Tax basics for small business

Transcription

1 BUSINESS SMALL BUSINESS GUIDE NAT SEGMENT AUDIENCE FORMAT PRODUCT ID Tax basics for small business A guide to your tax obligations and entitlements when running a small business Visit

2 OUR COMMITMENT TO YOU The information in this publication is current at June 2004 and we have made every effort to ensure it is accurate. However, if something in the publication is wrong or misleading and you make a mistake as a result, you will not be charged a penalty. You may have to pay interest, depending on the circumstances of your case. You are protected under GST law if you have acted on any GST information in this publication. If you have relied on GST advice in this Tax Office publication and that advice has later changed, you will not have to pay any extra GST for the period up to the date of this change. Similarly, you will not have to pay any penalties or interest. If you feel this publication does not fully cover your circumstances, please seek help from the Tax Office or a professional tax adviser. Since we regularly revise our publications to take account of any changes to the law, you should make sure this edition is the latest. The easiest way to do this is by checking for a more recent version on our website at COMMONWEALTH OF AUSTRALIA 2004 This work is copyright. Apart from any use as permitted under the Copyright Act 1968, no part may be reproduced by any process without prior written permission from the Commonwealth available from the Department of Communications, Information Technology and the Arts. Requests and enquiries concerning reproduction and rights should be addressed to the Commonwealth Copyright Administration, Intellectual Property Branch, Department of Communications, Information Technology and the Arts, GPO Box 2154, Canberra ACT 2601 or posted at

3 CONTENTS Quick guide to tax issues for your business iii 01 GETTING STARTED 01 Are you carrying on a business? 02 Business structures 02 Features of different business structures 03 Registering your business 04 Non-profit organisations INCOME TAX 09 How income tax works 10 Tax rates for resident individuals, including sole traders, PAYG instalments 12 Simplified tax system 13 Capital gains tax 13 Non-commercial losses 14 Personal services income 15 Primary producers BUSINESS EXPENSES AND DEDUCTIONS 17 How deductions for business expenses work 18 Motor vehicle expenses 19 Fuel schemes 19 Working from home 20 Business travel expenses 21 Decline in value (depreciation) GST AND RELATED TAXES 23 GST 24 Taxes on wine and luxury cars EMPLOYEES AND OTHER WORKERS 27 Determine the status of your workers 28 PAYG withholding for employees 29 Contract workers 30 Superannuation 30 Eligible termination payments 31 Fringe benefits tax 31 Employees and child support RECORD KEEPING, REPORTING AND PAYMENT 33 Business records 34 Invoices you receive 35 Reporting and paying tax 37 Budgeting to pay your tax 38 Definitions 39 More information 41 Index 42 TAX BASICS FOR SMALL BUSINESS i

4 ABOUT TAX BASICS FOR SMALL BUSINESS This book provides a guide to tax issues for small businesses with an annual turnover of less than $2 million. Larger businesses may also find it useful. You can use Tax basics for small business to find out: c which taxes affect your business, and c where to get more detailed information. A good place to start is the quick guide to tax issues for your business on the next page. At the beginning of each chapter there is a subject-specific guide which helps you work out which tax issues affect your business and which sections you need to read. We then tell you where you can get more detailed information if you are interested in a particular topic, or you need to know how to do something. You will also find important notes throughout the book (look for the symbol) which will help you work out what further steps you may need to take, or key information you should note. When we refer to you or your business in this guide we are referring to you as a small business entity, for example, a sole trader, a partnership, a company or a trust that conducts a business. You can obtain additional forms, publications and more information on all topics in this guide from our website at or by phoning TAX BASICS SEMINARS Tax basics seminars are helpful if you ve just started a business or are thinking of starting one. The seminars run throughout the year and cover a range of tax topics. To find out more or to make a booking visit or phone ii TAX BASICS FOR SMALL BUSINESS

5 QUICK GUIDE TO TAX ISSUES FOR YOUR BUSINESS DOES YOUR BUSINESS... c have an Australian business number (ABN)? see page 04 c account for income tax? see page 09 c account for business expenses claimed as deductions? see page 17 c withhold 48.5% from payments to other businesses that don t quote their ABN? see page 36 c keep business records and report and pay tax? see page 33 If your business: c c c c has received a pay as you go (PAYG) instalment rate pay PAYG instalments towards your expected income tax liability see page 12 has turnover of $50,000 or more, or provides taxi travel register for goods and services tax (GST) see page 23 is registered for GST charge and account for GST see page 24 has employees withhold amounts from your employees wages or salaries using PAYG withholding see page 29 contribute a minimum level of superannuation support for your employees see page 30 pay fringe benefits tax (FBT) on non-cash benefits provided to employees. see page 31 If you represent a non-profit organisation: c you may be affected by special endorsement requirements and tax rules. see page 07 TAX BASICS FOR SMALL BUSINESS iii

6 iv TAX BASICS FOR SMALL BUSINESS

7 GETTING STARTED 01 If you re a new or intending starter, determine whether your activity is a business, employment or hobby, see page 02. See how different business structures are treated for tax purposes. This will help you apply the other tax rules in this publication, see page 02. Ensure your business has an ABN, see page 04. TAX BASICS FOR SMALL BUSINESS 01

8 GETTING STARTED ARE YOU CARRYING ON A BUSINESS? You must declare any income earned by your business. You can generally claim an immediate deduction for expenses that you necessarily incur in carrying on a business, provided these expenses are not of a private, domestic or capital nature. (Some capital expenses are deductible over time.) To be able to claim business deductions you must be carrying on a business. If you aren t carrying on a business, your activities may in fact be a hobby in which case you don t declare the income and you can t claim deductions for expenses. The courts have provided some guidelines to help determine whether a business exists or whether it is, in fact, a hobby. There are no hard and fast rules. The Tax Office looks at all the circumstances of a case in determining whether a business exists. Guidelines adopted by the courts include the following: c Does your activity have a significant commercial purpose or character? c Do you have more than just an intention to engage in business? c Do you have a purpose of profit as well as a prospect of profit? c Is there repetition and regularity to your activity? c Is your activity of the same kind and carried on in a similar manner to businesses in your industry? c Is your activity planned, organised and carried on in a business-like manner? c What is the size, scale and permanency of your activity? c Is your activity better described as a hobby, recreation or sporting activity? EXAMPLE: CARRYING ON A BUSINESS Wendy sells wooden toys from a retail outlet. Her outlet is open the same hours as other retail outlets. She advertises in the Yellow Pages as well as regional toy magazines. She sells to clients within her region and to people who have seen her advertisement. She sells her toys at a price that enables her to make a profit. Wendy would normally be considered to be carrying on a business. EXAMPLE: CONDUCTING A HOBBY Tchen makes wooden toys at home. He works about six hours a week and sells the toys only to his family and friends. He intends the activity to remain small and is happy if all he does is cover his costs. Tchen would be considered to have a hobby. As such, he would not include the amounts he received in his income tax return. Consequently, he cannot claim any expenditure he incurred in relation to his hobby against any other income he earns. Visit our website at for more information about what constitutes a business. BUSINESS TIP: NON-COMMERCIAL LOSSES If you re an individual involved in a business activity that makes a loss, you will be able to claim that loss against your income from other sources (such as wages) only if you meet certain conditions. See page 14 for more information. BUSINESS STRUCTURES An important decision you need to make when starting a business is choosing the business structure that best suits your needs. There are four main types of business structure commonly used by small business in Australia: c sole trader c partnership c trust, and c company. The main features of these structures are described in the table on the next page. BUSINESS TIP: YOUR INCOME IN A COMPANY If you use a company to operate your business it s likely you ll be an employee or a director of your own company. In that case, the company will need to withhold amounts from salary or wage payments it makes to you as an employee, and from any amounts it pays you as directors fees, under the PAYG withholding system. 02 TAX BASICS FOR SMALL BUSINESS

9 GETTING STARTED FEATURES OF DIFFERENT BUSINESS STRUCTURES Structure Sole trader Partnership Trust Company Features Description: a sole trader is an individual who is trading on their own. That person controls and manages the business. ABN: a sole trader applies for an Australian business number for their business and uses this number for all their business dealings. TFN: a sole trader uses their individual tax file number when they lodge their income tax return. Who pays income tax: the income of the business is treated as the person s individual income, and they are solely responsible for any tax payable by the business. Business income is included along with any other income in the sole trader s individual tax return. Description: for tax purposes, a partnership is an association of persons or entities that carry on business as partners or receive income jointly (except a limited partnership, which is treated as a company). ABN: partners apply for an ABN for the partnership and use this number for all the partnership s business dealings. TFN: a partnership needs its own tax file number. Who pays income tax: a partnership doesn t pay income tax each partner includes their share of the profit or loss in their individual tax return. However, the partnership lodges a separate income tax return to report its income. Description: a trust is an obligation on a person to hold property for the benefit of others (who are known as beneficiaries ). ABN: a trust has its own ABN. The trustee needs to register for the ABN in its capacity as trustee of the trust. The trustee is taken to be an entity in that capacity. TFN: the trust must have its own tax file number, which is used when its annual income tax return is lodged. The trustee needs to register for the TFN in its capacity as trustee of the trust. Who pays income tax: except in special circumstances it is the beneficiary, rather than the trustee, that is taxed. Usually the beneficiary has to include their share of the trust s net income in their personal tax return (Form I). The trustee is liable to pay tax on income distributed to minor or non-resident beneficiaries, or on any income it accumulates. Description: a company is a legal entity separate from its shareholders. Companies are regulated by the Australian Securities and Investments Commission. For tax purposes, a company means a body or association, incorporated or unincorporated, but does not include a partnership or a non-entity venture.. ABN: a company needs to register for an ABN. TFN: a company needs to register for its own tax file number. Who pays income tax: a company pays income tax on its profits the general rate of tax is 30%. TAX BASICS FOR SMALL BUSINESS 03

