5 things first-time small business owners need to know about taxes
Small businesses are the heart of the Australian economy. With over 3 million active small businesses in the country, they represent about 96% of all companies.
Whether it's your first time dealing with taxes as a business owner or you're an old pro who wants to refresh your tax knowledge, check out these five essential tips:
1. Determine if you need to pay GST
Small businesses are required to register for the goods and services tax (GST) if they have a GST turnover of $75,000 or more. If you're not certain if you will reach that threshold but expect to come close, you should go ahead and register for GST. When you do, you'll automatically receive a business activity statement (BAS) four times per year.
You must complete the BAS and submit it quarterly. If you're not required to register for GST but do so anyway, you'll be permitted to submit your BAS on an annual basis. In addition, if you intend to claim GST credits, you'll need to register ahead of time.
2. Collect PAYG withholding
Pay as you go (PAYG) withholdings are deductions from gross wages paid to your employees and contractors. You're responsible for determining how much tax to withhold from your employees' pay.
The Australian Taxation Office (ATO) provides tables and calculators to help you work out the tax you need to withhold from your payments. These tools can also help you understand the correct amounts to withhold for the Medicare levy, superannuation payments and study and training support loans.
3. Utilise the instant asset write-off
One of the best tax breaks is only available to small businesses. The instant asset write-off allows your business to acquire capital assets and reduce your taxable profits at the same time. For qualifying asset purchases made from April 2, 2019, through June 30, 2020, you may write off up to $30,000. After that period, the threshold will revert to $1,000.
Note that you must subtract any private-use proportion of claimed assets. Only the proportion used to earn assessable income is taxable. However, even though only the taxable purpose portion is deductible, the total cost of the asset must be less than the threshold. For example, if an asset costs $20,000 and is used 80% of the time for business purposes, you would be able to claim $16,000.
4. If you're a sole trader, see if you meet the tax-free threshold
A sole trader is the simplest form of small business. Sole trader structures are taxed as part of your own personal income. For the 2019-20 financial year, the tax-free threshold for individuals is $18,200.
If your business is structured as a company, you're required to pay tax on every dollar the company earns.
5. Keep your tax records for at least five years
If the ATO ever needs to inquire about your taxes, your life will be much easier if you have all of your documents available and organised. In fact, the law requires you to maintain tax records for a minimum of five years. That includes all sales receipts, invoices, bank and credit statements, employee records and more.
One of the advantages of being your own boss is that you have total control over your finances. For that reason, many small business owners decide to handle their own taxes. But tax deadlines can come around quickly, and you may not have the resources to ensure that you maximise your tax benefits.
Reach out to our trusted tax experts to learn more about how to meet your compliance obligations and ensure your returns are all in order.