Small business tax rate basics
Tax season can be a stressful time for any business and can easily become overwhelming or confusing. Here are the basics from what a small business is to the taxing regimes effecting small business.
Getting to know the basics will help you understand where you stand as a small business owner and what to expect when it comes time to file your taxes.
What is a small business?
First things first, a small business is defined by the Australian Taxation Office (ATO) as having $10 million or less aggregate turnover in a year. Aggregate turnover is the annual exchange of your assessable income and any income of any entity connected with your business. For Australian businesses, that means all income from in and out of the country.
Key business taxes
- Income tax: Earning $50 million or less qualifies you for a 25% tax rate if you operate through a company. However, if your company earns more than 80% investment income (passive income) the rate is 30%. If you are operating your business as a "sole trader" you will be taxed on the margin rate your level of assessable income falls into over and above $18,200 income.
- Capital gains tax: This is a misnomer, as it is not a separate taxing system. Any capital gain made through selling an asset (like property) is included as part of your assessable income and taxed at your particular rate.
- Goods and services tax: 10% tax on any goods or service items sold or consumed.
- Payroll tax: A state tax on the wages you pay your employees if your wages exceed a threshold amount. For example, in NSW it is payable if your wages are over $1,200,000 p.a. at a rate of 4.85%. Thresholds and rates vary between states and territories.
- Fringe Benefits Tax: Broadly, this is tax payable at 47% on personal expenses paid by your business. However, once this is paid the tax and the personal expenses become deductible to your business.
When do I file and do I have to file separately?
The Australian tax year runs from 1 July to 30 June, which is referred to as the "financial year" as opposed to the "calendar year."
Normally all small business and individual tax returns are due on 31 October for the previous financial year. However, if you engage a tax agent the last day to lodge is extended to 15 May. If you run your business through a company or a trust you will need to lodge an income tax return on their behalf as they are considered a separate entity to yourself. If you are a sole trader (i.e. trading under your own name), your business income is incorporated into your personal tax return – there is no need to separately lodge a business return.
Small business tax rate breaks
With a refresher on the basics, there are some major upsides to owning and operating a small business entity: tax concession. The ATO performs annual audits to ensure tax integrity has been upheld. Closely follow these stipulations so you can get all of the tax breaks you deserve while maintaining legal filing protocol.
GST, or goods and services tax, is the taxes you pay on all of the services and goods you sell as a business. This can be reduced by the GST you have to pay on your business expenses.
Capital gains tax relief
Capital gains tax reductions are available to a business' active assets, such as a factory property, or the goodwill on the sale of your business. There are four possible reductions to the assessable amount of capital gain:
- 15-year exemption: If your business has continuously owned an active asset for 15 years and you're aged 55 or over and are retiring or permanently incapacitated, you won't have an assessable capital gain when you sell the asset.
- Retirement exemption: You can apply this exemption to capital proceeds from a disposal of a CGT asset. This exemption does not mean you need to retire and can be applied multiple times.
- 50% asset reduction: This can be applied to a CGT asset disposal but the asset must qualify.
- CGT rollover: A rollover occurs when the asset has been disposed of and replaced with another within two years.
Broadly, to be eligible for these concessions, you must be one of the following:
- A small business entity with an aggregated turnover of less than $2 million, or
- the total net value of CGT assets owned by you and certain entities does not exceed $6 million just before the CGT event.
Franking credits refer to the recognition that company tax has been paid before issuing a dividend to shareholders. This is to avoid paying twice on one set of income, known as double taxation. It is only applicable after corporations have already paid taxes. The franking credit protects shareholders from paying taxes on the dividends again. Shareholders qualify for this credit after holding the stock for at least 45 days.
Preparing for tax season
The best way to prepare for tax season is to keep accurate records of all expenses going out and small business income coming in. While this guide will prove helpful from your first tax return season to your fiftieth, hiring a tax professional could be your safest bet. Wilson Porter professionals are trained to help you with all of your tax planning, no matter how large or small your business is.
Get started with planning for your next tax season as soon as possible by contacting us and setting up an appointment.