For the average small business owner, tax can seem like an impossible, complex minefield that needs to be navigated with great care.
Luckily your taxes can be easily managed with a little bit of professional know-how, so I’m going to give you the ultimate 101. Grab a chair, and a cuppa. You’re going to want to know this!
Throughout the year
Before I get into the nitty gritty of tax returns and BAS, let’s talk about how you can set yourself up to be tax ready throughout the year.
1. Keep a separate business bank account – Regardless of what your business model is, if you keep your company finances separate, things will be much easier come tax time (and much easier for you when managing your business!)
2. Keep all your receipts. Keep them manually (in a box or file) or scan them as you go. Tip: Scan them as you go! Either scan directly through your accounting package, use an external scanning provider like Squirrel Street or use the app Scanner to PDF. You just take a picture of the receipt using the app through the Smart Phone and it automatically converts it into a PDF document, allowing you to easily send to your own email, or save as an electronic file.
3. Put aside tax from your earnings as you go. There is nothing worse than getting to the end of the year or quarter and suddenly having to come up with the cash to pay your tax. Put it away (preferably into a separate bank account) as you go!
First, let’s establish your business structure. Chances are, if you are reading this, you are either a sole trader or a company (which means you have registered a company and have Pty Ltd after your business name).
If you are operating as a sole trader, you need only to complete an individual tax return. The business income received is considered to be personal income and therefore taxed at your individual income rate. However, my tip here would be to still set up a separate bank account for your business. Regardless of tax requirements, you would still want to understand the how much money you are making and spending in the business in its own right.
If you are operating as a company, there are some benefits (current as at May 2017 for the 2016/17 tax year). Firstly, the tax rate for small business is only 27.5%. You can also claim immediate deductions for any assets acquired for the business under $20,000 that you obtain throughout the year. Additionally, as a small business you are able to claim deductions on your start-up expenses and expenses incurred in raising capital for the start-up of your business.
Your company tax return needs to be completed by 31 October each year if you are doing it yourself, although I’d recommend that you use a tax agent, in which case there are extended tax lodgements. Don’t forget that you will also still need to complete an individual tax return and you will also need to pay tax as an individual on any wages or drawings you have taken throughout the year.
There are numerous things you may be able to claim through your business to reduce your taxable income. For example, a home office (i.e. a % of your rent), some of your car expenses, mobile phone costs etc. For details around what you can claim in your business, talk to your accountant or the ATO.
The dreaded BAS (or Business Activity Statement) is only applicable if your business is registered for GST or PAYGW and if you pay PAYGI.
You only have to register for GST if your business turns over more than $75k (gross income, minus GST) in any 12-month period (once you reach that amount, you then need to register). Once you are registered for GST, you then need to collect GST on income you receive. You can also then claim GST on many expenses that you pay.
BAS is a quarterly document prepared for the ATO to keep record of (and for you to cough up for!) all of the taxes your business will be liable for. Your BAS is due in the month following each quarter i.e. Feb, May, August, October and the due date for payment will always be displayed on your actual BAS.
Even if you don’t have the cash, you can usually work out a payment plan. It is always better to prepare your financial docs on time, understand your liabilities and know your options rather than put your head in the sand!
Depending on your business model, you may have do Pay as you go (PAYG) where you pay incremental amounts that accumulate towards your expected end of year income tax liability, or pay Fringe benefits tax (FBT) … I’d suggest you ask your accountant if these are applicable for your business.
For further information around tax legislation, please visit the official ATO Website: https://www.ato.gov.au/
Whether you specialise in children’s clothes or copywriting, there are resources are out there to help you understand taxes and finances and keep your business running smoothly all year round. When in doubt, the best course of action is to ask an expert- be it an accountant, a bookkeeper or a business coach!
If you are keen to learn more about how business coaching can help you set a clear business strategy (and how finances form part of that process), please get in touch with me, Clare Wood, for your FREE strategy session.