10 GETTING STARTED REGISTERING YOUR BUSINESS You can register for an Australian business number (ABN), GST, a tax file number and/or PAYG withholding: c electronically at c on the same application form phone to obtain a form, or c through your tax agent. The Australian Company Number and the ABN On forming a company, you are issued with an Australian Company Number (ACN) by the Australian Securities and Investments Commission. When a company registers for an ABN, the number issued by the Australian Business Registrar is its ACN with two check digits at the beginning: ABN The ABN is the identifying number that businesses use when dealing with other businesses for example, you generally need to quote an ABN on your invoices or other documents relating to sales that you make to other enterprises to avoid having tax withheld from payments to you. You use your ABN in certain dealings with the Tax Office and other areas of government. If you re registered for GST, you also need to put an ABN on your tax invoices and adjustment notes. You can obtain an ABN even if you don t register for GST. Australian Business Register The Australian Business Register is a database of identity information provided by businesses when they register for an ABN. The ABR makes it easier for businesses and all levels of government to interact using a unique identifier the ABN. The ABR provides instant online access to ABN details and transactions at If you are a Corporations Act company or an entity carrying on an enterprise in Australia you are entitled to an ABN. If you re not sure about your entitlement, check the Tax Office website. c How to register for an Australian business number (NAT 2929) BUSINESS TIP: ENTERPRISES You will often see the term enterprise, especially in relation to the ABN and GST. Basically, the term enterprise covers commercial activities but does not include hobbies or employment. So businesses are enterprises for GST and ABN purposes, and so are activities by charities and religious institutions Carrying on an enterprise includes anything done in the course of commencing or terminating the enterprise. Often the date of commencement is before the business starts to trade. Companies don t have to quote both the ABN and ACN on documents. Under the Corporations Act, a company is required to show its ACN on all public documents and negotiable instruments. However, companies with an ABN can use the ABN in place of their ACN, on the condition that: c the ABN includes the company s ACN as the last nine digits, and c the company quotes the ABN in the same way it quoted its ACN. Registering your business name You may need to register a name for your business. Information about registering a business name can be obtained from the Business Entry Point at The Business Entry Point can also help you with more information about: c business structures c forming a company c accessing finance c business licences c payroll tax, and c workers compensation. BUSINESS TIP: PUT YOUR ABN ON YOUR INVOICES Put your ABN on your business stationery, especially your invoices. If you don t, other businesses may withhold 48.5% from any payment to you. 04 TAX BASICS FOR SMALL BUSINESS

11 GETTING STARTED GST You must register for GST if: c you are an entity carrying on an enterprise (if you are in business and not a hobby you probably meet this requirement), and c your annual turnover is at or above the registration turnover threshold of $50,000 (or $100,000 for a non-profit organisation). You may choose to register if you are carrying on a business and your turnover is below the registration turnover threshold. If you provide taxi travel in your business you must register for GST, regardless of turnover. Tax file number Partnerships, companies and trusts need their own tax file number. A tax file number can be obtained at the same time as the ABN, using the same application form. Sole traders use their individual tax file number in dealings with the Tax Office. PAYG withholding If you make payments from which withholding is required for example, wages to employees or payments to businesses that do not quote an ABN you must register with the Tax Office before you first withhold. For more information about PAYG withholding, see page 29. Registering for fringe benefits tax If you are an employer and provide fringe benefits to your employees, we recommend that you register for fringe benefits tax (FBT). For more information about FBT, see page 31. NOTE Does your business need to register for: c c c c c an ABN? GST? a tax file number? PAYG withholding? g You can register for any or all of these at the same time: on the same application form phone to obtain a form electronically at through your tax agent. Does your business need to register for FBT? g Use an FBT registration form: visit phone BUSINESS TIP: WHAT HAPPENS IF YOU DECIDE NOT TO CONTINUE WITH YOUR BUSINESS OR YOU STOP RUNNING YOUR BUSINESS If you decide not to proceed with your business or you close, sell or wind up your business, there are a number of tax matters you may need to attend to. These may include c cancelling registrations; c making certain GST adjustments on your final activity statement, and c calculating the: capital gains and capital losses on your CGT assets; gains and losses on your depreciable assets; and gross profit or loss on your trading stock. You should also check if your state or territory has any special requirements. For more information about government regulations concerning company and business name deregistration, employee payments, cancellation of tax registrations, and specific state or territory requirements, visit the Business Entry Point website at TAX BASICS FOR SMALL BUSINESS 05

12 GETTING STARTED EXAMPLE Alex All Electrical On 1 July 2003, Alex starts his own business as a sole trader electrician. He either makes repairs on site or back at his workshop. c Structure: sole trader c Expected turnover: $40,000 c Staff: works alone Business registrations for All Electrical Tax file number ABN GST PAYG withholding FBT Alex can: Alex uses his own TFN Every business should have an ABN Alex doesn t have to register for GST because his expected turnover is less than $50,000, but he prefers to charge GST and claim GST credits Alex plans to work alone, with no employees; he can register later if he needs to (for example, if he needs to withhold from a supplier that doesn t quote an ABN) Alex has no employees c phone the Tax Office (on ) to obtain an ABN application form and use the same form to register for GST, or c use the online registration at the Business Entry Point at EXAMPLE Renee Fashion Pty Ltd On 1 July 2003, Renee starts her own clothing shop, Renee Fashions. At the same time she creates a company, Renee Fashions Pty Ltd, through which she runs the business. c Structure: company c Expected turnover: $190,000 c Staff: three (including Renee herself) Business registrations for Renee Fashions Pty Ltd Tax file number ABN GST PAYG withholding FBT TFN needed for the company ABN needed for the company Renee Fashions Pty Ltd is required to register for GST because its expected turnover exceeds the threshold of $50,000 Renee Fashions Pty Ltd will have at least one employee (Renee herself). In addition, Renee plans to employ two more staff. Renee does not plan to provide fringe benefits to any employees, but can register for FBT later if this situation changes. Renee can obtain a tax file number for the company and register it for an ABN, GST and PAYG withholding by: c phoning the Tax Office on to obtain an ABN application form, or c using the on-line registration at the Business Entry Point at 06 TAX BASICS FOR SMALL BUSINESS

13 GETTING STARTED NON-PROFIT ORGANISATIONS The Tax Office has a range of publications and services specifically for non-profit organisations (including charities). Are you a non-profit organisation? A non-profit organisation is an organisation that is not operating for the profit or gain (either direct or indirect) of its individual members. This applies both while the organisation is operating and when it winds up. Examples include churches, community centres, cultural societies, environmental protection societies, public museums and libraries, scholarship funds, sports clubs and traditional service clubs. Tax concessions for non-profit organisations There are various tax concessions for particular types of organisations in the non-profit sector. Some types of non-profit organisations are entitled to: c exemption from income tax c concessions in working out their income tax obligations if they are not exempt c exemption from fringe benefits tax (FBT) or a rebate to reduce the amount of FBT payable c deductible gift recipient status c refunds of imputation credits, and/or c concessions available for goods and services tax (GST). Tax deductible gifts and fundraising If your organisation wants to receive tax deductible gifts, you will need to familiarise yourself with: c the types of organisation that can qualify c maintaining a gift fund c information to be recorded on receipts for donations, and c the types of gifts that are tax deductible. State and territory government regulations and the impact of GST should also be considered when conducting fundraising. c Visit the For non-profit organisations section of our website at c See Tax basics for non-profit organisations (NAT 7966). c Obtain a fax by phoning c Phone Income tax There is an endorsement process for charities under which they apply to the Tax Office to be income tax exempt. Other organisations can self-assess their income tax status. Non-profit organisations that are not exempt may receive concessions in calculating their taxable income and lodging income tax returns, and/or special rates of tax. TAX BASICS FOR SMALL BUSINESS 07

14 GETTING STARTED 08 TAX BASICS FOR SMALL BUSINESS

15 INCOME TAX 02 Account for income tax for your business: sole traders, see page 10 partnerships, see page 11 companies, see page 11 trusts, see page 11. How you account for income tax depends on whether your business: has received a PAYG instalment rate pay PAYG instalments, see page 12 has average turnover of less than $1 million you may be eligible to enter the simplified tax system and use special rules to work out your taxable income, see page 13 has a capital gain or capital loss (by disposing of a capital asset, such as land or goodwill) capital gains tax affects you, see page 13 makes a loss, and consists of you as an individual (alone or in partnership with others) you may not be able to claim the business loss against your income from other sources, such as wages, see page 14 has income that is mainly a result of your personal effort or skills the income may be treated as your income for tax purposes and the deductions you can claim may be limited, see page 15 is a primary production business special tax rules affect you, see page 16. TAX BASICS FOR SMALL BUSINESS 09

