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how much do I have to pay and when do I have to pay it? sections
In this eBook we’ll be covering off the basics of how the tax system works for small business so you know what to expect as the year rolls on. Nobody likes surprise tax bills, so read this guide to ensure you’re savvy as to what the tax man expects from you and your small business. Whilst you may not be excited about tax and staying compliant, it really does pay to have a good working knowledge of how the system works and what is expected of you. Tax may be boring for some, but falling foul of the tax man can be much worse than simply boring!
This guide will assume you’re operating your business through a company structure and that you’ve got a great bookkeeper and accountant on hand should you have any questions. If you don’t have already those two key advisers you may want to go out and get them!
Company income tax— Basics— Franking credit system— PAYG tax instalment system
(PAYG-I)
Activity statements— GST— PAYG withholding on wages
(PAYG-W)
Payroll tax
Personal income tax
01
02
03
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03tax basics for small business
basics
All small businesses operating via a company structure must lodge an annual company tax return and pay income tax on the profits made. The tax is calculated as 28.5% of the taxable income, this means all assessable income (e.g. sales) your business has earned during the tax year less all allowable tax deductions (e.g. rent, wages, direct costs, etc.). If you’re GST registered all income and expense are reported net of GST, if you’re not registered they get reported inclusive of GST.
The current company tax rate is 28.5% however it had been at 30% for many years until the rate drop in 2016.
The tax bill is typically payable when your company tax return is due to be lodged which is usually May of the following year if you use a tax agent to lodge the return for you. If you’ve been late in lodging in previous years you may have to lodge the company tax return as early as the October directly following year end in June.
franking credit system
When your company pays income tax to the ATO it will start to build up what are known as ‘franking credits’ (also referred to as ‘imputation credits’). These credits are stored in your company’s franking account. This isn’t a real account as such, rather it’s a notional way of keeping track of your company’s franking account balance.
When you pay dividends out from the company you may be able to attach these franking credits to the dividend payments. The franking credits received by the shareholders can be used as a tax credit against, for example, any possible tax bill they might have as a result of receiving the dividend income.
As you pay company income tax the credits increase. This goes for tax instalments and for actual income tax payments. Any amounts of company tax refunded or franked dividends paid will reduce the franking account balance.
Best if we explain this via a simple example:
Year 1 – the Best Creative Agency Pty Ltd company makes a $1,000 profit and pays $300 tax on it. Let’s say that this means that there is $700 left in the company bank account and that $300 went to the tax department. This means that the franking account will now have a $300 balance.
Year 2 – the company pays out a dividend to the single shareholder using all of the available cash, meaning $700. The company decides to ‘fully frank’ the dividend meaning it comes with the full $300 franking credit. The company does not get a tax deduction for the dividend payment. The company’s franking account is now at $0. The shareholder needs to return $1,000 as assessable income (this is the ‘grossed up’ amount meaning the net cash received plus the franking credit). The shareholder will have to pay tax on the $1,000, but they can use the $300 already paid to offset this.
company income tax01
05tax basics for small business
As you can see from this example the company income tax paid isn’t really paid for the company, rather it is tax paid in advance for the shareholders. Think of it as a timing issue – the company pays it today so you can pay less tax later when you receive the dividends – rather than a true cost to the business.
PAYG tax instalment system (PAYG-I)
If there is one area that stumps new small businesses owners more than any other it’s the PAYG tax instalment system.
What this system seeks to do is collect company income tax in advance based on an estimate. The estimate is based on the most recently lodged company tax return plus a small amount for inflation. Typically the instalment amounts are paid via the quarterly Business Activity Statement (BAS). Any amounts paid can then be used to offset any potential tax bill that may arise during the year.
Again, best if we explain via a simple example:
Year 1 – the Talented Unit Agency Pty Ltd lodges a tax return that results in a $1,000 tax bill. The tax return is lodged nice and early in July directly following the end of the tax year.
Year 2 – when the September BAS arrives for the company the owner sees a $270 PAYG tax instalment amount payable. This is the ATO guessing that the company will have another $1,000 tax bill this year (plus a small amount to cover inflation).
The owner can either pay the amount if they agree the tax bill is likely to be roughly the same as last year based on profits for the quarter, or the owner can vary the amount to reflect what is actually going on this year. The amount can even be varied to nil if required.
Sometimes the ATO will try and ‘catch up’ instalment amounts when you lodge the company tax return later in the year. Say you had no instalments raised all year long then you lodge the company return with a big tax bill in April. The ATO may then decide to raise all four quarter’s worth of instalments in the June BAS. Just something to be aware of.
Remember, PAYG tax instalments are tax being paid in advance based on an estimate. If you overpay, your company will get the overpaid amount refunded when the company tax return is lodged.
All businesses registered for GST and/or PAYG withholding on wages must lodge Business Activity Statements (BAS). These will either be monthly or quarterly depending on the size of your business. Make sure your BAS obligations are up-to-date otherwise you’re inviting drama from the tax department and with your cash flow.
