Small businesses are often considered the engine room of the economy, with research from the Council of Small Business Organisations of Australia (COSBOA) showing that small businesses were responsible for creating 5.1 million jobs! But no matter how big or small your business is, you’ll have several obligations to follow set out by the Australian Taxation Office (ATO).
If you don’t abide by your tax obligations, you might be liable for penalties and fines which can drastically change the horizon of your business. So, it’s incredibly important that you know what’s expected of you as you continue to run and grow your business.
Types of business structures
There are four commonly used business structures in Australia that you might operate under:
- Sole trader
- Partnership
- Company
- Trust
Your business structure defines who owns and operates the business. It will affect your tax and registration requirements, as well as your legal liabilities and obligations, so it’s important that you understand what type of business you are to understand your tax obligations.
Tax obligations according to your business structure
It’s important to note that small businesses can operate under any of the four business structures above, which is why we’re looking at the tax obligations for all of them today:
Sole traders
A sole trader is an individual who runs their own business, making you the sole owner of it who controls every aspect. This is the cheapest way to run a business, but it means you’re legally responsible for all its aspects, including debts and losses. As a sole trader, you can employ workers for your business, but you can’t employ yourself.
Key tax obligations
- You’ll need to use your tax file number (TFN) when lodging tax returns
- There isn’t a separate business tax return for sole traders, so your income needs to be reported on your individual tax return using the ‘business items’ section to show your income and expenses
- You’re entitled to an Australian business number (ABN) which you should use for all business activities
- You need to register for goods and services tax (GST) if:
- Your GST is over $75,000 per annum
- You offer taxi, limousine, or ride-sourcing services
- You want to claim fuel tax credits
- You might be required to lodge business activity statements for certain occasions, such as if you’re registered for GST, have employer obligations including PAYG withholding, or have PAYG instalments
- Tax will need to be paid on all of your income, including that coming from your business, based on your personal tax rate
- You may either be required to make, or be allowed to voluntarily use, PAYG instalments to prepay income tax
- Deductions can be claimed for any personal super contributions you make after notifying your fund
- You are able to hire workers, but you’ll need to meet all of their employer and superannuation obligations
Partnerships
A partnership is a group or association of people who agree to run a business together, sharing both income and losses between themselves. Partners aren’t considered employees of the business, but they can employ other workers. Each partner is responsible for their own superannuation, as well as the supers of the rest of their employees.
Key tax obligations
- As a partnership, you’ll have your own TFN
- You’ll need to lodge an annual partnership return to show all business income and deductions, along with how this has been distributed between partners
- You need to apply for an ABN and use it for all of your business activities
- You need to register for GST if your partnership:
- Has a GST higher than $75,000 per annum (or $150,000 for not-for-profit organisations)
- Offers taxi, limousine, or ride-sourcing services
- Wants to claim fuel tax credits
- You might have an obligation to lodge business activity statements if certain circumstances call for it, including if you’re registered for GST, have employer obligations including PAYG withholding, or have PAYG instalments
- Your partnership will not have to pay tax – instead, each partner reports their share of net partnership income and loss for their own tax return, making them personally liable for any tax that might be due on that income
Companies
A company is a separate legal entity that operates with its own tax and superannuation obligations. It’s run by directors and owned by shareholders. A company has income and assets that belong to it rather than its shareholders, meaning there might be more tax consequences and obligations depending on what you’re doing with its money. All company directors will need to verify their identity and apply for a director identification number (director ID) before being legally appointed a director of the company.
While small businesses are less commonly run as companies, it’s possible that you might still be running under this business structure and therefore will need to understand your key tax obligations.
Key tax obligations
- Companies own their own TFN and must apply for it
- They’re responsible for all of their own tax and superannuation obligations
- You’re entities to an ABN if the company is registered under the Corporations Act 2001 (if your company isn’t registered under this, you may still be able to get an ABN if it’s running a business in Australia)
- Companies must register for GST if it:
- Has an annual turnover of $75,000 per annum ($150,000 for not-for-profit organisations)
- Offers taxi, limousine, or ride-sourcing services
- Wants to claim fuel tax credit
- You might need to lodge business activity statements if your company is registered for GST, has employer obligations like PAYG withholding or instalments
- The company legally owns the money that the business earns, so you might have to pay tax on any money that’s withdrawn from the accounts
- Companies need to lodge annual company tax returns
- They’ll usually pay income tax in instalments through the PAYG instalments system
- Companies need to pay tax at their applicable company tax rate
- You must pay super guarantees for any eligible employees, including company directors
- The company must issue distribution statements to any shareholders who it pays dividends to
Trusts
A trust is the most complex and expensive business structure, involving one person who gets given the obligation to hold and manage the business to benefit the beneficiaries. Trusts set up to hold a business will often have a trust deed which sets out the powers of trustees and the interests of the beneficiaries. When it comes to responsibilities, the trustee will deal with the taxes.
Again, small businesses don’t tend to be trusts as this business structure is often for bigger corporations and businesses. However, it’s still possible, and the trustee can even be a company rather than an individual.
Key tax obligations
- Trusts must have their own TFN
- They need to lodge an annual trust tax return, which also includes information on how the income is distributed
- It needs to have its own ABN which should be used for all business activities
- Trusts need to register for GST if:
- It has an annual turnover of $75,000 per annum ($150,000 for not-for-profit organisations)
- It offers taxi, limousine, or ride-sourcing services
- It wants to claim fuel tax credit
- It might be required to lodge business activity statements depending on certain factors, including if it’s registered for GST, has employer obligations like PAYG withholding, or has PAYG instalments
- Trusts must pay all super for eligible employees, which might include the trustee if they’re employed by the trust
Tax deductions small businesses might be able to claim
Tax obligations can bog you down and make running your business much more difficult than originally thought – but there’s one silver lining, and that’s that you can often claim tax deductions. Sweeten the deal by seeing if you can claim on things like:
- Advertising: Costs to promote your brand are generally deductible unless they fall into the definition of ‘entertainment’
- Car expenses: You can claim for any expenses on your company’s vehicle, no matter whether it’s leased or owned
- Fringe benefits: If you provide fringe benefits to your employees, you can generally claim back on these
- Bad debts: An unpaid debt that’s seen as ‘bad’ can be deducted as long as it was included as assessable income within the most recent income year
- Superannuation contributions: You might be within your rights to claim a deduction for a contribution made to your own super fund
- Working from home: Working from home means you can claim on expenses like insurance, heating, lighting, interest, and more
- Borrowed money: Expenses required to get borrowed funds might be claimable as a deduction as the money was used to produce assessable income, including legal costs, registration fees, and more
- Business travel: Travel planned solely for the benefit of the business can be claimed as long as you have the receipts and itinerary
- Salaries: If your small business is a trust or company, you might be able to claim a deduction for salaries paid to employees if it’s in respect of duties connected with the business
- Depreciating assets: Larger items, like cars and buildings, can be claimed over time as depreciating assets
- Repairs and maintenance: Upkeep of machinery, tools or premises can be expensive, but if they’re used to create assessable income, you can generally claim on them (as long as they’re not capital costs)
- Tax management expenses: If you pay someone to manage your business tax affairs, you can claim these as deductions, too
Book A Free Strategy Meeting With A Business Accountant Today
It can be difficult to keep track of all your tax obligations depending on what business you’re running and all the expenses you can claim as deductibles. One of the best ways to keep stress levels low and help you focus your attention on more important parts of the business is to hire a business accountant who can help make sure you’re meeting your obligations and getting the most back out of the system as possible. Why not book a free, no-obligation strategy meeting with Walker Hill to discuss your options today?
