Small business tax guide

small-business-tax-guide

Where to begin at tax time if you run a small business.

This guide explains where you need to begin and what you need to know at tax time for small businesses as well as some tips to get more money back.

Note that this is more of an overview than a comprehensive guide. It’s meant to help you understand small business tax rather than become a complete expert.

What are the main taxes and how do I pay them?

  • GST. You need to pay 10% of your taxable goods and services. You add 10% to the cost of these goods in order to pay it.
  • PAYG. These are deductions from the gross wages paid to any staff you employ.

How are they paid?

You pay taxes through Business Activity Statements (BAS). When you register for an Australian business number and have registered for GST, you will automatically receive a BAS form when it’s time to lodge.

  • You will most likely receive a BAS four times per year, which you will need to submit quarterly.
  • If you do not have to register for GST, but do so anyway, then you can submit a BAS annually instead.
  • In special circumstances, the ATO might send you monthly BAS.

Simply complete the form and send it to the tax office (the ATO).

You must register for GST in the following situations:

  • Your business’s annual income is $75,000 or more, or you think it will be.
  • You provide any taxi-type transport to paying customers.
  • You want to claim GST credits.

If your annual income is under $75,000, then you do not have to register for GST, but you might want to do so anyway in order to claim GST credits.

The four BAS due dates each year are as follows:

  • 28 April: Your BAS for January to March
  • 28 July: Your BAS for April to June
  • 28 October: Your BAS for July to September
  • 28 February: Your BAS for October to December

The way you choose to lodge a BAS will also determine how you’ll receive the next one. For example, if you lodge online then you’ll receive your next BAS online. If you lodge through the mail, you’ll receive the next one through the mail.

What about business income tax?

Some small businesses will also have income tax obligations where they pay a percentage of income in addition to the GST and other things on the BAS. Your obligations here will depend on the company structure and whether you are a sole trader or actually own a company.

  • Sole traders. This is when you run the business. You have no business income tax obligations, and your tax comes out of your personal income tax.
  • Company owners. This is when you operate a company as a separate legal entity. For the 2016-2017 financial year, small business income tax rates are 27.5% and you need to pay this annually at tax time. This is separate from the BAS. To qualify as a small business, companies need to have an annual aggregate turnover of less than $10 million.

In summary:

  • You must register for GST if you expect an annual income of $75,000 or more.
  • If you register for GST, you will generally receive a BAS four times per year.
  • Complete the BAS and send it to the ATO in order to do your taxes.
  • Sole traders pay income tax as part of their personal earnings, while small business companies pay separate business income tax. This is separate from the BAS.

Should I DIY or use an accountant?

Generally, there are two different options:

  • DIY. This may be more suitable for sole traders or for those who won’t be claiming a lot of deductions or offsets. DIY accounting software makes this a lot easier and simpler than it used to be.
  • Use a tax agent or accountant. This costs money but there can be a number of benefits. If you have a lot of potential offsets or deductions, it could be value for money. The accountant can help you address any tax concerns you may have or find tax breaks or offsets you might not have been aware of.

Tax breaks, deductions and GST credits for 2017

Note that this is a brief explanation of some of the main tax breaks, deductions and GST tax credits available to small businesses. It is not a complete list of all possible small business concessions or deductions.

These can help you or your business end up with more money after tax time, and many of them work hand in hand, so it’s good to understand how they fit together.

The first thing to consider is GST credits. These count towards your other payable taxes and reduce the total amount you need to pay in other business tax. You record these are part of your BAS, and you must register for GST in order to get them.

The amount you can claim in GST credits is generally the amount you’ve paid in GST for business items.

For example, if you pay $50 for a printer that you only use for business purposes, and you pay $5 GST on it, then you can claim $5 in GST credits for the printer. In other words, these credits, as recorded in your BAS, can show that you’ve “already paid $5 in business tax” that year.

You can claim GST credits for any GST you pay on business items.

  • If the item is for both business and personal use, then you can only claim GST credits equal to the proportion of business use it gets.
  • GST credits work differently for some specific items. For example, you can earn fuel tax credits, instead of GST taxes, for fuel used by your business.
  • When requested, suppliers must send invoices to their customers within 28 days. You need these invoices in order to claim GST credits.

