Tax for small business: a guide
Small businesses are considered the backbone of the Australian economy. According to the Australian Banking Association, small to medium-sized businesses (SMBs) make up 96% of all businesses in the country. We've put together this guide to help connect all of the dots when it comes to tax for SMBs.
What is considered a small business?
A small business is an enterprise with less than $10 million in aggregated annual turnover. This means that you could have a business with two people or 200 people, and it may still be considered a small business as long as the turnover is less than $10 million. An aggregated turnover includes your primary business and any entity connected or affiliated with you.
Owning and operating a small business can open the box to a lot more questions, the biggest being when you should pay yourself for your work?
When and how much should a small business owner pay themselves?
The owner's salary might be the last thing on their mind. If you take into account the tax implications of your salary, you can better budget for both your personal expenses and invest the leftover funds back into your business.
Generally, it's best to work with an accountant who helps you organise your funds. They'll have an understanding of your income and expenses that can help you come up with the best number for your salary that can meet your needs and goals.
Tax tips for a small business
Your small business will likely have pretty tight margins, and saving each dollar you earn can mean a world of difference. Here are a few small business tips you can work with your accountant on for the best results.
Improve your business structure
When you organize your business, there are ways you can simplify your organization for optimal tax outcomes. Your structure type has an impact on your tax obligations. It's good business practice to reassess your structure from time to time as your business grows.
Some structures to consider:
- Sole trader: You are the business, so your business income will be included on your personal tax return and you have full legal responsibility for the business.
- Partnership: You've coupled with another person (or entity) who will share ownership of the business with you. Each partner will pay taxes separately and pays tax on the share of the net partnership profits each receives.
- Company: You've established the business as a separate entity apart from yourself and must comply with the Corporations Act 2001. Consequently, a company will lodge a separate annual company tax return.
A sole trader or partnership business structure can help you save tax when you start on the assumption you have a lower profit level and can take advantage of a lower marginal tax rate. Once you grow, it's more financially savvy to work as a small business company structure because of the relatively low company tax rate.
Keep accurate records
Don't underestimate the importance of keeping records of your income and expenses. You should have at least the last five years of your income and expenses for the ATO at any time. You want to keep track of several types of cash flow items:
- Employee records, including wages, super, tax declarations, etc.
- Asset purchases.
- Sales receipts.
- Credit card statements.
- Bank statements.
- Expense invoices.
- Lists of debtors and creditors.
- Vehicle records.
The ATO could ask your business to verify an expense at any time, and you should be able to pull these up right away. Failure to do so could result in some complicated and messy situations with the ATO.
Use accounting software
Keeping records can take up a lot of your time as a business owner, but it's a necessary part of running a business. The easiest way to keep up with your expenses and cash flow is by adopting an accounting software package. It'll keep your time open, so you have more time to improve the business rather than working on the books.
Wilson Porter has a recommended software package that we recommend and can help you set up and use. This makes working with an accountant much easier as we can help manage the software through a cloud connection.
Apply for tax offsets
While only sole traders are eligible for a small business tax offset, it can help reduce your tax assessment amount. A tax offset is only applicable to the portion of tax payable on a business's income and can be up to $1,000 of money deducted.
Temporary full expensing has kicked in from 2020 during COVID-19 lockdowns. The expense offset helps you write off the full cost of items on your tax return that you may have bought to make your home office more comfortable and functional. You can include capital items such as:
- Solar systems.
- Technology, such as laptops and computers.
- Tools, plants and equipment.
- Office furniture.
- Motor vehicles, including delivery trucks.
It's important to keep records that these items were for the sole purpose of the business.
Claim eligible tax deductions
You may not be aware of deductions that could save you money on your taxes.
Some deductions could include:
- Bad debts: Some debts that you've been unable to pay as long as it's part of your assessable income.
- Business travel: Keep all receipts and your plane tickets for a tax deduction — you should be able to explain each expense and why it's deductible, keeping in mind that personal time and expenses are non-deductible.
- Insurance: Workers' compensation, fire, public liability, theft and loss of profits insurance premiums are deductible
- Depreciating assets: Over time, large items like tractors or buildings depreciate that you can claim on your taxes.
- Salaries and wages: You can claim the wages and salaries paid to your employees connected to your business.
Improving your tax position is a combination of knowing what's out there to help lower your tax assessment and working with an experienced tax professional. Whether you engage a full-time accountant for your business or only hire one for certain times of the year, this professional can help improve your tax experience from the top down.
What a small business accountant can do to help
Working with Wilson Porter to talk through your goals and structures can change your tax season for the better. There may be some things the business may not be aware of that could save them thousands of dollars.
We recommend having a tax planning meeting before taxes are due. Taxes become a lot more straightforward with the right amount of tax planning. The more you plan, the better the tax season can be. With the combination of accurate records and a professional accountant from Wilson Porter, you could reduce the amount you owe.