Personal Tax
Tax, we know it can seem overwhelming and quite scary when you’re first starting out. So we thought we’d put together some information for you about the basics of tax in Australia. All of this info is available elsewhere on the internet, but it’s here for you all in one place. We’ve also included links for further information and advice.
Now, take a breath as there is a fair bit of info coming right up. Just take it in bit by bit!
Why not start by figuring out if you are actually running a business?
Logical, I know! Some of the things to take into account include whether you have actually started to undertake business activities or started to “do” business with others (instead of just planning to at some point in the future), whether you intend to make a profit (perhaps now, perhaps down the track a little bit – the intention just needs to be there), and is there repetition and regularity to your activities.
Most businesses operate for a purpose and their everyday activities reflect this – they do the same or similar things in order to operate. The Australian Taxation Office (ATO) is here to help with some basic info for you about working out if you are running a business.
Are you running a for profit or a not-for-profit (NPF)?
According to the ATO, “a non-profit organisation is an organisation that is not operating for the profit or gain (either direct or indirect) of its individual members. This applies both while the organisation is operating and when it winds up. Any profit made by the organisation goes back into the operation of the organisation to carry out its purposes and is not distributed to any of its members.”
What does this mean? NFP’s still have staff and pay wages, including to any management peeps, but any profit that is generated is not given out to directors or employees as dividends or bonuses, that profit stays in the organisation and is then used to run it.
Some examples are churches, sports clubs, environmental protection societies and charities. Click here for more information on NFP’s.
For info on registering a NFP as well as registering click here.
If you intend on making some profit and paying out some of that profit to owners or directors, then you are probably NOT a not for profit!
Australian Business Number (ABN)
An Australian Business Number is an 11-digit number that is unique to your business.
What is it used for? It helps other businesses to easily confirm your details, it indicates to other businesses that you are operating a business (even if as a sole trader), it is required if you are claiming Goods and Services Tax (GST) credits, among other tax related things.
If you’re operating as a sole trader, partnership or company, you need an ABN. If you’re operating as a NFP, you may or may not need an ABN.
It’s pretty simple to get yourself an ABN, and it doesn’t cost anything. You can apply online .
More info for NFPs is available in regards to ABN requirements.
According to the ATO, “Anyone carrying on an enterprise (this is usually a business) should quote their ABN in relation to goods or services they supply to another enterprise. If they don’t, the general rule is that the payer must withhold 46.5% from the payment to the supplier (you) and send the withheld amount to the Tax Office. Some payments are excluded from this rule.”
So once you’ve got your ABN, remember to use it, otherwise the people you deal with may hold on to 46.5% of what they owe you, ouch!
Australian Company Number (ACN)
According to the Australian Securities and Investments Commission, “Under the Corporations Act 2001, every company in Australia has been issued with a unique, nine-digit number, an Australian Company Number (ACN), which must be shown on a range of documents. The purpose of the ACN is to ensure adequate identification of companies when transacting business.”
So what this means is, when you register as a company, you will receive an ACN. Often your ACN will be very similar to your ABN, only nine digits instead of 11.
For more info check out the ASIC site.
If you operate as a sole trader, you can do this under your own individual tax file number (TFN).
If you operate as a partnership, company or trust, you must also have a business tax file number. If you operate as a NFP, you might need a TFN.
For help in figuring out if you need a tax file number, check out the ATO site.
Your Accountant
It’s never too soon to get an accountant for your biz. Look at it this way – they live and breathe all this tax and compliance stuff! If you’re not sure about tax, account keeping, etc, why not go to an expert?
We know it is scary and you think straight away….”there is no way I can afford an accountant”! But you will be surprised at how affordable they can be, and how much they can SAVE you, thus paying for themselves in your business! The Frank Team can recommend a few great accountants – who are young entrepreneurs – who are really affordable. Ask us for their contact details.
Remember there’s no obligation to stick with the first accountant you find. Go and meet a few, find one that you trust and enjoy working with, and who obviously knows what they’re talking about. Here at The Frank Team have been with the same accountant since 1998, she is awesome!
Accountants’ fees vary a lot. Be sure to ask about fees and find an accountant that you feel is affordable. $500 per hour charge rates might not be in the budget to start off with, so why not support another small business person? Also remember that meeting all of your compliance needs could end up saving you a lot of money and hassle in the long term.
Remember also that your local Business Enterprise Centre can be a huge help here too – and they give FREE advice!
Record Keeping (or bookkeeping)
What records do you need to keep and for how long?
Keeping records of all your financial transactions (money in and out) are vital to your financial record keeping, whether you do it on a day to day, monthly or even annual basis.
All payments you make, all money you receive- receipts, invoices, bank statements, proof of purchase of assets, everything! With as much detail as possible – job numbers, what it was you bought if it isn’t clear, who you just made that cheque out to. Months later it will be extremely difficult, if at all possible, to remember.
