Tax and accounting jargon explained
This Jargon Buster guide will help you to understand accounting terms in a simple and practical way, so you can free up more time to get more done.
Capital Gains Tax
Capital Gains Tax (CGT) is a tax that applies to items that can be sold for a profit. Generally, these are items like company shares, antiques, investment properties or other items that gain value over time. CGT does not apply to homes or cars that are solely for private use. If you sell a valuable item and make a profit, CGT tax will be payable on the profit that you make.
Fringe Benefits Tax
Fringe Benefits Tax (FBT) is something that employers must pay when they offer extra items (known as fringe benefits) to employees or associates in addition to their regular salary or wages. These benefits could be things like a gym membership, paying staff’s childcare fees or providing a company car for personal use. The FBT is calculated on the taxable value of the benefit and is due each year.
Income tax is payable on the total amount of money we receive from things like wages, investments, shares and properties. To reduce the amount of income tax we have to pay, it’s possible to claim tax deductions on costs that are directly related to earning your income. These deductions are then subtracted off your total income figure, meaning that the income you report is lower, and you therefore pay less tax.
A tax return is a report that you make to the government each year which includes information on income and expenses throughout the relevant financial year period. In Australia, financial years start on 1 July and finish on 30 June. At the end of each financial year and before 31 October, you need to lodge details of your income and expenses to the Australian Tax Office (ATO) via what’s called a tax return.
PAYG stands for the phrase pay-as-you-go. This refers to system which allows you to pay regular, smaller increments of your expected tax liability to the ATO throughout the year, rather than one large payment at the end of the financial year. These smaller payments act as a credit towards the tax liability you are likely to have and if they exceed the amount due, can be refunded after your tax return is complete.
GST stands for ‘goods and services tax’ and is added to almost every purchase you make – be that products or services. Companies who sell products or services where GST is applicable must register with the ATO and add an additional charge of 10% to every product or service. They then report their GST collections and payments to via a Business Activity Statement (BAS) and the ATO will advise them on how much they owe.
There are two types of accounting methods – accrual and cash. The accrual method is considered to be the ‘standard’ method for most companies, apart from very small businesses and individuals. The accrual method records income and expenses when an invoice or expense is issued, often times before a payment is actually made. It works on the expectation of what will be received or paid in the future, despite no payments actually having to have occurred.
The cash basis accounting method is often preferred by small businesses and sole traders as it is more simple than its counterpart, the accrual accounting method. In cash basis accounting, income or expenses are only reported on an income statement once they have been actually paid and the ‘cash’ has been moved. Whilst the cash method is simpler, it does lack the ability to accurately judge the future cashflow of a company.
A bad debt refers to a payment that a company is unable to recover. Bad debt can occur if a customer has gone bankrupt, or if the cost of continuing to chase the amount outstanding exceeds the actual amount outstanding. Bad dept is money that has been permanently lost by your business and is therefore reflected as a loss or expense on your income statement.
Depreciation is a calculation that puts a value to the wearing out of a fixed asset. Fixed assets usually become less efficient or valuable as time goes on, and this calculation is designed to measure the ‘wear and tear’ of an asset. The depreciation of your assets is recorded on your profit and loss statement as part of the day to day running costs of your business, or an expense.
The Superannuation Guarantee (or SG) is the contribution that an employer is legally required to make into an employee’s superannuation fund. The current rate for super guarantee payments is 10% of an employee’s ordinary time earnings. Generally, if an employee gets paid $450 or more (before tax) in salary or wages in a calendar month, they must also be paid a super guarantee.
Superannuation contributions cap
There are two types of contributions for superannuation, and each has a cap on how much you are permitted to pay into your superannuation account via that method. Concessional contributions are the most common and are paid directly by an employer into an employee’s super fund. These contributions are currently capped at $27,500 per year. Non-concessional contributions are additional contributions you make to your or your spouse’s super account, and these are currently capped at $110,000 per year.
Business Tax Rates
All businesses in Australia are expected to pay some form of tax to the Australian Taxation Office. To ensure you’re paying the correct amount, businesses need to ensure that they are being charged the correct business tax rate and taking advantage of relevant tax concessions. The core Business Tax Rates to research are company tax, capital gains tax, goods and service tax (GST) and payroll tax.
Single Touch Payroll (STP)
The ATO recently introduced Single Touch Payroll as a new, compulsory way companies must regularly report payroll information. The system allows payroll information to be sent directly to the ATO each time you complete a pay-run. This is done via STP-enabled payroll or accounting software or a registered tax or BAS agent and includes information on salaries, wages, PAYG and superannuation payments.
Single Touch Payroll 2 (STP 2)
The expansion of Single Touch Payroll is known as STP Phase 2. For Phase 2, you'll need to send additional information to the ATO about areas such as employment type, gross income and country codes. Providing this additional information will reduce your overall reporting burden. The changes will also aid the administration of Services Australia.
Small Business Entity (SBE)
For tax purposes, a small business entity (or SBE) is a company that is carrying on business and has an aggregated turnover less than $2million. Aggregated turnover is the total amount of income from all relevant business entities that are affiliated or connected with you. This can be worked out in three ways, using your previous year’s turnover, estimation of your current year’s turnover or using your actual current year turnover.
Business Activity Statement (BAS)
A Business Activity Statement, or BAS, is a report that businesses make to the ATO that covers how much GST they have collected and paid, as well as information on business income and employee payments. These reports are submitted between 1 and 12 times per year, dependent on your business setup, and they are used to help the ATO work out your liabilities for GST and PAYG tax.
A key decision when starting a business will your business structure. The structure you choose will depend on the size and type of your business, your personal circumstances and your plans for growth. The four key business structures in Australia are sole traders and partnerships, companies and trusts. There are also co-operatives and incorporated associations. It’s a good idea to discuss your proposed structure with a financial adviser before starting your business.
For individuals, an income statement is a summary report that calculates your total income from wages, salaries and other taxable payments, the tax that has been withheld and the amount of superannuation paid on your behalf. These statements are sent directly to the tax office each pay run. For companies, income statements can also refer to a statement which calculates all income received by the company in a certain period.
A balance sheet, also known as a statement of financial position, is a fantastic way to get a snapshot of how your business is performing and its current financial health. The balance sheet shows the calculation of all the things you own (assets) and all the things you owe (liabilities and equity). It helps business owners work out money needed to fund the day to day operations or how quickly you could pay off your current debts.
All businesses should perform regular stocktakes, counting exactly what stock you have on hand as well as damaged or outdated stock you have set aside. This not only helps keep track in an operational sense, but is also required at the end of the financial year when reporting the value of stock you have on hand, and any losses which can reduce the amount of tax your company owes.
Profit and Loss
Profit and loss reports are sometimes referred to in business as an income statement. These reports list all of your sales and expenses, and then calculates how much profit your making, or losing. These snapshots allow businesses to easily see where they are receiving the most income from, or where they are overspending and need to reduce.