Latest small business tax guides

How to claim GST credits on your BAS

You enter the information on your BAS and back it up with evidence in the form of tax invoices from your suppliers. These invoices should include the following information:

  • The supplier’s business name and ABN
  • The date of the invoice
  • A brief description of the items, including quantity and price
  • An indication of how much was paid in GST

For purchases of over $1,000, invoices will also need to include your business name or ABN.

You must keep these documents (for at least five years) in order to support your claims.

Your GST credits also affect your tax deductions.

Tax deductions

You are able to claim tax deductions for business items. These are items that contribute to your ability to earn a taxable income and can be almost anything that fits the definition.

For example, repayments made on a business loan would typically qualify, but so would repayments on a personal loan that you spend on your business.

Business loan repayments might be 100% deductible because you are using it all for your business.

If you spend a quarter of the personal loan on your business and use the other three-quarters for personal purposes, then repayments might be 25% deductible.

You cannot claim “value” already claimed through GST credits as tax deductions. Let’s say you spend $50 on a business-use-only printer, including $5 of GST. If you claim that $5 as a GST credit, then you’ll only be able to claim the remaining $45 as a tax deduction.

However, if you are don’t register for GST, then you won’t be able to claim GST credits on your BAS, in which case you would be able to claim the full $50 as a tax deduction.

Other rules apply:

  • Small business owners with an annual turnover under $10 million can claim business items in their entirety.
  • You can claim up to $20,000 worth of value per individual item.

Consider the following example to see how it works, and how you might maximise your deductions for the most money back.

John buys a car

John was a sole trader making $90,000 per year. He wanted a new ute for business and personal use and wanted to use business tax deductions to find the most cost-effective way of getting it.

The first thing he did was look at his income next to the tax thresholds. By doing this, he saw that if he managed to claim $10,001 in deductions, he might save over $10,000 in tax.

He picked out his first choice:

  • The cost of the car. $22,000.
  • The use. 50% personal use, 50% business use.
  • Deductible amount when buying straight up. $9,000 after claiming for GST credits.

He got all the extras he wanted, including useful work features such as a roof rack and sliding trays. However, because it was valued at over $20,000 (the 2017 limit for immediate asset write-offs), he could only claim it over time as a depreciating asset. As a small business he could use simpified depreciation rules, letting him claim 15% of the value in the first year, and then 30% in subsequent years.

In other words, he would only be able to claim $3,000 on the vehicle that year (15%) of the purchase amount, plus $1,100 of GST credit in his BAS (10% of the full purchase worth of GST, which is then cut in half because the car is only 50% for business purposes).

All up, John could only claim $4,100 all up for the vehicle in the first year, and then more in subsequent years. However, for the most tax benefits he wanted to claim as much as possible in the same year.

He started looking for ways to claim more, and decided to buy and claim accessories separately.

This lowered the cost of the car to $20,000, which let him claim a full $9,000 for the vehicle itself in the first year alone. Then he purchased $2,000 worth of work-only accessories and claimed them separately.

  • Vehicle deduction. $9,000.
  • Accessory deductions. $1,800. The accessories were 100% for work purposes, in contrast to the vehicle itself, and John could therefore claim the entire amount except for the 10% he claimed as GST credits.

Now he was getting the same thing, but was able to claim $10,800 in deductions. Because the total value of an item includes money spent on improving them, John made sure that the accessories were all removable and non-permanent, and could therefore count as separate items rather than upgrades to the original vehicle.

Alternatively, he could have found more claimable things, such as 50% of his car insurance payments or his car loan repayments.

Small business tax offsets in 2017

Another tax offset is available to people who are paying tax on small business income. In the 2016-2017 financial year, this is an 8% discount up to a maximum of $1,000 per year.

It is only available for income derived from small businesses with an annual turnover under $5 million per year.

This is an increase over last year, when the discount was only 5% and was only available for small businesses with a turnover under $2 million.

The ATO works out your discount based on the amount shown in your tax return. This amount is based on your net small business income earned as a sole trader and the share of your net small income from a partnership or trust.

The following people are eligible for this offset:

  • Sole traders who are carrying on a small business
  • People who earn a share of small business income as part of a partnership or trust
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