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Tax Essentials for Small Businesses

A business is classified as a small business entity where the aggregated annual turnover is less than $10 million. The aggregated turnover is based on the ordinary income earned in the course of running the business (annual turnover) plus the annual turnover of any business connected or affiliated with you.

When starting a small business, there are some items that need to be considered to ensure your business is set up correctly and structured in the most suitable way for you.

Below are some of the key details that you will need to consider when initially setting up your business, and even later down the track as your business grows.

Structures

The first step when creating a small business is to identify the business structure that best suits the type of business being created. There are four types of business structures, each having their own benefit:

  1. Sole Trader:
    1. Income is taxed at the individual’s marginal tax rate
    2. Eligible for the small business tax offset
  2. Partnership:
    1. Share of income is taxed at each partner’s marginal tax rate
    2. Eligible for the small business tax offset
  3. Company:
    1. Income is taxed at the corporate tax rate of 27.5%
  4. Trust:
    1. Distributed income is taxed at each beneficiary’s marginal tax rate
    2. Eligible for small business tax offset

Personal Identifier Numbers

A Tax File Number (TFN) is a personal number that is required for tax, super and identity purposes, and should be applied for upon set up of a new business entity. If you decide to operate as a sole trader and already have a TFN, you do not need to apply for a new one.

Your business will also be required to have an Australian Business Number (ABN), a unique 11-digit number which is used to help identify your business, and interact with other businesses and all levels of Government.  An ABN is required in order to register for things like GST and PAYG Withholding.

Registrations
There are several registrations that your business may need in order to operate now or even in the near future:

  1. Goods and Services Tax (GST)
    Your business must register for GST when it reaches the GST turnover threshold of $75,000. The GST turnover is different to the annual turnover and is based on your gross business income. If your gross business income is below $75,000, registering for GST is optional, however, you should consider registering if you expect your turnover to be greater than the GST turnover in the first year of trading.
  2. Pay As You Go (PAYG) Withholding
    If your business makes payments to employees, directors or certain contractors, it may need to withhold tax from these payments. The tax withheld is then lodged on an Activity Statement and paid to the ATO. Depending on how much you withhold on these payments in a year, you may need to pay these amounts to the ATO on a quarterly (withholding $25,000 or less), monthly (withholding $25,001 to $1 million) or weekly (withholding more than $1 million) basis.
  3. Fuel Tax Credits (FTC)

Your business may be eligible to claim credits for the fuel tax that has been included in the cost of fuel that is used in light vehicles that are travelling off public roads, machinery, equipment and heavy vehicles for business purposes. Some fuels and activities are not eligible to have these credits claimed back including light vehicles travelling on public roads.
It is important to note that your business must be registered for GST at the time the fuel was acquired.
Pay As You Go (PAYG) Instalment System

The PAYG instalment system is designed to pay down a looming tax burden by making regular payments to the ATO each year. These instalments are generally required to be paid quarterly, but they can also be made monthly, biannually or annually.
PAYG instalments are not required in the first year of the business’ operation, however, the ATO will assess whether or not the business needs to pay these instalments in the future based on the information reported in the most recent Tax Return lodged.

If you are looking to start up a new business, or have any questions about the future requirements of your business, please get in touch with one of our accountants on 5437 9900.