Start early with this stuff and set up a way of keeping track, trust us!
We know of some young entrepreneurs who were years behind in their recording and tax and it not only cost them in terms of paying their tax bills but also cost them huge amounts of time to back track. So even if it is shoe boxes that are labeled, set up a way of keeping track of all money in (and what it was for) and all money out (and what it was for). Then an accountant will be much more useful for you.
Keeping all of your documentation together means when it comes time to process all of your accounts, the info is ready to go! It also means that if your accountant comes back with questions, you can look anything up that you need to, with minimal effort.
We keep our financial records in ring-binder folders, sorted month by month; if we ever need to look up a payment, find a receipt, even find companies’ contact details, we can generally find it within just a couple of minutes. Everyone needs their own filing system, electronic or paper/manual. You can even use online Google doc spreadsheets to keep yourself sorted.
If you were ever audited by the ATO, or needed to complete a financial audit for any reason, you could get in a lot of trouble for not having all of your financial records. So make it easy for yourself!
By law, you are required to keep financial records. As a general rule, your records should go five years back for regular income tax purposes, though it does vary for other taxes. For more info, check out the ATO site.
If you’re a NFP, more information about record keeping requirements is available here.
Cash vs Accrual Accounting
Ok… so now we’re getting into the technical stuff. Cash and accrual accounting are just two different ways of keeping track of your finances.
Cash accounting records only the amounts of cash that have flowed in and out of your business. So when you receive $100 for your product, you record that sale. When you pay $40 to your supplier, you record that purchase. Cash accounting is definitely the easiest place to start.
Accrual accounting records all of the expenses and purchases paid by your business, as well as those that are currently due or outstanding. So if you sent a client an invoice for $100, you would record that as a sale, even if you haven’t yet received that money into your bank account. If you receive an invoice from a supplier for $40, you record that purchase/expense. You then also have an Accounts Receivable account/category in your accounting system (money that you are due to receive) and Accounts Payable (money you need to pay).
An accounting package of some sort will help you with this system, if that is what you choose. You would use accrual when you have larger volumes of transactions happening and you need to be able to track and predict cash flow.
Tax Returns
If you’re operating as a sole trader, your business tax information will go into your individual/personal tax return. You may need to complete some extra schedules/forms, and record all business income and expense. Your business profit will then be taxed at your marginal rate of tax. For details go to the ATO site.
If you’re operating as a partnership, the partnership lodges its own tax return. BUT, because of unlimited liability, the income and expenses from the partnership’s tax return then get allocated to the partners. This means, on your individual/personal tax return, you will need to report your share of the business’s income and expenses. Your partnership profit will then be taxed at your marginal rate of tax. More info here.
If you’re operating as a company, your company will need to lodge a tax return. You will need to show all business income and expenses. Your business profit will then be taxed at a rate of 30%, or 30 cents per dollar. And yes that means for any profit you make, 30% of it is paid to the government. More details here.
As soon as your business starts to earn an income and incur expenses, you need to start thinking about your tax return. Your first financial year of operation (even if you start your business in May) is the first year you need to lodge a tax return or include biz info in your own personal tax return, depending upon the business structure you’ve chosen.
If you’re operating as a NFP, you need to be aware that only certain types of non-profit organisations are exempt from income tax. Charities and income tax exempt funds require endorsement from the Tax Office to be exempt from income tax. Other non-profit organisations can self assess their exemption.
Many non-profit organisations are taxable and may need to lodge an income tax return and pay income tax.
Taxable non-profit organisations are generally treated as companies for income tax purposes, whether or not they are incorporated.
Tax Concessions for Small Biz & NFPs
If your revenue is under $2 million, you might be eligible for certain tax concessions. Simpler depreciation, entrepreneurs tax offset, the list goes on.
For more info, check out here.
This is where an accountant can come in really handy. Do your research; list your questions then book in some time with an accountant or Business Enterprise Centre for some specific advice for your business.
If you operate as a NFP, you may be eligible for a number of tax concessions. For more info, go here.
It really is up to YOU to be aware of and find out what obligations your business has in regards to tax, and what concessions it could be eligible for.
Goods and Services Tax (GST)
In Australia, GST is incurred at a rate of 10% on top of the company price for many goods and services. So lets say you go to clothes store and buy a new shirt, it will have 10% GST included in the price already.
You don’t need to register your business for GST until you have sales of up to or over $75 000 a year, including GST (your portion of the sales would be ten elevenths of $75 000, or $68 181).
It’s up to you if you register for GST under the $75 000 threshold, or under $150 000 if you’re a not-for-profit. There are some exceptions – like if you’re a taxi driver. Check out www.ato.gov.au for more information.
