Small business owners have a lot on their minds. At any given point, you’re likely worried about sales, growing your business, marketing, social media pages, and more. The last thing you want to stress about is small business taxes, but alas, there they are.
Every Australian business faces various taxes — from income tax to sales tax to tax credits. To make the tax process easier, we’ve created this business tax guide that will walk you through various types of business taxes, common tax mistakes, and how to help your business succeed financially. To start, let’s take a look at what business taxes are.
What is business tax?
Every year, businesses all over the country pay the Australian Taxation Office (ATO) their due taxes. These taxes can be broken into several categories.
This is a state tax that’s applicable on any wages you pay employees. Each territory and state has an exemption limit that determines if payroll taxes must be paid. If you don’t have any employees, this is one less thing to worry about.
If you’re an Australian resident company, meaning your company is registered or incorporated in Australia, you will have to pay a company tax. The company tax rate is determined by the Australian government and can be found on the ATO website. Non-resident companies operating in Australia will still pay company tax for any income generated in Australia.
Goods and services tax
The good and services tax (GST) is applied to nearly every good or service sold in Australia. This tax is 10% and is generally applied to the prices of items or services sold. Most GST taxes paid can be turned into GST credits, which can result in a better tax return for your business.
Capital gains tax
This tax is a part of income tax and is applicable to income generated through the selling or disposal of assets. Non-resident businesses can also be required to pay capital gains tax if any profits are made through selling assets within Australia or to Australian entities.
There are a lot of taxes that come with running a small business and obeying tax laws. But, understanding these taxes can make your life as a business owner much easier and result in a better tax return each income year.
While it’s important to understand these taxes, it’s even more important to understand common mistakes companies make when filing their business taxes.
4 common business tax mistakes
There’s a lot that can go wrong come tax time, not to mention the year leading up to it. Fortunately, most of the major tax mistakes are easily avoidable.
1. Keeping poor records
Ideally, your business should have a bookkeeper. Even a part-time bookkeeper can go a long way when it comes to organisation.
But, not all businesses can afford a bookkeeper. If this is the case, make sure you’re going the extra mile to ensure your records are accurate and up to date. Poor record-keeping is an easy way to inaccurately report small business income. This can result in an incorrect tax rate, legal fees, and a plethora of additional problems.
Even if you have a bookkeeper, make sure you’re keeping accurate records. This will make their job easier and free them up to help you with additional financial tasks.
2. Not using a tax agent
As a small business owner, you’ve likely made a lot of progress all on your own. While this DIY, entrepreneurial mindset is great for running a business, it’s never a bad idea to call in professional help when it comes to taxes.
A tax agent will ensure your taxes are reported correctly, and any potential hiccups or legal fees are avoided. On top of that, they’ll help you find valuable deductions. Deductions and write-offs can go a long way when it comes to getting a bigger income tax return.
Tax agents are an added expense, but the cost can sometimes be completely offset by the deductions they help you find. And most importantly, they provide peace of mind during the oft-stressful period of tax preparation.
3. Failing to report investment income
Not all small businesses have investment income to report, but many do. If you have any kind of business investments that have resulted in income used for your business, be sure to report this.
Failure to report investment income is like poor record-keeping in that it results in an inaccurate look at your business income. Again, this can result in misclassifying your tax rate, owing back taxes, and paying hefty legal fees in the event you’re audited.
If you’re working with a tax agent, tell them about your investments. They’ll be able to gather the appropriate account info or point you in the right direction to find this information.
4. Filing late
It’s never good to be late, especially when it comes to filing your taxes.
Always be aware of the tax filing deadline. Prep your documents in advance and get the ball rolling on your taxes as soon as possible. You never know what kind of issues may present themselves as you work through your taxes. Starting your taxes early will ensure these issues don’t turn into major headaches.
The tax filing deadline this year is October 20, 2020. Write that down and stick it next to your computer. Taxes don’t have to be the tricky, complicated thing they’re often made out to be. Keep the above in mind, take your time, and don’t hesitate to reach out for help. A tax agent or even financial consultant can be a great resource.
5 tax strategies to help your business
Tax season is coming, so now is the perfect time to start thinking about how you can save money this financial year. You don’t need to be a mathematician to get started. Sometimes, all you need is a few simple strategies to reap impressive savings. Here are five sharp tax strategies that will keep you happy while meeting your tax obligations.
1. Check your concessions eligibility
Being a small business — whether you’re a sole trader, company, partnership, or trust — comes with its own unique set of benefits. Your business may be eligible for concessions on certain taxes such as, income tax, capital gains tax (CGT), PAYG instalments, fringe benefits tax (FBT), and superannuation.
To be eligible, you have to be classified as a ‘small business’, which is determined by your current or previous year’s turnover. You’re a small business if you earn up to $10 million (rather than the previous $2 million) in a fiscal year. If this change means your business classification has changed, the concessions you’re eligible for have likely changed too, so find out which apply to your business or ask your accountant.
2. Use simplified depreciation
Working out how much your equipment and assets have dropped in value over time, and therefore how much you can deduct for depreciation in your return, can be tricky. That’s why the ATO introduced simplified depreciation rules for small businesses with an aggregated turnover of less than $10 million.
Using these rules, you can immediately write off (deduct the total cost) of most assets that cost less than $20,000 and were bought, used, or installed between May 12, 2015, and June 30, 2018. Or, you can pool most higher cost assets (those equal to or higher than $20,000) and claim a 15% deduction for the year you bought them and a 30% deduction each year thereafter.
There’s nothing wrong with keeping things simple, especially when it comes to depreciation.
3. Claim deductions for prepaid interest
It’s rare for a small business to not operate using some form of credit. Whether you have a business loan or you’re managing mortgage repayments on your business premises, you can squeeze some good fortune from some of your debts.
By pre-paying any deductible interest within the stipulated 12-month period, you can immediately reduce this year’s tax payment. If you pay interest that covers a period of more than 12 months, you’ll need to spread out your deductions over two years or more.
4. Manage your capital gains tax
All capital gains and losses must be reported on your tax return. Capital gains are profits you make selling assets, while capital losses occur when you sell an asset for less than you paid for it. Any gains you make are added to your assessable income and may increase your tax.
However, there are a number of strategies you can adopt to minimise the amount of capital gains tax you pay. For example, selling assets that have lost value can offset some of the capital gains you’ve made. You can also carry capital gains losses forward for use in later years, provided you’ve recorded them in your tax return.
5. Adjust your spending
If your cash flow is healthy, paying for expenses or making asset purchases in advance of June 30 is a smart idea, as it allows you to bring any tax deductions forward. Expenses include things like office and equipment lease payments, business insurance, subscriptions, travel and conference bookings, and telephone and IT services.
You could even try to negotiate a discount from your supplier for paying in advance. It’s likely they’ll be as keen to make another sale before the end of the financial year as you are to reduce your taxable income. By employing these smart tactics, you can pay less tax and keep more of this year’s profits. You can’t say no to that.
A not-so-taxing year
Taxes aren’t going away, at least not in the foreseeable future. Mastering business taxes now, rather than later, means you’re free to focus on what matters most: your business.
You’re a small business owner. You’ve taken an idea and turned it into a living, breathing business. You’ve had late nights and early mornings, learned the ins and outs of an industry, and already come so far.
Business taxes are nothing compared to the challenges you’ve already overcome. Learn the ins and outs of taxes, keep accurate records, and prepare for a fiscally great year. Then, you’ll have a not-so-taxing tax season.