Understanding business tax: What you need to know

Building a business brings its fair share of surprises and uncertainty. But if there’s one thing that’s always consistent, it’s business taxes.

All businesses that operate in Australia need to pay tax on the money the business earns.

While paying tax might seem like a headache, the more you understand about the process and types of taxes, the more likely tax time will be straightforward and stress-free for you.

Key points:

1. All businesses are required to pay tax to the government.
2. Company or corporate tax, GST and PAYG are three common business taxes that most businesses will be required to pay. Some companies in Australia will also be required to pay payroll tax.
3. Check your business tax obligations with the ATO or an accountant or bookkeeper.

How do business taxes work?

Businesses have to pay many different types of taxes. These are affected by a number of things, like the size of the business, the structure of the business, whether or not the business engages employees and the amount of money the business turns over and the profit it makes.

How much tax does a small business pay in Australia?

The amount of tax you’ll pay as a small business owner depends on a number of things, like the size of your business, its structure, whether or not you have employees and the amount of profit your business makes.

Some small businesses pay a percentage of income in addition to the GST and other items on the BAS.

The structure a business is operated under affects business tax obligations. For example, sole traders have no business-income tax obligations and their tax comes out of personal income tax.

But a small business that operates under a company structure (such as those with an annual aggregate turnover of less than $50 million) pays business-income tax which is paid annually at tax time. Business-income tax is paid separately from the BAS.

See the ATO’s website for up-to-date company tax rates.

What can a small business claim on tax?

A small business can claim a deduction for most of the costs incurred to run it.

Here are some examples:

• Staff wages
• Marketing and advertising costs
• Cost of managing business finances
• Costs related to business travel like airfares, other transport, and meals and accommodation
• Office equipment or expenses
• Plant or machinery, and
• Training or education

How long do you need to keep tax records for a business?

As a business owner, you must keep all business records for five years. These include records like:

• Tax invoices
• Receipts
• Salary and wages records
• Tax returns
• Activity statements, and
• Employee super contributions

What tax does a business have to pay?

There are many taxes that businesses may have to pay, but four of the most common are GST, PAYG, payroll tax and company tax.

1. Goods and Services Tax (GST)

Goods and Services Tax (GST) is applied to most goods and services. In Australia, GST is taxed at 10 percent of the price of goods and services.

You must register your business for GST with the Australian Taxation Office (ATO) if:

• Your annual business income is, or is expected to be, $75,000 or more a year (or $150,000 or more for non-profit organisations)
• You provide taxi travel as part of your business, meaning you charge passengers for transport passengers by taxi or limousine
• You want to claim fuel tax credits

You can choose to pay your GST obligations monthly, quarterly or annually, depending on the BAS reporting structure of your business.

You can read more about GST for business here.

2. Pay As You Go (PAYG)

As a small business owner, you need to help employees take care of their tax obligations with PAYG withholding.

PAYG withholding means that employers collect income tax payments from their employees, which they then pass onto the ATO.

PAYG payments are generally made quarterly, with an additional payment made at the end of financial year.

You can read more about your PAYG obligations here.

3. Payroll tax

Payroll tax is a state tax on wages and other benefits paid by employers.

It’s calculated on the amount of wages you pay per month and the number of staff you employ. You pay payroll tax to the State Government of each state or territory that your employees are located in.

Payroll tax thresholds vary from state to state, so your payroll tax obligations may change across borders. You can find information about your state’s payroll tax obligations here. We’ve also put together tips for managing payroll tax to help you save time and money here.

Payroll tax is closely related to fringe benefits tax, which you might also have to pay. You can find more information about fringe benefits tax here.

4. Company tax

Company tax, which is sometimes referred to as corporate tax, is a tax on the profit your business makes.

In Australia, the company tax rate is 28.5 percent for businesses that make less than $10 million per annum in aggregated turnover.

For businesses that make more than this, the company tax rate rises to 30 percent of annual profit.

Australian businesses pay company tax through a Pay as you go (PAYG) system, which usually occurs quarterly.

Top 3 takeaways:

1. All businesses are required to pay tax to the government.
2. Company or corporate tax, GST and PAYG are three common business taxes that most businesses will be required to pay. Some companies in Australia will also be required to pay payroll tax.
3. Check your business tax obligations with the government or an accountant or bookkeeper.

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