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As a business owner, it is critical to understand the different taxes your business is responsible for. If you do not meet your tax obligations, you could face consequences from the Australian Tax Office (ATO). This article provides a brief overview of the key taxes every business owner needs to be aware of.

Note that if your business has an aggregated turnover of less than $10 million, you will qualify for a separate range of small business tax concessions.

Income Tax

Like individuals, businesses pay income tax on their taxable income. 

A taxpayer’s income tax is calculated using the following formula:

Income tax = (taxable income x rate) – tax offsets

Taxable income is calculated using the following formula:

Taxable income = assessable income – deductions

Assessable income is any income that your business earns before tax. It includes both 

  • ordinary business income;
  • other kinds of income, like capital gains from the sale of an asset. 

It does not include GST payable.

Amount of Income Tax Payable

If you are a sole trader or a partner in a partnership, your business income is simply added to the rest of your personal income. You are taxed on the total sum at your marginal rate of tax. 

If your business is a company, the company tax rate is 30%. However, if your company has an aggregated turnover below $25 million, it is defined as a ‘base-rate entity’. As such, it has a reduced company tax rate of 27.5%. This is set to reduce further to 26% in the 2020-21 income year, and then to 25% from the 2021-2022 income year.

If your business operates through a trust, the trust itself will not ordinarily pay tax. Instead, beneficiaries will be taxed on any trust income that is distributed to them.

Goods and Services Tax (GST)

GST is a flat 10% tax on most goods and services sold in Australia. The main exceptions include: 

Although your consumers pay the GST for your goods or services, it is your responsibility to issue tax invoices to customers and to collect and pay GST to the ATO along with your business activity statements (BAS).

If your business has an aggregated annual turnover of at least $75,000, you must register for GST. If you provide taxi travel or ride-sourcing services, like Uber or OLA, you must register for GST regardless of your turnover. You can register for GST through the ATO’s Business Portal.

If you are registered for GST, you can claim an input tax credit for any GST you paid on goods or services you purchased in the course of carrying on your business. You claim input tax credits in your business activity statement.

Remember to keep a tax invoice if you intend to claim an input tax credit for any purchases greater than $82.50.

Capital Gains Tax (CGT)

CGT is the tax payable on the net capital gain or loss when a ‘CGT event’ occurs in relation to a ‘CGT asset’. A net capital gain or loss is the difference between the price you paid for an asset and what you received when you disposed of it.

The most common CGT event is the disposal (i.e. sale or transfer) of property. Another example of a CGT event is the loss or destruction of a CGT asset.

Types of CGT assets include:

  • real estate;
  • shares in a company;
  • units in a unit trust;
  • options; and
  • foreign currency.

There are ‘anti-overlap’ rules which prevent assets being subject to CGT, such as: 

  • trading stock;
  • depreciating assets; or 
  • revenue assets.

It is important to understand that, unlike GST, CGT is not a separate tax. Instead, your business’ net capital gain or loss from the disposal of a CGT asset is included in your calculation of assessable income and taxed accordingly.

If you make a capital loss upon a CGT event occurring, you can deduct this from any current or future capital gains. However, you cannot use a capital loss to deduct any other forms of personal or business income.

If your business is a sole trader, partnership or trust structure, there is a 50% discount on the CGT payable. The 50% CGT discount is not available to companies.

Fringe Benefits Tax (FBT)

FBT is a tax imposed on your business (or associates of your business) for benefits you provide to your employees or their associates. 

Examples of fringe benefits include:

  • a gym membership;
  • a work car;
  • free tickets to concerts or films; and
  • discounted loans.

Examples of things you may provide to employees that are not fringe benefits are:

  • salary or wages;
  • employee share schemes; and
  • superannuation contributions.

If you provide fringe benefits to employees, you need to register for FBT.

Although your employee is not taxed on the fringe benefit they receive, their fringe benefits affect their legal responsibility for:

  • the Medicare levy surcharge;
  • HELP/TSL debt repayments; and
  • child support obligations. 

Therefore, if the taxable value of the fringe benefits you provide to them exceeds $2,000 for the FBT year, you need to gross up that amount by 1.8868 and report that amount on their PAYG payment summary.

Note that the FBT runs from April 1 to March 31.

To calculate your FBT payable, you should undertake a five-step process:

  1. determine whether you have provided a benefit;
  2. if so, determine the financial value of the benefit;
  3. determine whether any reductions apply. Reductions apply if the employee makes a contribution to the fringe benefit, or if the employee would have been eligible for an income tax deduction for the expenditure had they purchased it themselves;
  4. classify the benefits into two categories: those that are eligible for GST input tax credits and those that are not;
    • for those that are eligible, multiply the value (after any reductions) by 2.0802;
    • for those that are not, multiply the value (after any reductions) by 1.8868; and
  5. multiply the amount reached in Step 4 by the FBT rate of 47%.

Payroll Tax

Payroll tax is a tax calculated on the total wages your business pays each month. For the purposes of payroll tax, ‘wages’ include: 

  • superannuation contributions; and 
  • any fringe benefits you provide to your staff.

You only have to register for and pay payroll tax if your total Australian wages are above the tax-free threshold.

Payroll tax is a state and territory-based tax. This means that the rates and tax-free thresholds differ depending on which state or territory your employees are located in. 

It is important to remember that you need to register for payroll tax in every state and territory that you employ staff, not just the state that of your business’ headquarters.

Land Tax

Land tax is an annual tax levied on the unimproved value of land above a certain threshold. While your primary residence is exempt from land tax, any land or real estate your business owns is most likely going to receive land tax.

Like payroll tax, land tax is a state and territory-based tax. This means that the relevant rates, thresholds and exemptions vary from state to territory.

This is except for the Northern Territory, which does not have land tax. Further, although the ACT has land tax, it does not apply to commercial properties.

Whether your business is responsible for land tax will depend on whether you owned the land at a particular time. The relevant dates for each state are as follows:

New South Wales31 December
Queensland30 June
South Australia30 June
Tasmania1 July
Victoria31 December
Western Australia30 June

Stamp Duty

Stamp duty is essentially a tax on a transaction. Like payroll tax and land tax, stamp duty is a state and territory-based tax, meaning that the types of transactions which attract stamp duty and the relevant rates differ depending on the state or territory in which the transaction occurs.

The most common form of stamp duty is that which applies to the purchase or transfer of real property, like real estate. However, there are a number of other transactions that can attract stamp duty in the course of doing business, such as:

  • setting up a trust in NSW, Victoria, Tasmania or the Northern Territory;
  • a premium payment for the creation of a commercial lease;
  • the transfer or surrender of a lease; or
  • the sale of a business.

Key Takeaways

Navigating the different taxes you and your business are responsible for is a difficult yet essential part of being a business owner. It is crucial that you meet your tax obligations so that you do not face consequences down the line. If you would like advice on how to structure your business and arrange your transactions, contact LegalVision’s taxation lawyers on 1300 544 755 or fill out the form on this page.

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