Being registered for GST means that you are helping the government collect GST. This also means that you can claim credits for any GST that you pay in the price of your business purchases.
When you are registered for GST, you need to show this information on the tax invoices that you send and give to customers when you make a sale. In fact, the difference between an invoice and a tax invoice is being registered for GST – if you are not registered for GST, you are using an invoice. If you are registered for GST, it is known as a tax invoice.
We have a sample tax invoice for you to use if required.
You can register for GST when you are applying for your Australian Business Number; through your tax agent (your accountant); or through the ATO. For more information, check out the ATO.
See Business Activity Statement below for more info about reporting on GST.
Pay As You Go Tax Withholding (PAYGW)
What is PAYW, I hear you say?
Pay As You Go tax is the amount of money that is withheld from your wages each week/fortnight/month. If you’ve ever received a pay slip, you’ll notice it has Gross Wages (e.g. $500), PAYGW (e.g. $60) and Net Wages (e.g. $540).
Now that you’re running your own business, it’s up to you to withhold that PAYGW tax (for yourself and for any staff that you employ), and then pay it to the ATO when it comes to BAS time (see below).
Personal income tax rates change from financial year to financial year. Which means when a new financial year rolls around, you need to check the new rates at which you should withhold tax.
You can get updates for your accounting software, like MYOB, which have the current tax rates. Or you can check out the ATO’s online tax calculator. It’s a simple tool to use; you plug in each person’s information and it tells you how much money to withhold for that pay period. Easy! Check it out here.
If you operate your business as a sole trader or company, it’s likely you pay ‘pay as you go withholding’ (PAYGW) installments at different times throughout the income year as you earn your income. These installments are credited against the total amount of income tax you are liable (must) to pay for the income year.
All that means is the government keeps track of those payments, and at the end of the financial year when you work out how much PAYGW you are required to pay for that year, you see how much you have already paid and then either just pay the difference or get a refund back from the ATO.
If you operate your business as a partnership or trust, you do not have to pay PAYG installments. However, you may have to pay PAYGW installments on your individual share of your partnership’s income or any income you receive from your trust.
If you operate as a NFP and you have employees, you need to withhold PAYGW just like any other business. You’ll need to determine who is an employee, a contractor and a volunteer. NFP’s also have some fringe benefits tax concessions for additional benefits for their employees. For more info, check out the ATO.
Handy Hint: have a separate bank account in which you collect your GST and PAYGW tax, and even superannuation (so you are moving money into this account regularly). If you put these small amounts away each week, or fortnight, whenever you receive payment, when it comes time to pay your BAS and superannuation, you won’t have to scrounge the money out of your other accounts. Streamline this from the beginning. There are lots of banks now that as part of your business account can provide you with a tax management account that has higher interest rates, so check with your bank.
Business Activity Statements (BAS)
So now it’s time to report to the ATO…
Generally, new businesses use an activity statement to report and pay their GST and PAYG withholding.
When it comes time to do your Business Activity Statements (or BAS as most people call it), you will need to include in your declaration the amount of sales you made (money IN); and the amount of GST collected. You will then need to include the amount of purchases (money OUT) you have made; and the amount of GST you have paid. Then you will be required to either pay the Australian Taxation Office the difference (if you have collected more GST than you have paid out) or this will contribute towards a refund from the Australian Taxation Office (if you have paid more GST than you have collected in sales).
So depending on the difference between what you have collected and paid you may have to pay the government, or they will pay you!
BAS’s can be lodged either monthly (if you make a lot of money), quarterly (if you make a bit of money) or annually (if you don’t make much money).
In each BAS, you will need to outline:
* Sales made in $ (sales your business completed)
* GST on the sales made in $
* Purchases made in $ (things your business bought)
* GST on the purchases made in $
* Wages for the period
* Pay as You Go Withholding tax incurred on those wages (which you’ve been holding for your employees, just waiting to pay to the ATO)
You may also be required to pay Pay As You Go Installments (PAYGI– different to Pay As You Go Withholding [PAYGW], which refers to employees personal taxation. We’ll call them Income Tax Installments for now to keep it simpler) to the ATO, if your business has reported an end of year profit before and you are expecting to make a profit again this year. This installment will be outlined on the BAS report you receive from the ATO.
Once you are paying PAYG installments, any installments you pay during the year are credited towards your final tax assessment after you lodge your income tax return. What does that mean? For example, if you make four installments of $1000 throughout the year and your end of year company tax bill is $4200, you’ll only need to pay the ATO $200, instead of $4200 in one big go).
The amount you need to pay to the ATO will consist of:
+ GST you collected
– GST you paid (you receive a credit for this)
+ PAYGW tax that you collected/withheld from your employees’ wages
+ Income tax instalment (if relevant)