16 02 INCOME TAX HOW INCOME TAX WORKS Income tax is levied on a person s or business taxable income, which is worked out using this formula: assessable income less allowable deductions equals taxable income c Assessable income is generally the income the business earns. It does not include GST payable on sales that you make, nor does it include GST credits. For an individual taxpayer (such as a sole trader or a partner in a partnership), assessable income includes business income and income from other sources, such as personal investments or wages from another job. c Allowable deductions are deductions for certain expenses necessarily incurred in relation to the business for example, tools, expenses for business premises and motor vehicles, business stationery and employee wages. GST that you pay and are entitled to claim as a GST credit is not an allowable deduction. c Taxable income is the person s or business s assessable income less their allowable deductions. Income tax works on a self-assessment principle. This means the information you provide to the Tax Office is initially accepted as true and accurate, and your tax liability is calculated on this basis. Later, you may be asked to show records to support your information. It is important that you keep records (for five years) to verify your claims. BUSINESS TIP: BUSINESSES MUST LODGE INCOME TAX RETURNS You must lodge an income tax return for any year in which you carry on a business, even if you expect to have no income tax liability. Remember, activity statements are different from income tax returns. Even if you report your pay as you go (PAYG) instalments and other obligations on activity statements, you must still lodge an income tax return. Individuals and sole traders A sole trader is an individual taxpayer and is subject to the same income tax rates that would apply to a wage or salary earner. Sole traders don t need to complete a separate return for their business they use their personal income tax return (Form I) to report their business income and deductions. TAX RATES FOR RESIDENT INDIVIDUALS, INCLUDING SOLE TRADERS, Taxable income scale Tax rate $0 $6,000 0% $6,001 $21,600 17% $21,601 $58,000 30% $52,001 $70,000 42% $70, % *At the time of printing this table is expected to be effective from 1 July 2004 Note: Medicare levy may also be payable and is calculated as a percentage of taxable income. Special rules apply if you have recently left full-time education and entered the workforce, or have recently become an Australian resident. EXAMPLE Alex All Electrical (sole trader) In , Alex has the following income and deductions: c business income: $34,000 c investment income: $2,000 c deductions: $10,000 Alex includes these amounts on his individual income tax return. His taxable income for the year is calculated as follows: assessable income $36,000 allowable deductions $10,000 taxable income = $26,000 To work out the tax he has to pay, Alex applies the marginal rates of tax for individuals to each relevant bracket of his taxable income. On the first $6,000 of his taxable income the tax rate is 0%; on the next $15,600 (that is, the taxable income from $6,001 to $21,600) the rate is 17%; and so on until he reaches $26,000. Alex s tax is calculated as follows: Marginal tax rates $70,001 $58,001 $21,601 $6,000 47% $0 x 47% = $0 42% $0 x 42% = $0 30% $4,400 x 30% = $1,320 17% $15,600 x 17% = $2,652 0% $6,000 x 0% = $0 Tax on $26,000 = $3, TAX BASICS FOR SMALL BUSINESS

17 02 INCOME TAX See TaxPack (NAT 0976) for information on income tax for individuals and how the Medicare levy is calculated. Partnerships All assessable income earned by a partnership and deductions claimed for expenses incurred in carrying on that business must be shown in a partnership tax return (Form P). A partnership (except a limited partnership, which is treated like a company for tax purposes) does not pay tax on its income. Instead, each partner pays tax on their share of the partnership s income. Each partner must include their individual share of the net partnership profit or loss in their personal tax return (see Individuals and sole traders on page 10). c Partnership and trust tax return instructions (Nat 2297) EXAMPLE Katchin Consulting Pty Ltd In , Katchin Consulting Pty Ltd earns $165,000 and has $152,000 of allowable deductions. These amounts are included on the company s company tax return. The company s taxable income for the year is calculated as follows: assessable income $165,000 allowable deductions $152,000 Taxable income = $13,000 To work out the company s income tax liability, the company tax rate of 30% is applied to all taxable income: 30% company tax rate X $13,000 taxable income = $3,900 tax to pay Companies A company is a distinct legal entity with its own income tax liability, separate to your personal income tax. However, the treatment of any personal services income may be different (see the business tip below). The company must lodge a company tax return (Form C), which shows the income and deductions of the company and is used to calculate the income tax that the company should pay. As with individuals, the income tax of companies is calculated on taxable income, which is the assessable income earned by the company less any allowable deductions. A company s income tax is calculated as a percentage of the taxable income earned by the company during the financial year. The general company tax rate for the income year is 30%. (This rate is applied equally to all taxable income of a company unlike individuals, companies do not have marginal tax rates or tax-free thresholds.) Companies must also lodge an annual return with the Australian Securities and Investments Commission. Employees of the company (which usually includes the owner/ director) must include their wages or salaries in their personal tax return (see Individuals and sole traders on page 10). c Company tax return instructions (NAT 0669) Trusts If a trust is carrying on a business, all income earned by the trust and deductions claimed for expenses incurred in carrying on that business must be shown in a trust tax return (Form T). Except in special circumstances it is the beneficiary, rather than the trustee, that is taxed. Usually the beneficiary has to include their share of the trust s net income in their personal tax return (see Individuals and sole traders on page 10). Distributions to minor beneficiaries are assessed to the trustee, which also pays the tax assessed on their behalf. c Partnership and trust tax return instructions (NAT 2297) c PAYG instalments working out your proportion of partnership instalment income (NAT 3494) BUSINESS TIP: PERSONAL SERVICES INCOME If you earn income mainly for your personal efforts or skills, your income may be taxed at your personal tax rate even if it is paid to a company, partnership or trust and not directly to you. See page 15 for more information. TAX BASICS FOR SMALL BUSINESS 11

18 02 INCOME TAX PAYG INSTALMENTS Pay as you go (PAYG) instalments is a system for taxpayers to pay instalments of their expected tax liability on their business and investment income for the current income year. By providing for your expected tax liability, PAYG instalments help you minimise any amount you may have to pay when your next annual income tax return is assessed. Companies and superannuation funds are usually required to pay PAYG instalments, while individuals are generally required to pay PAYG instalments only if the business and investment income reported in their annual income tax return is $2,000 or more. The Tax Office will notify you by letter if you are required to pay PAYG instalments and tell you how often to pay. PAYG instalments are generally paid quarterly (four times per year), although some taxpayers pay two instalments per year and some have an annual instalment option, depending on their circumstances. Most taxpayers have the option of paying instalments worked out by the Tax Office or instalments they work out themselves based on their instalment rate and instalment income. When your instalments are due, the Tax Office will send you an activity statement or notice, which you complete and return. Whether you pay instalments annually, two times a year or four times a year, you are still required to lodge an annual income tax return at the end of the income year. Any PAYG instalments you ve paid for the income year will be credited to your income tax assessment. You then pay any additional income tax owing, or receive a refund. NOTE Have you received a PAYG instalment rate from the Tax Office? g Pay your PAYG instalments with your activity statements (or, if eligible to pay annually, you ll receive a PAYG instalment notice). Your letter from the Tax Office and your activity statements will tell you about your options for paying PAYG instalments. This information is available on our website: Introduction to pay as you go income tax instalments (NAT 4637) PAYG instalments for individuals (NAT 4269) PAYG annual income tax instalments for individuals (NAT 7324) PAYG instalments for companies (NAT 7331) PAYG annual income tax instalments for companies (NAT 7322) PAYG instalments for primary producers and special professionals (NAT 4352). Partnerships and trusts Partnerships are not liable to pay PAYG instalments. Instead, the individual partners may be liable to pay PAYG instalments on their proportion of income from each partnership of which they are a member. Similarly, trusts are not liable to pay PAYG instalments. Instead, the beneficiaries or trustees may be liable to pay instalments. c PAYG...working out your proportion of trust instalment income (NAT 3495) BUSINESS TIP: PAYG INSTALMENTS FOR NEW BUSINESS STARTERS New businesses usually don t pay PAYG instalments until after they ve lodged their first income tax return. They pay their entire tax liability for the first year when their income tax return is assessed so in the first year of business it s important to put aside money to pay your end-of-year tax liability. If you wish, you can provide for your income tax liability by making voluntary payments. For more information, phone us on TAX BASICS FOR SMALL BUSINESS

