For small business owners, knowing where to start with tax can be an overwhelming topic. You may think you’re paying too little or too much; this is normal, and every new business owner eventually gets used to the process as their business and knowledge develops.
There are a few tax tips that you’d benefit from as a small business in Australia that’ll help you deal with your taxes in the most efficient way. Take advantage of these tips, and you may find that you save on your tax deductions for this financial year.
What is considered a small business in Australia?
Before we can give you some advice on tax laws and tips, we need to take a look at what a small business is in the eyes of the Australian Taxation Office (ATO).
The ATO describes a small business as an individual, entity, partnership, trust or company that brings in less than $2 million in aggregated turnover. Aggregated turnover is defined as an owner’s annual turnover as well as the annual turnover from other businesses that the company is in partnership with or connected to.
Small businesses may also exceed 20 employees and have an annual income of over or under $2 million. In comparison to a micro business, a small business has a salary between $2 million and $10 million, whereas a micro business has a total income of under $2 million a year.
Best Tax Tips for Small Business Owners
Now that we understand what a small business is defined as we can discuss what tips could help you take advantage of tax exemptions and other benefits.
1. Check if you need to file taxes
Before we focus on how you can pay less tax, we need to figure out whether your small business is currently eligible to pay tax altogether. All small businesses need to log a tax return regardless of their income. However, this doesn’t mean you would have to pay taxm necessarily. The tax-free threshold for businesses sits at $18,200. If your business income is under this amount annually, then your business won’t have to pay tax for that tax season.
2. Get the Basics Right
When it comes to tax, getting the basics right can make a huge difference to your business finances. The basics include keeping your records correctly, tracking your income and business expenses, ensuring your account codes are accurate, and keeping valid tax invoices and stock records.
3. Get to know what tax deductions you can claim for
One of the most valuable tips a small business owner can get is to understand what tax deductions you can claim. The more things that are tax-deductible, the less tax you’ll end up paying.
A tax deduction refers to a method business owners use to reduce their gross income by spending their income on expenses related to business needs. These include expenses like rent, business assets and overall running costs of the business. You can also use simplified depreciation rules to work out your deductions for most of your depreciating assets.
Chat with one of our tax professionals at Walker Hill for the best advice on what your deductions are, and you’ll be surprised by just how much you can save.
4. Learn what tax forms and documents you need
Sorting out your own tax can seem like a complex task, but once you’ve got the hang of it, every tax season will feel less stressful. Understanding the tax forms and documents needed to file your taxes will make the process simpler and faster. These are the forms and documents you’d need:
- Business Activity Statement (BAS)
- Income Tax Return (ITR)
- PAYG Instalment Notice
- Employee/Payee tax declaration if wages are paid
- Fringe Benefits Tax return (FBT)
- Goods and Services Tax/Harmonised Sales Tax (GST/HST) return
- Capital Gains Tax return (CGT)
5. Pay Your Expenses Early
Getting ahead of things is another way of making tax deductions. Once you know your tax liability, pay your expenses for your upcoming financial year in your current financial year. This will help lessen the overall amount you’ll pay in tax at the end of this financial year. You can deduct up to 12 months of the following year’s expenses in your current financial year.
6. Use Early Stage Investment Companies (ESIC)
Invest in Early Stage Investment Companies (ESIC). ESIC is a startup company that has tested its prototypes and completed its service models, making it ready to start developing as a business. When you invest in ESIC, concessions give you a 20% tax offset on what you invest.
An ESIC investment is free from capital gains tax for up to 10 years, meaning that if you sell your investment before 10 years, you’ll have no tax obligations on your earnings.
7. Use the $20,000 instant asset write-off
A $20,000 instant asset write-off allows you to deduct business assets that you purchase from your assessable income. This means that if you buy an asset under $20,000, you can claim deductions for it in the same tax year.
8. Understand Capital Gains Tax Concessions
Capital gains tax refers to any tax on your income that isn’t taxable. These taxes are on investments and assets that are sold at a profit, which you’ll be liable to pay tax for at your marginal tax rate. These assets include property, shares or crypto assets.
Here’s how it works. When you sell an asset, you may trigger a CGT event, which is when you need to report whether you’ve had capital gains or losses. Capital gains refers to when you make a profit off the sale of your asset. Here, you’ll generally have to pay more tax. With a capital loss, you can use it against your capital gains at a later stage to reduce your tax amount.
9. File Tax Returns Early
Filing your tax returns early will help you avoid any penalties that may occur if you’re late. The ATO takes their deadlines seriously, and if not met, you may have to pay a Fail Lodge penalty. The Fail Lodge penalty for small businesses is calculated by adding one penalty unit for each day your return statement is late. You have a maximum of five penalty units.
10. Get Professional Advice
While you can deal with your own tax returns, in most situations, it’s best to get professional advice from a tax consultant or accountant. These professionals have studied the ATO’s requirements inside and out, so they’ll help you work out your tax, highlighting your available deductions, and advise you on what to pay.
They’ll also help you with your tax planning for the years to come. So, when it comes to next year’s tax time, you’ll be ready to pay without hesitation.
11. Check your investment structure
Taking another look at your business structure and assets is always advised. For some business structures, you can take advantage of reduced or capped rates. Say, for example, your business structure is capped at 30%. This could make a significant difference in how your investment performs.
12. Be Aware of what the ATO is on the lookout for
The ATO tends to change what it looks for to catch people out on their taxes from year to year. At the beginning of the year, the ATO usually lets Australian business owners know what they’ll be on the lookout for during the course of the year. Things they often look for include car expenses, education expenses and home office expenses.
Conclusion
Paying tax is a bittersweet experience for everyone, but it’s necessary. That said, you don’t need to pay every last penny your business earns as tax when you know how to deal with tax and what tax deductions you’re able to make. These tips are designed to help you run your business well and to be tax-wise with the new tax year around the corner.
