. This means:
- You add up all the money you make from selling things.
- Then, you subtract any losses you had.
- And, if you qualify for any special discounts on your gains, you take that into account too.
Now, here’s a good deal: if you’re an individual in Australia and you’ve held onto an asset for at least a year, you get a 50% discount on the tax you owe for the profit you made when you sell it. So, you only pay tax on half of your net capital gain for that asset.
Let’s take an example to explain CGT
Let’s talk about Christopher, an Aussie resident. He bought a piece of land, held it for 18 months, and sold it for a $10,000 profit. No capital losses for him.
Christopher qualifies for a 50% Capital Gains Tax (CGT) discount, so he’ll report a $5,000 capital gain on his tax return. Smart investment plus tax benefits for Christopher!
Goods & Services Tax (GST)
GST, or the Goods and Services Tax, is a 10% tax that the ATO imposes on the sale of most goods and services within the country. Businesses that are registered for GST are responsible for collecting this tax from their customers and then remitting it to the ATO.
Eligibility for GST
To be eligible for GST registration, a business must have an annual turnover of at least $75,000 ($150,000 for non-profit organizations) and is required to file a Business Activity Statement every quarter.
The way GST affects your business’s cash flow depends on whether you use a cash accounting method or an accrual method. Additionally, there are circumstances where you can claim GST credits.
Is there an exemption from GST?
Basically, the question is: are there any products or services that businesses offer which are exempted from GST? The answer is yes!
Most essential foods, certain educational programs, and specific medical, health, and care products are exempt from the general sales tax (GST). However, there are situations where GST could apply to the sale of a business.
To avoid GST on a business sale, a few conditions must be met:
- Both the buyer and seller need to agree in writing that the business is being sold as a ‘going concern.’
- The buyer should receive everything necessary to run the business in the future.
- The seller continues to manage the business until the settlement day.
- The buyer has a valid GST registration.
- The full purchase price has been paid.
Even if all these conditions aren’t met, GST might still be applicable in some cases. It’s crucial to consult both your accountant and attorney before any sales transaction to get advice tailored to your specific situation if you’re dealing with complex GST issues.
What if I have an export business? Do I still pay GST?
Essentially, when it comes to exporting products from Australia, they are usually not subject to the Goods and Services Tax (GST) as long as they are shipped out of the country within 60 days of the invoice being issued or payment received.
However, there are some special cases where this rule doesn’t apply.
For instance, if the person or entity receiving the service is located outside of the country, GST typically doesn’t apply.
However, there are specific conditions to determine whether a sale made overseas qualifies for this GST exemption. To get clarity on how these rules apply to your unique situation, it’s a good idea to consult with your accountant or reach out to the ATO at their toll-free number, 13 72 26.
What Other Taxes Do Small Businesses Have To Pay?
Now we are going to talk about some other taxes that businesses have to pay in Australia. These are not the major ones, as those have been mentioned above. However, they exist, and it’s good to know what these are all about.
So there are two taxes that we’ll talk about, which are as follows:
- Fringe Benefits Tax (FBT)
- Payroll Tax
So let’s explore them each one by one.
Fringe Benefits Tax (FBT)
A fringe benefit is an extra perk or form of compensation given to an employee on top of their regular salary or wages.
Let’s say you’re running a company and you’re also an employee of that company. In this case, any additional benefits you receive, apart from your salary, are considered fringe benefits.
These fringe benefits can take various forms, including:
- Providing an employee with a loan that doesn’t accrue interest.
- Allowing an employee to use a company vehicle for their personal use.
- Reimbursing an employee for their children’s school fees.
- Covering an employee’s health insurance costs.
- Covering expenses related to entertainment, like hosting a Christmas party for employees and their partners.
These are just a few examples of fringe benefits, and there can be more. It’s important to understand that these benefits come with specific tax implications and regulations, so it’s wise to consult a professional for guidance on how to handle them correctly.
If your business is paying salaries, benefits, and superannuation contributions that go beyond the tax-free threshold set by your state or territory, you’ll need to factor in payroll tax as one of your financial responsibilities.
Now, since payroll tax is specific to each state, you’ll need to visit your local government’s official websites to find out what those specific thresholds and tax rates are.
To give you an idea, let’s say you have employees in New South Wales. If your total wage payments for them exceed $1.2 million, you’ll be required to pay a payroll tax rate of 5.45% to your local government. On the other hand, if you employ people in Queensland and your wage payments surpass $1.3 million, you’ll be subject to a payroll tax rate of 4.75%.
Remember, if your business operates in multiple states or territories, you’ll have payroll tax obligations in all the regions where your employees work.
In conclusion, understanding the taxation landscape for small businesses in Australia is crucial for financial planning and compliance. The major taxes, including Company or income tax, Capital Gains Tax (CGT), and Goods and Services Tax (GST), are well-established, with stable rates subject to economic factors.
Looking ahead, the future of taxation in Australia may involve ongoing adjustments to tax thresholds and rates to accommodate economic shifts. Small businesses should remain vigilant, staying informed about any tax changes and seeking professional advice when needed.
In this dynamic tax landscape, proactive tax planning and compliance will continue to be essential for the success and sustainability of small businesses in Australia.