19 02 INCOME TAX SIMPLIFIED TAX SYSTEM The simplified tax system (STS) is an alternative method of determining taxable income for eligible small businesses with straightforward financial affairs. It began on 1 July The STS has three main elements: c an STS accounting method that recognises most business income and expenses only when received and paid c simplified trading stock rules where businesses only need to conduct stocktakes and account for changes in the value of trading stock in limited circumstances, and c simplified depreciation rules where depreciating assets costing less than $1,000 each are written off immediately. Most other depreciating assets are pooled and deducted at a rate of 30%. In addition, STS taxpayers can claim a full deduction for certain prepaid expenses. Participation in the STS is optional. If you choose to enter the STS you must use all three elements where they apply. Eligibility Most small businesses are eligible to enter the STS. Broadly, you are eligible to enter the STS for an income year if: c you carry on a business in that year c your STS average turnover for that year is less than $1 million, and c your business and related businesses have depreciating assets with a total adjustable value of less than $3 million at the end of that year. NOTE CAPITAL GAINS TAX As a small business operator, you will most commonly make a capital gain or capital loss if you sell one of your CGT assets used in your business for example, your business premises or goodwill. If you conduct your business through a company or trust, you may make a capital gain or capital loss if you sell your shares or trust interest. Basically, a capital gain or capital loss is the difference between the sale proceeds you receive for the asset and its purchase price. Capital gains tax affects your income tax liability because your assessable income includes any net capital gain you made for the income year. Your net capital gain is the total of your capital gains (not just those you made from your business CGT assets) for the year, reduced by your total capital losses for the year or earlier years and any relevant concessions. There are a range of capital gains tax concessions that reduce capital gains made by small business operators. Capital gains tax does not generally apply to depreciating assets, such as tools or motor vehicles, that you use only in your business. Gains from these assets are included in your income; losses from these assets are deductible. BUSINESS TIP: KEEPING RECORDS FOR CAPITAL GAINS TAX You must keep records of any act, transaction, event or circumstance that might reasonably be expected to be relevant to working out a capital gain or capital loss even if the capital gain or capital loss hasn t yet happened. Otherwise you may incur extra expense to reconstruct the information later. Penalties can apply if records are not kept. Do you want to enter the simplified tax system? g Confirm your eligibility (see more information below). g To enter, tick the STS box on your income tax return. g Use STS rules for accounting, trading stock and depreciation for the income year. c Guide to capital gains tax (NAT 4151) c Guide to capital gains tax concessions for small business (NAT 8384) c The simplified tax system: a guide for tax agents and small businesses (NAT 6459) TAX BASICS FOR SMALL BUSINESS 13

20 02 INCOME TAX NON-COMMERCIAL LOSSES If you re an individual involved in a business activity that makes a loss, you may be able to claim that loss by offsetting it against your income from other sources, such as salary or wages. However, there are tax provisions that may restrict your ability to claim the loss. What are the effects? If you are affected by these provisions in a particular income year, a loss incurred by your business activity in that year is deferred and cannot be claimed against income from other sources. It may be possible to claim the loss against other income in a future year. Does this affect you? These provisions may affect you if: c you are undertaking a business activity as an individual, whether alone or in partnership with other individuals or entities c the business activity makes a loss c you have income from other sources, such as salary or wages, and c the business activity does not meet any of four tests set out in the provisions. (The tests relate to levels of income, profit, real property and assets. If your business activity does not meet any of the four tests you can ask the Tax Office to use its discretion to allow you to deduct the loss.) These provisions do not apply if: c the activity is being run by a company or trust, rather than by you personally c you are undertaking a primary production business or a professional arts business and you make less than $40,000 (excluding any net capital gains) in an income year from other sources, or c the losses arise from passive investments in shares, rental property or infrastructure bonds (unless your investment activity is really a business, rather than a passive investment). This means you can still negatively gear these passive investments. NOTE Are you potentially affected by the provisions for non-commercial losses? g You may not be able to claim a loss from your business activity against income from other sources instead, you may need to defer claiming the loss to a future year. See Non-commercial losses: overview (NAT 3379). Visit Talk to your tax agent. 14 TAX BASICS FOR SMALL BUSINESS

21 02 INCOME TAX PERSONAL SERVICES INCOME There are specific tax rules relating to personal services income earned by contractors and consultants. Are you affected? Personal services income is income that is mainly a reward for, or the result of, your personal efforts or skills. Income is not personal services income if it is mainly: c for supplying or selling goods c for granting a right to use property c generated by an income-producing asset, such as income derived from the use of a truck, or c generated by a business structure (for example, a large accounting firm). Your personal services income will not be affected by these rules if you are conducting a personal services business, either on your own or through a company, partnership or trust. A business qualifies as a personal services business if it meets any of four tests relating to responsibility for results, level of income from any one client, business premises and employment of others. If your business does not meet any of the four tests, in some circumstances you can seek a Tax Office determination that you are conducting a personal services business. What are the effects? If you earn personal services income, the deductions available against this income may be limited. If the personal services income is earned through a company, partnership or trust (called a personal services entity ), the income may be treated as your income for tax purposes, unless the entity is conducting a personal services business. The entity may also have PAYG withholding obligations regarding the income. You will be affected by these rules only to the extent that your income, or the income of an entity, is your personal services income. Note that even if your business qualifies as a personal services business, the general anti-avoidance tax rules may apply if you operate through a company, trust or partnership for the purpose of reducing your income tax liability (by income splitting, for example). NOTE Are you potentially affected by the rules for personal services income? g You may need to seek a Tax Office determination, to find out more about these rules. See Alienation of personal services income: important information for contractors and consultants (NAT 4788). Visit Talk to your tax agent. TAX BASICS FOR SMALL BUSINESS 15

22 02 INCOME TAX PRIMARY PRODUCERS The tax laws include special provisions to help primary producers, such as accelerated depreciation for some items, special deductions for water conservation and landcare, and ways to deal with fluctuating income. Are you a primary producer? To use these provisions you need to check that you meet the Tax Office s definition of carrying on a business of primary production. Some of the factors the Tax Office may consider include: c the size or scale of the activities c whether the activities are profitable if not, whether the person genuinely believes the activities will be profitable, and c whether the activities are carried on in the same manner as that type of activity is ordinarily carried on. Examples of primary production activities include farming, fishing and aquaculture. Tax averaging If you are a primary producer, tax averaging enables you to even out your income and tax payable over a maximum of five years to allow for good and bad years. When your average income is less than your taxable income excluding capital gains you may receive an averaging tax offset. When your average income is more than your taxable income excluding capital gains you may be required to pay a complementary amount of tax, which is included in the tax assessed. Income averaging applies automatically to primary producers unless you choose otherwise (that is, notify the Tax Office in writing). If you choose to opt out of the averaging system your decision is irrevocable. You do not need to register to be a primary producer. Averaging of income will apply automatically when your primary production income is shown at the primary production question in your tax return. NOTE Are you a primary producer? g Find out more about the special provisions for primary producers (and the eligibility criteria for being a primary producer). See Information for primary producers (NAT 1712). Visit Phone or Talk to your tax agent. 16 TAX BASICS FOR SMALL BUSINESS

23 BUSINESS EXPENSES AND DEDUCTIONS 03 Claim deductions for your business expenses when you lodge your income tax return, see page 18. To claim deductions for your business expenses when you lodge your income tax return you need to know how to claim, as well as some specific rules relating to whether your business: has motor vehicle expenses claim deductions for these expenses, see page 19 uses diesel fuel you may be eligible for grants or rebates, see page 19 is based at your home you may be entitled to deductions for expenses relating to the area you use, see page 20 has travel expenses, such as fares, car hire and accommodation these can generally be claimed as deductions, see page 21 uses plant, such as machinery, tools or computers you can claim a deduction for the decline in value (depreciation) of this plant, see page 22. TAX BASICS FOR SMALL BUSINESS 17

24 03 BUSINESS EXPENSES AND DEDUCTIONS HOW DEDUCTIONS FOR BUSINESS EXPENSES WORK Under income tax law, a person carrying on a business can generally claim an immediate deduction for outgoings that are incurred in carrying on their business to produce assessable income, provided these expenses are not of a private, domestic or capital nature. Capital nature means the expenses of establishing, replacing, enlarging or improving the business structure, as distinct from working or operating expenses. Some capital expenses are deductible over time see Decline in value (depreciation) on page 22. Some expenses may not be deductible if the tax rules relating to personal services income apply to you see page 15. The following are examples of common expenses that can generally be deducted from gross income: c rent or lease of business premises c hire or lease of plant and equipment c trading stock c decline in value of depreciating assets (depreciation) c tools c employee expenses c registered tax agent fees c interest on borrowed money c motor vehicle expenses c repairs c telephone expenses c bank fees and charges c transport and freight, and c light and power. Record keeping For all business deductions it is important that you are able to substantiate your claim. Income tax works on a selfassessment principle, which means the Tax Office initially accepts your information but may later ask you to show records to support your claims. Records to verify claims for deductions include: c business books c evidence of transactions (such as invoices and receipts), and c evidence of usage (such as motor vehicle logs and airline tickets). Keep records of your business transactions for five years, or five years after you last used them to prepare a return. For example, a log book may be relied on for up to five years after it was last used to prepare a return. Minor expenses of individuals and partnerships For certain work, car and business travel expenses it is not always possible to get a receipt. In such cases, you can claim the expense as long as you record your expenses (in a diary, for example), each expense is no more than $10, and they add up to no more than $200. If it was unreasonable to expect to get a receipt and the expense was more than $10, you can still claim the expense as long as you record it. This type of expense is not counted towards the $200 overall limit for small expenses. Each expense entry in the diary must contain all the details that would be required of a valid receipt and you must sign each entry. c Record keeping for small business (NAT 3029) Prepaid expenses A prepaid expense is expenditure incurred for something that will not be wholly provided during the current income year for example, a 12-month subscription or insurance premium that overlaps the end of the income year (30 June for most taxpayers). An immediate, full deduction may not be allowed for such prepaid expenses instead, part of the deduction may need to be apportioned to each income year of the service period. However, there are transitional concessions that allow a larger deduction in the first year if the service period ends within 13 months of the expense being incurred If your business is in the simplified imputation system (STS), you can generally claim an immediate, full deduction for prepaid expenditure if the service period is 12 months or less (even if the 12 months overlaps the end of the income year). c Deductions for prepaid expenses (NAT 4170) c Prepaid expenses taxpayers in the simplified tax system (NAT 7545) BUSINESS TIP: GST AND INCOME TAX DEDUCTIONS You can t claim an income tax deduction for the GST included in the price of something you purchased if you can claim it as a GST credit in your activity statement. See TaxPack (NAT 0976) for information about business expenses and deductions. 18 TAX BASICS FOR SMALL BUSINESS

