Small and medium enterprises (SMEs) make up 99.97% of the businesses in Australia. Collectively, they play no small part in assisting Australia to grow as a country. They employ people, pay taxes and spend money in the Australian economy. If you run an SME, you are obligated to pay certain taxes. This includes income tax, capital gains tax, goods and services tax, payroll tax and fringe benefits tax. In this article, we look at each of these taxes more closely.
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1. Income Tax
Each business in Australia must pay tax on its income, and the assessment of the tax payable depends on the structure of the SME.
- Sole trader: a business structured as a sole trader pays the tax on the business’ income while the business owner completes their own personal tax return. The income is taxed at the business owner’s individual tax rate.
- Partnership: a partnership does not pay a separate income tax. Instead, each partner within the partnership pays income tax personally for their share of the income.
- Company: a company pays income tax at either the small business company tax rate or the company tax rate, depending on the size of the company. Currently, a small business company tax is payable where the company meets specific requirements, including that the company’s yearly income is less than the threshold amount, which currently is at $50 million. The small business company tax rate used to be 27.5%. The rate was reduced to 25% for the 2021-22 year, and may reduce in the future. The company tax rate is a flat 30%.
2. Capital Gains Tax
Capital gains tax is payable when a capital gains tax event occurs. For most businesses, this is the sale of a business asset like property or company shares for a profit. Capital losses are the opposite and occur when you sell an asset at a loss.
Capital gains tax is not taxed separately but is taxed with income tax. Therefore, a business would report both its capital gains and losses when completing the income tax return. The capital gains tax is payable on the net capital gains of your business, which is the total capital gains less any capital losses and any capital gains tax discounts your business is entitled to. For instance, a business set up as a unit trust is entitled to a 50% discount on any capital gains tax payable from any profits it makes from the sale of an asset it has held for more than 12 months.
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Goods and services tax (GST) is a flat 10% tax on the sale of your business’ goods and services. Some goods and services like basic food, education courses and medical products are exempt from GST. GST is payable by any business with a turnover of at least $75,000. Businesses usually pass on this cost to the customers by adding 10% to the price of the goods and services.
Your business must pay GST to the Australian Taxation Office by completing a Business Activity Statement (BAS) each quarter. Your business should automatically receive a BAS once you register for an Australian Business Number and GST. You can lodge the BAS through myGov online services.
4. Payroll Tax
Payroll tax is the tax on salaries and wages that is payable by an employer. It is payable where a business employs staff and the total amount of wages paid to those employees exceeds a certain amount. The payroll tax rates and thresholds amount for wages vary between each state and territory in Australia.
5. Fringe Benefits Tax
Fringe benefits tax is another type of tax that a business with employees must pay if you provide fringe benefits. They include payments you make to an employee other than their salary or wage, for example:
- providing a car to an employee for non-work-related purposes;
- paying for the employee’s gym membership;
- giving a discounted loan to employees.
Fringe benefits tax are taxed separately from income tax and is calculated based on the value of the fringe benefits you provide.
Key Takeaways
Like all persons and entities in Australia, SMEs must also pay their share of the taxes. There are five key taxes that most SMEs will pay in the course of their business:
- income tax: a tax on the business’ income;
- capital gains tax: a tax on the profits a business makes from the sale of an asset;
- goods and services tax: a tax on any goods and services that a business supplies to its customers;
- payroll tax: tax payable where employees’ wages and salaries goes above a certain threshold; and
- fringe benefits tax: a tax payable for any payments a business makes to its employees where that payment is not a wage or salary.
If you have any questions about the taxes you will pay as an SME or general questions about your business, our experienced startup lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
When running an SME, key taxes you will typically pay include income tax, capital gains tax, goods and services tax, payroll tax and fringe benefits tax.
Fringe benefits tax is a type of tax that a business with employees must pay if you provide fringe benefits. Fringe benefits can include providing a car to an employee for non-work-related purposes or paying for the employee’s gym membership.
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