5 Essential tax tips for first-time small business owners

According to the Australian Bureau of Statistics, there are approximately 2.6 million small businesses in Australia as of June 2023. A small business is considered any company with a turnover rate of $10 million or less, according to the Australian Taxation Office (ATO).

When operating a small business, every dollar counts. That's why understanding how to get the most out of them is essential. We know that the tax process can be daunting, so we've compiled five essential tips to help demystify small business taxes and maximise your returns.

Understanding How Income Tax Works

Everyone who makes over a certain amount must pay taxes to the ATO. How much they pay is based on their taxable income and their tax bracket. The higher your taxable income, the higher the tax bracket, and the more you'll need to pay in taxes.

The income tax system for small businesses, by tax law, can be broken down into two categories: assessable income and eligible deductions.

Assessable income is the amount your business earned from sales, capital gains, interest etc. Deductions are the dollars you spend on running your business on eligible expenses such as:

• Employee salaries.
• Super contributions.
• Business insurances.
• Office supplies.
• Office rents.

So, your taxable income is your accessible income minus eligible deductions.

Understanding how much or little you have to pay during tax season will help your business save money while keeping in good standing with the ATO.

How To Do Your Taxes: 5 Essential Tax Tips

With a brief understanding of your tax obligations, here's the step-by-step guide for completing your taxes at the end of this fiscal year.

1. Determine if You Need to Pay GST

Goods and Services Tax (GST) is how much is added to any item or service sold or consumed in Australia. If your business turnover is $75,000 or more within the anniversary of acquiring your Australian Business Number (ABN), you'll have to register for GST.

Registering for GST is a legal obligation for all who qualify. You'll use your Australian business number (ABN) to register for GST. If you no longer qualify to pay GST, the registration can be cancelled. However, you will need to re-register if you re-qualify.

2. Remitting PAYG Withholding

Pay-as-you-go withholding (PAYG(w)) is the tax that is deducted from your employee's salaries. Depending on the size of your wages bill, it is either remitted to the ATO on a monthly or quarterly basis. The amount is included on your business activity statement along with other taxes due such as GST.

Depending on the circumstances, it may be necessary to deduct PAYG(w) from contractor's fees.

The ATO offers calculators that'll help you determine how much you should withhold to take any confusion out of the process.

3. Utilise the Instant Asset Write-Off

Small businesses can claim an immediate deduction of up to $20,000 for the business portion of the cost of an asset in the year the asset is first used or installed ready for use.

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. Tax Considerations for Sole Traders

Sole traders, or someone who owns and operates their own business, must pay income tax if they qualify. However, if the business makes 18,200 or less with no other taxable income, the sole trader won't have a tax liability.

5. Maintain Tax Records Diligently

Navigating the landscape of small business tax is only possible with meticulous documentation and tax records. Many expenses and income pass through your small business bank account, and each cent must be recorded no matter how seemingly minute.

Records such as accounts payable, receivable, gains and losses, depreciation, and more must be recorded to align with tax compliance. This can help you track and prove your income and deductions to the ATO if you are audited.

If your business is audited, you should legally have at least five years of records available at any given time. You can keep your records digitally or printed as long as they're readable and an accurate copy of the original document.

Different Types of Tax Relief

• Concessions: The ability to reduce, defer, or ignore capital gain from an active asset.
• Rebates/Offsets: A tax offset/rebate reduces the tax you pay on your taxable income. The amount of tax offset you receive depends on your taxable income and the amount of tax you need to pay.

Concessions are only applicable to small businesses that qualify based on aggregate turnover. Such thresholds include:

• If less than $2 million, you qualify for CGT concessions.
• If less than $5 million, you qualify for an income tax offset.
• If less than $10 million, you qualify for restructured rollover.

High earners can qualify for tax deductions and other opportunities to lower their taxable income as well.

Exploring Business Types

The type of business you run will determine your tax rate. Here's a quick breakdown of different business structures:

• Sole Trader: A business with only one owner operating the organisation. This person is solely responsible for all aspects of the business.
• Partnership: These can be two or more individuals that operate the business together. The Partnership lodges a tax return that indicates how much each owner receives which is included on their personal tax return.
• Company: This is a separate legal entity to the underlying owners of the business. It engages the owners as employees of the business.
• Trust: A trust is a legal entity with separate and distinct rights, similar to a person or corporation.  In a trust, the trustee holds title to and manages business, property or other assets for the benefit of its beneficiaries.

Consulting an accountant can help you understand where your business stands and how you'll be required to file your taxes.

How Wilson Porter Can Help

At Wilson Porter, we take the mystery out of the preparation and lodgment of your tax return.

Our services give you the space to grow your business rather than in it, leaving you time to find creative solutions. Business development is based on how well you can make informed decisions with your money, and a dedicated accountant from Wilson Porter can get you there.

Learn about business solutions for small businesses by inquiring today.