25 03 BUSINESS EXPENSES AND DEDUCTIONS MOTOR VEHICLE EXPENSES Sole traders and partnerships All expenses for business purpose vehicles are generally deductible. These are vehicles such as trucks or vans that have a dedicated business use, and some smaller vehicles (such as utilities or panel vans) where private use is restricted to home-towork travel. Special substantiation rules apply to claims for car expenses. The car must be owned, leased or hired under a hire purchase agreement by the taxpayer, and have a carrying capacity of less than one tonne and fewer than nine passengers (this may include certain panel vans and utility trucks). You may choose one of four methods to calculate car expenses: c cents-per-kilometre method c 12% of original value method c one-third actual expense method, or c log book method. The following do not qualify as a car for these purposes: c motorcycles or similar vehicles c taxis taken on hire, and c motor vehicles hired intermittently. FUEL SCHEMES The energy grants credits scheme The energy grants credits scheme provides a grant for eligible fuel used in eligible activities including road transport, mining, agriculture, forestry, fishing, rail transport, marine transport, electricity generation for residential premises, the operation of hospitals, nursing and aged care homes and other medical institutions as well as other activities. Eligible fuels include diesel fuel and some alternative fuels. Petrol is not an eligible fuel. NOTE Do you use diesel or alternative fuels in your business? g You may be eligible for energy credit grants. For more information or to register for the energy grants credits scheme. See Energy grants credits scheme (NAT 8890). phone If you wish to claim expenses for such vehicles, you will have to comply with the general work-related expense substantiation rules (see page 18). Companies and trusts The above methods of calculating income tax deductions for motor vehicles do not apply for companies and trusts. Companies and trusts don t have private expenses, so all vehicle costs are tax deductible to the business. Private use of vehicles owned by a company or trust is generally subject to fringe benefits tax (see page 31). If you are a director of your own company you are an employee for fringe benefits tax purposes. BUSINESS TIP: TRAVELLING FROM HOME TO WORK Except in certain limited situations, travel between your home and place of business is not deductible. See TaxPack (NAT 0976) for information about motor vehicle expenses. TAX BASICS FOR SMALL BUSINESS 19

26 03 BUSINESS EXPENSES AND DEDUCTIONS WORKING FROM HOME If you do work relating to your business at home you may be able to claim a deduction for phone rental and business calls, depreciation of office furniture and equipment, and any additional heating, cooling and lighting expenses. If part of your home is used exclusively as your place of business you may also deduct a portion of such expenses as rent, mortgage interest and insurance. The table below summarises the allowable deductions for the three ways that a person may carry out work at their home: c home is the principal place of business the business is run from home and a room is set aside exclusively for business activities c home work area a room is set aside exclusively for business activities but the home is not the principal place of business, or c work at home but no home work area the work is done at a time when others are not present in a living area or garage but the home is not the principal place of business and there is not a room set aside primarily or exclusively for business activities. What you can claim Cost of owning or renting the house Cost of using a room (utilities) Home is the principal place of business Home work area Yes No No Yes Yes Yes Business telephone Yes Yes Yes Decline in value (depreciation) of assets Yes Yes Yes Work at home but no home work area In determining allowable deductions, the emphasis is on additional costs you incur because you conduct business activities from home, and excluding any private portion of expenses. You need to have a reasonable basis for apportioning business and private costs for example, you might allocate heating and lighting costs based on the floor area of the business part of your home relative to the total floor area. As with all claims for deductions, it is important to keep records to substantiate your claims. BUSINESS TIP: CAPITAL GAINS TAX If your home is a place of business there may be capital gains tax implications when you come to sell your home. See Main residence exemption - the effect of using your home to produce income (NAT 10255) EXAMPLE Alex All Electrical (sole trader) Alex s house is his principal place of business he runs his business from home, though he usually works on customer premises. He has converted his garage into a workshop and his spare room into an office both are now used exclusively for his business. Alex works out that the dedicated workshop and office constitute 15% of the floor area of his house. On this basis, he claims deductions for 15% of the house s costs for gas, electricity, insurance premiums, council rates and mortgage interest. Based on a review of his itemised home phone bills, he estimates that 10% of calls from his house are for business purposes. On this basis he claims 10% of his total call costs and line rental fees for his home phone. Alex also claims deductions for the decline in value of depreciating furniture that he uses for the business. For his income tax return, Alex works out his deductions as follows: Utilities, rates, insurance, interest $10,500 Business floor area 15% X $1,575 Home phone costs $800 Business use of phone 10% X $80 Decline in value of business furniture $100 $100 Total deductions $1, TAX BASICS FOR SMALL BUSINESS

27 03 BUSINESS EXPENSES AND DEDUCTIONS NOTE To help you work out your expenses relating to a home work area, we have developed an electronic calculator. To access the calculator, visit our website at au and search for Home office expenses calculator. Do you work from home? g Keep records to substantiate your claims for deductions for example: electricity and telephone bills rental receipts, and obtain a reasonable estimate of your home s value at the time you start working there you will need this to calculate whether you have made a capital gain or a capital loss when your home is sold. g For more information about working from home expenses: see TaxPack (NAT 0976) see Tax and the home-based business (NAT 10709) phone BUSINESS TRAVEL EXPENSES The term business travel expenses means travel expenses incurred in producing income other than salary or wages. These expenses are only deductible if special substantiation rules are met: c written evidence of all expenses (this is not required if there is no overnight stay away from home), and c travel records, if the business travel is for six or more consecutive nights away from home. The travel records must record the particulars of each business activity before it ends, or as soon as possible afterwards, in a diary or similar document. The particulars that must be specified are: c the nature of the activity c the day and approximate time when it began c how long it lasted, and c where (the place) you engaged in it. BUSINESS TIP: KEEP YOUR PLANE TICKET A plane ticket may show all the details that are required to substantiate your expenses relating to air fares. For expenses incurred on or after 1 July 1994 you need to keep the records for five years. If only part of your trip was for business purposes, you can claim only the part that related to your work. TAX BASICS FOR SMALL BUSINESS 21

28 03 BUSINESS EXPENSES AND DEDUCTIONS DECLINE IN VALUE (DEPRECIATION) You may be able to claim a deduction for the decline in value of your depreciating assets. A depreciating asset is an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used for example: c computers c electrical tools c furnishings c carpet and curtains, and c motor vehicles. You can claim a deduction for part of the value of these assets in each year of their effective life that is, the length of time the asset can be expected to be used for business purposes. The Tax Office publishes a comprehensive list of assets and their effective lives to help you work out these claims or you can selfassess the effective life of your depreciating assets. To assist business taxpayers the Commissioner of Taxation has released PS LA 2003/8. Subject to certain criteria, this allows business taxpayers who purchase an asset costing $100 or less to assume it is a revenue expense and claim an immediate full deduction. Also, under the uniform capital allowance rules, assets costing less than $1,000 (low cost assets) or assets with an adjustable value of less than $1,000 (low value assets) can be pooled together and deducted at 37.5% per year. For assets with an adjustable value of $1,000 or more, you work out decline in value using either the prime cost or diminishing value method. Both methods are based on the effective life of the asset. Alternatively, most small businesses are eligible to enter the simplified tax system, which has simpler and more generous treatment of depreciating assets. STS capital allowances (depreciation rules) Eligible taxpayers have the option of joining the STS (see page 13). In the STS, you can claim an immediate full deduction for most depreciating assets costing less than $1,000 each. Most other depreciating assets are pooled and deducted at a rate of either 30% or 5% depending on their effective life. Newly acquired assets are deducted at half the applicable pool rate, that is, at either 15% or 2.5% in the first year, regardless of when they were acquired during that year. c See Guide to depreciating assets (NAT 1996) for information about the uniform capital allowances system. c See Simplified tax system: simplified capital allowances depreciation rules (NAT 4824) for information about the treatment of depreciating assets in STS. EXAMPLE Renee Renee Fashions Pty Ltd Decline in value of depreciating assets simplified tax system Renee Fashions Pty Ltd is eligible to enter STS and elects to do so in its first year of business ( ). During the company purchases a shop fit-out ($90,000), computer ($2,000), used car ($15,000), used cash register ($900) and computer printer ($400). The assets are wholly used for business purposes. Under the STS rules, for assets acquired and first used during the year (each costing $1,000 or more) that have an effective life of less than 25 years, Renee Fashion Pty Ltd can deduct 15% of the taxable purpose proportion of each asset s adjustable value. Assets costing less than $1,000 are immediate full deductions. These low-cost assets are never allocated to a pool. The company works out its claim for depreciating assets as follows: Newly acquired assets Shop fit-out $90,000 Computer $2,000 Car $15,000 Closing balance of general pool $107,000 Deduct at half general pool rate 15% $16,050 Immediate full deductions (low cost assets) Cash register $900 Printer $400 $1,300 Total claim for $17,350 The opening balance of the general pool for the next income year is $90,950 ($107,000 less the deduction for assets acquired during the year of $16,050. If no further assets are added to the pool, the deduction for will be 30% x $90,950 = $27,285. BUSINESS TIP: NON-BUSINESS USE A deduction for the decline in value of a depreciating asset is not allowable if the depreciating asset is used solely for private purposes. If an asset is partially used for private purposes, only the business-use proportion can be deducted. Your deduction for the decline in value of the asset must be apportioned accordingly. 22 TAX BASICS FOR SMALL BUSINESS