GST
The Goods and Services Tax (GST) is a value-add tax that business collect on behalf of the government and then hand over when they lodge their BAS. Assuming a business is GST registered the GST isn’t actually a cost to the business – you simply add it on to your price, collect it for the tax man, hold on to it, then hand it over. Any GST your business pays on expenses to other GST registered businesses will be refunded at the same time (i.e. when you do your BAS).
Businesses that turnover more than $75,000 must be registered for GST.
Where small business owners can get unstuck when it comes to GST is in two key areas:
a) Failing to keep up to date with their lodgement obligations. Make sure your bookkeeping is always up-to-date and that your BAS is always lodged and paid on time.
b) Failing to account for the cash properly. Remember the GST you collect isn’t your money to spend, you’re just holding it for the ATO, so it’s wise to set it aside in a separate bank account so it’s good to go when it comes time to pay the BAS.
PAYG withholding on wages (PAYG-W)
Much like the GST, this isn’t really an extra cost to your business, it’s just an amount you hold back from the wages you agreed to pay your employees. The amounts withheld are then handed over to the ATO via the relevant activity statement.
For example, if you pay Sally a salary of $50,000 (after allowing for superannuation) then you have around $8,500 in tax to withhold. Say you pay the BAS quarterly then you’ll have to hand over $2,125 to the ATO in relation to Sally’s wage. Now, this isn’t an extra cost to your business, it is simply part of the agreed $50,000 salary – part goes to Sally as cash and part goes to the ATO to cover her tax.
business activity statements (BAS)02
07tax basics for small business
payroll tax03
Payroll tax is levied by the state and is payable based on your total payroll bill. The amount taxable will generally include wages, superannuation and allowances paid to employees, but it can also include payments made to contractors, so be sure to get professional advice when it comes to sorting out your payroll tax obligations.
There is a threshold below which no payroll tax is payable and this differs from state to state. In NSW the current annual threshold is $750,000 – below this there is no need to register and pay payroll tax, however have a payroll bill above this and you will need to get registered and pay the tax. The amount payable is calculated as a percentage of the amount in excess of the threshold.
Payroll tax is typically calculated and paid monthly via the relevant state body website (in NSW it is the Office of State Revenue NSW) and then reconciled at year end to ensure the correct amount has been paid over the year.
Amounts paid in payroll tax will be tax deductible and definitely represent a real cost of doing business so should be budgeted for accordingly.
Some key takeaway points here:• Payments to contractors are often subject to
payroll tax, not just payments to employees• There are rebates available for hiring new staff
for both those paying payroll tax and those not required to register – check in with your accountant to find out more
There is a threshold below which no payroll tax is payable and this differs from state to state.
personal income tax04
As a small business owner you’ll typically find that most of your tax has been dealt with by the company. This will largely take the form of amounts withheld from your wages (being PAYG withholding paid via the BAS) and franking credits attached to the dividends you receive.
However you may find yourself liable for additional personal tax if you’re in a top tax bracket (e.g. you earn over $180,000) and you’ve received dividends. Why? Because the franked dividends are only taxed at a rate of 30% whereas the top marginal personal income tax rates are currently at 49% meaning you may need to ‘top up’ the tax payments.
Just like with the company tax return, your personal tax bill will be payable when your personal income tax return is due for lodgement each year – October for those who lodge themselves or who have a poor lodgement history with the ATO, and May for most other taxpayers.
Again, just like the company, anyone who personally has a tax bill may likely find themselves in the PAYG income tax instalment system, so if you have a tax bill one year do expect to receive those quarterly notices from the ATO chasing next year’s tax in advance. These can be varied downward, to nil if necessary, so always ask your accountant if you think you don’t need to be paying your tax in advance anymore.
That covers the basics of tax obligations for small business owners operating via a company. Get informed so you can keep your business in the best shape possible!
09tax basics for small business
lodgement & payment dates
Timing? The following represents a typical small business’s lodgement and payment obligations. Assumes no payroll tax obligations, if they are registered for payroll tax they’ll need to report and pay monthly.
jan feb mar apr may jun jul aug sep oct nov decLodge and pay GST/PAYG-W/PAYG-I via BAS for December quarter.
Lodge and pay GST/PAYG-W/PAYG-I via BAS for March quarter.
Lodge the company and personal tax returns from last year and pay tax if required.
Lodge and pay GST/PAYG-W/PAYG-I via BAS for June quarter.
Prepare the company and personal tax returns. Gives plenty of time to plan before the May lodgement.
Lodge and pay GST/PAYG-W/PAYG-I via BAS for September quarter.
BAS meaning net GST collected from customers, PAYG tax withheld on wages for employees and PAYG tax instalments for future company tax.
Tax returns. Start preparing early after year end so you can plan and prepare for any tax bills likely to be due in May the following year.
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eBook written by Ben Fletcher
