General on taxes that you need to know

Well, say it first, if you are in any doubt, you should talk to your accountant. The followings are for general information and reference.  

Income tax is applied on your profits, that is, the assessable income of the business less the allowable tax deductions. The amount of taxes you pay will depends on the organisational structure of your business. 

Sole traders will pay tax on their income at the personal income tax rates. These rates are progressive (the more you earn the more tax you pay), so if you earn more than $60,000, you pay tax at a rate of 48.5 percent on the income in excess of this amount.

One-person businesses can reduce their overall tax liability by entering into a partnership, commonly with their spouse or other person/persons. This has the effect of dividing the income stream between/among the partners,  according to the value of work performed or capital introduced.

For businesses with greater income, it is worth considering becoming a company. Companies pay tax at a lower, flat rate (currently 30 percent). All income earned is taxed at this flat rate. Further, when profits are distributed to shareholders, any tax already paid by the company is credited to the shareholder under the dividend imputation system.

A company will pay the directors and shareholders wages for working in the company. Such payments are subject to PAYG tax.   

Pay-As-You-Go (PAYG)

The Tax Office requires a business activity statement (BAS) to be completed regularly by business.

The BAS includes provision for PAYG instalments, which is a quarterly payment of income tax. The Tax Office provides a business with a PAYG instalment rate (based on the previous year's profit performance).

A business may pay company tax according to the specified Tax Office rate or use an alternative method of calculation. In any event, the matter should be discussed with your accountant.

For cash flow or others reasons you may agree to use the Tax Office rate or otherwise. As your accountant is most familiar with your business, seek the assistance of your accountant.

Fringe Benefits Tax (FBT)

FBT is a tax payable by an employer for "fringe" benefits, such as housing or a motor vehicle, paid as part of an employment package.

Most businesses do not provide fringe benefits (other than possibly a car) due to the complexities of the FBT system.

You should try to limit paying benefits that will attract FBT. Again, your accountant can best advise you as to what is a fringe benefit and what types of remuneration (salary, superannuation, allowances) you should provide your staff.

Capital Gains Tax (CGT) is levied on the increase in value of most assets acquired after September 1985. It may be levied on the sale of the business, or part of the business or investment asset you hold personally (eg. shares, negatively geared property).

CGT laws have been simplified for small business and certain concessions introduced. Where a business is sold, any capital gains liability may be rolled over when a small business is sold and another small business is undertaken.

In a sense, any capital gains tax is deferred. From a cash flow and a taxation point of view, this is obviously an attractive option.

Needless to say, CGT is a highly complex area, and where you dispose of a capital asset (especially your business), you should consult your accountant for advice. Your accountant may be able to minimise your taxation liability.

GST 

Since July 1, 2000, Australia has had a Goods and Services Tax (GST) that impacts most transactions. As an existing business, you should already be familiar with GST. However, it is worth mentioning certain basic elements to ensure GST is being adequately addressed.

The 10 percent GST is payable when a business makes a taxable supply or importation. That is:

Where a taxable supply is made, 10 percent GST is applicable. The tax is included in the price. However, a business only remits a "net" amount of GST as input tax credits may be claimed for GST paid on purchases.

What input tax credits can you claim?

A business can claim input tax credits for the GST amount on the purchase of most goods or services. The general criteria is:

Thus, each month or quarter, a business must calculate the amount of GST payable on taxable supplies and deduct from this amount any eligible input tax credits.
GST-free sales

If a supply is GST-free then no GST is payable on the supply. However, a supplier is entitled to claim input tax credits for GST paid on purchases related to the supply of GST-free goods.

The major categories of GST-free supplies are exports, health and medical care, education, food, and sales of businesses.

If you are unsure as to whether you should be charging GST, discuss the matter with your accountant or the Tax Office. It is imperative for all businesses that the correct amount of GST is paid.

GST accounting methods

The GST system provides alternatives on how you must account for GST. It is important that you use the correct method, especially for 'small' business, as there are significant cash flow advantages.

If your business has a current or projected annual turnover exceeding $1 million you must account for the GST on an accrual basis.

A business with a turnover of less than $1 million may use either the cash basis or accrual basis of accounting. It is highly recommended that you use the "cash basis", as GST is not payable to the Tax Office until you have been paid. This will help a small business' cash flow (see below).

Accrual accounting means your revenue and expenses are recognised at the date the transaction actually happened, not necessarily when you get paid or a payment is made. The amount of GST payable to the Tax Office is the amount that has been invoiced to customers, regardless of whether payment has been received. Therefore, businesses using this method must monitor carefully their debtors.

In relation to purchases, the amount that can be claimed as an input tax credit is based on the GST that has been charged on supplier invoices. Hence, you can claim "back" the GST prior to making payment, provided you have correct documentation (ie. tax invoice). It is important for businesses to monitor carefully the GST on sales and input tax credits. By following the basic tips above, most businesses will find that cash flow can improve.

If you are accounting for the GST on a cash basis the tax arising on the sale of goods or services is paid when payment is received from customers/clients. This is beneficial to your cash flow. The Tax Office gets paid only when you get paid. Similarly, input tax credits can be claimed when payment is made to suppliers.

Therefore, if you pay invoices prior to the end of your tax period, you can claim back the GST in your next BAS. Again, by understanding and using the GST system to your advantage, a business can better manage and improve its cash flow.

Whilst most businesses would be expected to be familiar with GST, by following some of the above tips, hopefully your business can improve.

Plan your tax before June 30

Assuming you are having a good year, you may need to consider end-of-financial-year planning. End-of-financial-year tax planning is a vital exercise for any profitable business to undertake.

It is also relevant, as often stock levels/values are relevant to the calculation of taxable income. To successfully and legally minimise your tax, you need to keep accurate and up-to-date accounting records and be aware of the exact financial position of your business.

This will also allow you to consider and potentially take advantage of the various choices and actions that will put you in the best possible position regarding tax payments or your tax liability. However, taxation is perhaps the most complex area of business, and you should make your end-of-year decisions with the assistance of your accountant.

Your accountant should be aware of the Tax Office's latest views on year-end tax planning.

One of the most popular year-end tax planning opportunities is superannuation. Often superannuation contributions are used on behalf of owners or directors to reduce the tax liability of the business.

Disclaimer: these are only general information, we do not accept any responsibilities in anyway whatsoever for anybody using or rely on the information in this page.