29 GST AND RELATED TAXES 04 Goods and services tax (GST) applies to the sale of most goods and services in Australia. If your business: has turnover of $50,000 or more (or provides taxi travel, or has turnover of $100,000 or more if it is a non-profit organisation) register for GST, see page 24 sells wine by wholesale collect and remit wine equalisation tax, see page 26 sells luxury cars pay luxury car tax, see page 26. is registered for GST prepare and issue tax invoices if your customers request them, see page 25 account for your GST obligations in your activity statement, see page 25 TAX BASICS FOR SMALL BUSINESS 23

30 04 GST AND RELATED TAXES GST Goods and services tax (GST) is a broad-based tax of 10% on the sale of most goods and services and other things in Australia. GST is charged at each step in the supply chain, with registered businesses including GST in the price of goods and services they sell. BUSINESS TIP: GST SALES AND PURCHASES In this publication we have used sale and purchase to describe the GST terms supply and acquisition. For GST, a sale or supply includes a sale of goods, lease of premises, hire of equipment, giving of advice, export of goods, and supply of other things. A purchase includes an acquisition of goods or services such as trading stock, a lease, consumables and other things. Do you have to register for GST? You must register for GST if: c you are an entity carrying on an enterprise (if you are in business and not a hobby you probably meet this requirement), and c your annual turnover is at or above the registration turnover threshold of $50,000 (or $100,000 for a non-profit organisation). If you provide taxi travel in your business you must register for GST, regardless of turnover. You may choose to register if the turnover of your enterprise is below the registration turnover threshold and you do not supply taxi travel. How GST works If your business is registered, GST is included in the price of most goods, services and other things you sell in the course of your business. This includes the disposal (by sale or otherwise transferring ownership) of capital assets used in your business such as motor vehicles and business equipment. These are called taxable sales. GST may be included in the price of purchases (including importations) you make for your business. However, if you are registered for GST, you can generally claim a credit for any GST included in the price you pay for things for your business. This is called a GST credit. GST is collected by GST-registered businesses at each step in the supply chain. Because these businesses claim credits for the GST included in their purchases, GST is tax-neutral for business the cost of GST is borne by the final consumer. There are other types of sales where GST is not included in the price: c input taxed sales these include financial supplies, such as loans, and residential rents c GST-free sales these include basic foods, such as fruit, milk and bread, exports, and some health and education courses. You can t claim a GST credit for the cost of things you purchase to make an input-taxed sale. For example, if you own a residential property that you rent out, you don t include GST in the rent you charge, and nor can you claim GST credits for things you ve purchased for the property. Collecting GST and claiming GST credits Type of sale Do I charge GST? Taxable Yes Yes Input taxed No No* GST-free No Yes Do I get a credit for GST on costs relating to this type of sale? *If you make financial supplies special rules may apply. 24 TAX BASICS FOR SMALL BUSINESS

31 04 GST AND RELATED TAXES BUSINESS TIP: GST CREDITS The amount of a GST credit for a purchase is reduced to the extent that the purchase relates to the making of input taxed supplies or the purchase is of a private or domestic nature. If goods or services are purchased only partly for the purposes of your business you will have to apportion the GST credits. Accounting for GST You account for your GST in your activity statement at the end of each tax period. As a small business you normally have quarterly tax periods (because your annual turnover is less than $20 million), but you can choose to have monthly tax periods. Eligible small businesses may elect to pay GST by instalments. In this case you make quarterly instalment payments and lodge an annual GST return. Generally, the election to pay GST by instalments is for the financial year in question. EXAMPLE Alex All Electrical (sole trader) Alex is registered for GST and has quarterly tax periods. In his first quarter Alex makes taxable sales of $2,200, buys stock costing $880 and has telephone expenses of $44. For each of these things he can calculate the GST component by simply dividing the total amount by 11. Alex calculates GST for his first activity statement as follows: GST collected on sales ($2,200 11) $200 GST credits: stock ($880 11) $80 expenses ($44 11) $4 $84 Net GST to pay ($200 $84) $116 Tax invoices A tax invoice is a document that records the sale of goods or services and complies with the GST law. The information that has to be included in a tax invoice is explained in the Guide to GST for small business (NAT 3014). If you make taxable sales with a GST-exclusive value of more than $50 and your customer asks you to provide a tax invoice, you have to do so within 28 days after the request. For this reason you might prefer to issue all your invoices in a form that satisfies the requirements for a GST tax invoice. You must have a tax invoice for a purchase before you claim a GST credit in an activity statement. You do not need a tax invoice to claim a GST credit if the GSTexclusive value of the purchase is $50 or less. However, you should have some documentary evidence to support these claims, such as a cash register docket or other receipt. Businesses that are not registered for GST cannot issue tax invoices or claim GST credits. NOTE Is your business registered for GST? g Include 10% GST in the price of taxable goods and services you sell. g Your advertised or displayed price must include any GST. g Claim a credit for any GST you pay on purchases for your business. g Issue tax invoices for things you sell and obtain tax invoices for things you buy. c Guide to GST for small business (NAT 3014) c GST and the disposal of capital assets (NAT 7682) GST and cash flow If you will report and pay your GST quarterly you may like to consider whether you would prefer to report and pay monthly instead. Monthly tax periods may suit you if you are likely to claim regular GST refunds for example, if you have a large volume of GST-free sales compared to taxable sales. You can claim GST credits sooner if you have monthly tax periods. TAX BASICS FOR SMALL BUSINESS 25

32 04 GST AND RELATED TAXES TAXES ON WINE AND LUXURY CARS Wine equalisation tax Wine equalisation tax (wine tax) is a value-based tax of 29% and is levied at the wholesale level. Wine manufacturers, wholesalers and importers collect wine tax and remit it to the Tax Office. The Australian Customs Service collects wine tax for imported wine. Retailers will not have a wine tax liability unless they make their own wholesale sales of wine (that is, to a reseller). The retailer is not entitled to a GST credit for wine tax. c Wine equalisation tax (NAT 3550) c The wine industry: how the use of invoices with a WEG label affects you (NAT 5007) Luxury car tax When entities such as retailers, wholesalers and manufacturers make a taxable sale of a luxury car, they may have a liability for luxury car tax. Importers (including private buyers) who make a taxable importation of a luxury car will also pay luxury car tax. The amount of luxury car tax payable on a taxable supply is calculated in accordance with a prescribed formula and is reduced by the sum of all luxury car tax that was payable for any previous importation or supply of the car. Generally, cars with a GST-inclusive value above the luxury car tax threshold are subject to luxury car tax. The luxury car tax value of a car includes the value of any parts, accessories or attachments supplied or imported at the same time as the car. Luxury car tax applies at a rate of 25% of the value of the car that exceeds the luxury car tax threshold. Luxury car tax is payable on the GST-exclusive value above the threshold. It is additional to any GST payable on luxury cars. Generally, luxury car tax is paid when a car is sold or imported at the retail level. c Guide to luxury car tax (NAT 3394) 26 TAX BASICS FOR SMALL BUSINESS

33 EMPLOYEES AND OTHER WORKERS 05 You will need to know how to meet your tax obligations if your business: has employees determine the status of your workers, see page 28 register for PAYG withholding if you re not already registered, see page 29 withhold amounts from salary and wages and pay the withheld amounts to the Tax Office, see page 29 contribute to your employees superannuation, see page 30 engages workers who are not employees they may be required to provide for their income tax liability through PAYG instalments or you may enter into a voluntary agreement to withhold amounts on their behalf, see page 30 provides fringe benefits to employees report and pay FBT, see page 31. TAX BASICS FOR SMALL BUSINESS 27

34 05 EMPLOYEES AND OTHER WORKERS DETERMINE THE STATUS OF YOUR WORKERS It is important to know the status of your workers for tax purposes as you have different obligations depending on whether a worker is: c an employee, or c a contract worker. This table will help you determine if your workers are employees or independent contractors. The information in the table is a guide only. It is not exhaustive you will have to consider the terms of the contract as a whole. Is your worker an employee or a contractor? Factors to consider Employee Contractor Control over work Independence Payment Commercial risks The employer has an implied right in industrial law to direct and control the work of an employee. The employee works in the business of the employer and the employer is free to manage their business as they see fit. An employee works in the business of the payer. Their work is an integral part of the business. Payment is often based on the period of time worked, but an employee can also work on piece rates or commission. An employee generally bears no legal risks in respect of the work; since the employee works in the business of the employer, the employer is legally responsible for any work performed by the employee. A payer has a right to specify how the contracted services are to be performed. However, such control must be specified in the terms of the contract, otherwise the contractor is free to exercise their discretion. Although the work of a contractor is done for the business, it is not integrated into it but is ancillary to it. Payment is dependent on the performance of the contracted services. A contractor bears legal risk in respect of the work. They have the potential to make a profit or loss, and must remedy any defective work at their own expense. Ability to delegate Tools and equipment An employee performs the work personally and generally cannot subcontract the work to someone else. The employer, except when specifically agreed otherwise, usually provides tools and equipment. Unless otherwise specified in the contract a contractor can subcontract or delegate the work. Generally, a contractor provides their own tools and equipment. c PAYG withholding guide no. 2 how to determine if workers are employees or independent contractors (NAT 2780) 28 TAX BASICS FOR SMALL BUSINESS

35 05 EMPLOYEES AND OTHER WORKERS PAYG WITHHOLDING FOR EMPLOYEES If you have employees, you re required to withhold amounts from their pay and send the withheld amounts to the Tax Office. This process is called withholding and is done using the pay as you go (PAYG) withholding system. You must register with the Tax Office before you withhold from payments to your employees. NOTE You can register for PAYG withholding by completing a form (which can be sent to the Tax Office in paper or electronic form) phone us on Alternatively, you can register electronically at or through your tax agent. Working out how much to withhold The amount to be withheld from an employee s pay depends on the amount they are paid and the information an employee has given you in a Tax file number declaration (and/or a Withholding declaration where provided). The Tax Office publishes tax tables that list the amounts to withhold from weekly, fortnightly and monthly pays. There is also an electronic calculator at Some business accounting software packages perform payroll functions and will do the calculations for you. If you use such a package it s important to keep it up-to-date, as tax rates and other withholding factors may change from year to year. Reporting and paying withheld amounts For small businesses, you report and pay the withheld amounts to the Tax Office monthly or quarterly when you lodge your activity statements. You are also required to provide each employee with an annual payment summary of the amount withheld from them during the year, and to provide an annual report to the Tax Office on withheld amounts. Every year the Tax Office sends a stationery package to employers who are registered for PAYG withholding (except those who report electronically) the package includes copies of payment summaries, guidelines for completing payment summaries and other information. BUSINESS TIP: PERSONAL SERVICES INCOME A company, partnership or trust that receives personal services income earned by you may be required to withhold tax if it is not a personal services business see page 15. How do I pay myself? If your business is operated through a company or trust, it s likely that you will be an employee (and/or director) of the company or trust. The company or trust has the same responsibilities to you as it does to any other employee it must withhold amounts from your salary and meet requirements of superannuation and FBT. Directors are treated similarly to employees for PAYG withholding purposes. If you re a sole trader or partner, you don t pay yourself a wage as such, and none of the withholding, superannuation or fringe benefits rules apply (although these rules do apply to any other employees of the business). Instead, you draw money from the business to live on. The amounts drawn from the business have no relevance to income tax you will pay tax on the business profits, regardless of how much or little you draw from it. c PAYG withholding for small business (NAT 8075). The following publications are also available from the Tax Office on and from most newsagents: c tax tables weekly (NAT 1005), fortnightly (NAT 1006) and monthly (NAT 1007) c Withholding declaration (NAT 3093) c Tax file number declaration (NAT 3092). NOTE You can calculate tax rates electronically using the statement of formulae or the PAYG withholding calculator available from our website at TAX BASICS FOR SMALL BUSINESS 29

36 05 EMPLOYEES AND OTHER WORKERS CONTRACT WORKERS The table on page 28 will help you determine if your workers are employees or independent contractors. Under PAYG, contract workers can either provide for their own income tax liability by paying PAYG instalments, or enter into voluntary agreements to have their payers withhold tax from their payments. Voluntary agreements A business and an individual contract worker who has an ABN can make a voluntary agreement to bring the worker s payments into the PAYG withholding system, if the work payments are not subject to any other PAYG withholding and the payment is in whole or part for the performance of work or services. If the business and the worker make a voluntary agreement, the business will withhold amounts from payments it makes to the worker and send these amounts to the Tax Office. The contract worker will not be required to pay PAYG instalments for that income because it has already been subject to PAYG withholding and therefore is not included in the worker s instalment income. A business and a worker can enter into a voluntary agreement only if the worker is an individual who has an ABN. (The worker can t enter into a voluntary agreement if it is a company, partnership or trust.) To enter into a voluntary agreement, a business and worker need to obtain and complete a voluntary agreement form. These are available from the Tax Office. c PAYG voluntary agreements (NAT 3063) SUPERANNUATION Superannuation guarantee As an employer you must provide a minimum level of superannuation support for your eligible employees currently 9% of an employee s earnings base or lodge a Superannuation guarantee statement and pay the superannuation guarantee charge (SGC). Who is covered by superannuation guarantee? Most employees, whether full-time, part-time or casual, are covered by the superannuation guarantee legislation. The definition of employees is extended for superannuation purposes to include some additional categories of workers including company directors, some artists, sportspeople and certain contractors. Exceptions include employees who are: c paid less than $450 in any calendar month superannuation does not have to be provided for that month c aged 70 years and over c non-resident employees who are paid solely for work undertaken outside Australia c under 18 years old and employed part-time (that is, employed to work for no more than 30 hours a week), or c paid to do work of a domestic or private nature for not more than 30 hours a week. How much to pay The minimum amount of superannuation support you must provide for your employees in is 9% of each employee s earnings base. Any existing superannuation obligations under an industrial award count towards the minimum level of support, as do payments made under a salary sacrifice arrangement. However, employee contributions do not count towards the employer s obligations. Employer contributions must be paid at least quarterly to a complying superannuation fund or retirement savings account. The table on page 31 shows the quarterly due dates. Reporting to employees You must report to your employees about the amount of superannuation paid on their behalf and the name of the superannuation provider to which the payments were made. These reports must be provided to employees within 30 days of the final superannuation contribution for the quarter. There is no prescribed method of reporting it could be done on a payslip, or letter, for example. 30 TAX BASICS FOR SMALL BUSINESS

37 05 EMPLOYEES AND OTHER WORKERS Superannuation guarantee charge If you don t pay the minimum level of superannuation support for your employees by the quarterly cut-off date, you must lodge a Superannuation guarantee statement and pay the superannuation guarantee charge to the Tax Office. The charge includes the shortfall between what you should have paid and actually paid, and administration and interest components. If you make sufficient superannuation contributions for your eligible employees by the relevant due dates, those contributions are generally tax deductible. However, the superannuation guarantee charge is not tax deductible. Superannuation quarters and due dates Superannuation guarantee quarter 1 July 30 September 1 October 31 December 1 January 31 March Due date for payment of superannuation contributions Due date for lodgment of statement and payment of superannuation guarantee charge (if required) 28 October 14 November 28 January 14 February 28 April 14 May 1 April 30 June 28 July 14 August c Superannuation guarantee How to understand and meet your superannuation guarantee obligations (NAT 1987) c Quarterly superannuation guarantee key facts for employers (NAT 7741) c Visit c Phone the superannuation enquiries line on ELIGIBLE TERMINATION PAYMENTS In general, a payment made to a person because their employment has been terminated is an eligible termination payment (ETP). ETPs are subject to concessional tax treatment. Examples include ETPs made in respect of redundancy, invalidity, retirement and death. Payments that are not ETPs include (for example) payments for unused annual leave, long service leave or leave loading; salary, wages and allowances owing to an employee for work already done and leave already taken; and payments for bona fide redundancies within the tax-free limit. Termination payments surcharge The termination payments surcharge is an additional tax payable by people who receive employer ETPs, and whose adjusted taxable income exceeds an indexed threshold level. c Eligible termination payments A practical guide for employers in meeting your obligations to employees who stop working for you (NAT 2698) c Phone the superannuation enquiries line on FRINGE BENEFITS TAX If you are an employer and provide a fringe benefit to your employees or to associates of your employees (typically family members), you may have a fringe benefits tax liability. It is separate from income tax and calculated on the taxable value of the fringe benefits provided. What is a fringe benefit? Fringe benefits tax (FBT) is paid on those fringe benefits which are provided in place of, or in addition to, the salary or wages of employees. A benefit includes any right (including a property right), privileges or services. For example, a fringe benefit is provided when an employer: c allows an employee to use a work car for private purposes c gives an employee a cheap loan c pays an employee s private health insurance costs, or c provides entertainment by way of food, drink or recreation. TAX BASICS FOR SMALL BUSINESS 31

38 05 EMPLOYEES AND OTHER WORKERS Exempt benefits Some benefits are exempt from FBT for example: c laptop computers (one per FBT year per employee) c mobile phones primarily used in employment c minor benefits valued at less than $100 c some taxi travel, and c in-house health care facilities. c Fringe benefits tax for small business (NAT 8164) Reporting and payment You must keep records that show the taxable value of certain fringe benefits provided to your employees. If you provide fringe benefits with a total taxable value of more than $1,000 to an employee in an FBT year (1 April to 31 March), you must report the grossed-up taxable value of the fringe benefits on the employee s payment summary for the corresponding income year (1July to 30 June). These are called reportable fringe benefits. ( Grossed-up reflects the gross salary that would have to be earned at the highest marginal rate, including the Medicare levy, to purchase the benefit from aftertax dollars). If you haven t previously paid FBT you need make only one payment for the year at the time you lodge your annual FBT return. In subsequent years the Tax Office may ask you to make quarterly FBT instalments on your quarterly activity statements. A balancing payment (if any) should be made when the FBT return is lodged. The annual FBT return is due on 21 May. Registering for FBT If you are an employer and provide fringe benefits to your employees, the Tax Office recommends that you register for FBT. To register for FBT you complete an Application for registration fringe benefits tax (NAT1055) and send it to the Tax Office. Once you are registered, we will send you additional information to help you lodge your return. Registration forms are available on our website at or by phoning EMPLOYEES AND CHILD SUPPORT Sometimes employers are required to deduct money from employees pay under the Child Support Scheme. You don t need to do anything unless you are asked to by the Child Support Agency. If this happens, you will receive an employer package about what to do. BUSINESS TIP: CHILD SUPPORT DEDUCTIONS Child support deductions are not taxation amounts, so they should not be shown on payment summaries. It is illegal to discriminate against any employee or potential employee because of their child support or maintenance obligations. Phone the Child Support Agency on For employers: c Fringe benefits tax for small business (NAT 8164) c Car fringe benefits: guide and workbook (NAT 2755) For employees: c Reportable fringe benefits: facts for employees (NAT 2836) c Reportable fringe benefits tax reporting arrangements: impacts on income tests for employees (NAT 3031) 32 TAX BASICS FOR SMALL BUSINESS

39 RECORD KEEPING, REPORTING AND PAYMENT 06 Good business records help you manage your business, manage your tax obligations and make sound business decisions. To help meet your obligations: receive and keep a record of your suppliers ABNs (otherwise you may need to withhold from your payment to them), see page 35 keep business records, in most cases for five years, see page 34 check that invoices you receive from your GST-registered suppliers have the necessary details for you to claim GST credits, see page 35 complete and lodge your activity statements for GST, PAYG and/or FBT, see page 37 budget to pay your tax, see page 38. TAX BASICS FOR SMALL BUSINESS 33

40 06 RECORD KEEPING, REPORTING AND PAYMENT BUSINESS RECORDS Good business records help you manage your business and make sound business decisions. They are also useful if you want to sell your business. A good record keeping system will also enable you to better manage your tax obligations. It will save you time and money when you prepare your activity statements and annual income tax return, and if your business is selected for a compliance review. Legal requirements Under tax law, if you are carrying on a business you must keep records that record and explain all transactions. These records include any documents that are relevant for the purpose of working out your income and expenditure. You must keep your records in writing in the English language or, if not in a written form (for example, in an electronic form such as a computer system), in a form that is readily accessible and convertible into writing in English. Any books of accounts, records or documents relating to the preparation of your income tax return must be retained for at least five years. FBT legislation requires records to be kept for five years. Other statutory provisions, such as corporate law, require a company to retain records for seven years after completion of the transaction to which they relate. The following list shows records you should keep for your business. This list is not exhaustive and other documentation may be required. NOTE records you must keep You must keep the following records for five years after they are prepared, obtained or the transaction completed (whichever is the later): g receipts, including records of sales, cash register tapes, deposit books and bank statements g purchases, including expense payment records, receipts from small cash purchases, cheque butts and a log book for car expenses g GST records: tax invoices, adjustment notes and any other document that records an election, choice, estimate, determination or calculation made for the purposes of GST law (in some circumstances the record is to be kept for a period of five years after the election etc ceases to have effect) g wages records, including worker payment records, current employment declarations, tax file number declarations, withholding declarations and superannuation records g records of amounts withheld from payments where no ABN was quoted g year-end records, such as stocktake sheets, creditors lists, debtors lists and depreciating asset worksheets, and g records of CGT assets (these need to be kept for five years after the sale of the assets). You must keep the following records for at least one month if reconciled with the actual sales, or five years if not reconciled: g receipts for sales you make, including credit card dockets (merchant s copy) and cash register tapes. BUSINESS TIP: RECORD KEEPING EVALUATION TOOL This is a free program to help you understand what records you need to keep and evaluate whether your record keeping practices are adequate. It provides a list of records tailored specifically for your business, a report on how well the business is keeping its records, and suggested improvements where appropriate. The Record keeping evaluation tool can be downloaded from the Tax Office website at 34 TAX BASICS FOR SMALL BUSINESS

41 06 RECORD KEEPING, REPORTING AND PAYMENT Manual and electronic systems You can keep your records manually (on paper) or electronically (on computer). Manual books are generally quicker to begin with and to enter information, but can be slower at tax time when everything has to be totalled. A variety of electronic record keeping packages are available. These take more time to set up but provide advantages in the long run such as doing your sums automatically, printing invoices, and providing summary details for your activity statements and tax returns. You can check whether an electronic record keeping package meets Tax Office requirements by using the registered software facility product register on the Tax Office website. A free electronic record keeping package, e-record, is available from the Tax Office. See c Record keeping for small business (NAT 3029). c Visit to download a copy of e-record. c Phone and request a CD-ROM (NAT 3043). INVOICES YOU RECEIVE An invoice of more than $50 (excluding GST) should show your supplier s ABN. Otherwise, you generally need to withhold 48.5% from the payment to the supplier (see Withholding from business transactions below. You cannot claim a GST credit in an activity statement unless you have a tax invoice. If you obtain a tax invoice later, you can claim the GST credit in the activity statement for the tax period in which you obtain the tax invoice or a later tax period. Tax invoices are not required if the GST-exclusive value of the sale is $50 or less. However, you should have some documentary evidence to support all GST credit claims. If you ask a GST-registered supplier to provide you with a tax invoice, they must do so within 28 days after your request. Businesses that are not registered for GST cannot issue tax invoices. Withholding from business transactions When you purchase something for use in your business, you must: c receive and keep a record of your supplier s ABN or c be satisfied that the sale is excluded from the ABN rule otherwise c withhold from the payment. Anyone carrying on an enterprise (this is usually a business) should quote their ABN in relation to goods or services they supply to another enterprise. If they don t, the general rule is that the payer must withhold 48.5% from the payment to the supplier and send the withheld amount to the Tax Office. Some payments are excluded from this rule. Receive and keep a record of your supplier s ABN The supplier must quote their ABN before payment is made. Normally an ABN will be quoted on the supplier s invoice and you keep this invoice in your business records. A supplier may also quote their ABN to you on another document as long as it relates to the sale they are making. BUSINESS TIP: WHAT IF THE SUPPLIER HAS APPLIED FOR AN ABN? Before you withhold, you could offer to hold back payment until the supplier has obtained and quoted their ABN. Delaying the payment is a matter for you and your supplier to work out. However, you should not make full payment to the supplier on the understanding that an ABN will be quoted later. If you fail to withhold from the payment, you can be held liable for the amount you did not withhold. You may also be prosecuted. TAX BASICS FOR SMALL BUSINESS 35

42 06 RECORD KEEPING, REPORTING AND PAYMENT Be satisfied that the sale is excluded from the ABN rule You should not withhold if: c the total payment to the supplier is $50 or less, excluding any GST c the supplier is under 18 years of age and your payments to that person do not exceed $120 per week c the supply is made through an agent and the agent has quoted their ABN on an invoice or some other document relating to the supply, or c the supply is wholly input taxed under GST. In addition, you should not withhold if you re satisfied that: c the supply is made in the supplier s private capacity, or as their hobby c the payment is exempt income for the supplier (for example, the supplier is a non-profit body) c the payment is to a non-resident who is not carrying on a business in Australia or through an agent in Australia, or c the supplier is not an enterprise because they are either an individual or a partnership and have no reasonable expectation of profit or gain (to be satisfied that this exception applies, you will need to obtain a statement to this effect). NOTE If you re unsure, ask the supplier to give you a written statement that the supply is excluded for one of these reasons. A template, Statement by a supplier (reason for not quoting an ABN to an enterprise) NAT 3346 is available from the Tax Office for this purpose. You must keep the supplier s statement for five years. Withhold from the payment If a supplier doesn t quote their ABN to you and you re not satisfied that one of the exclusions applies, you must withhold 48.5% of the total payment. If you withhold, you need to be registered with the Tax Office for PAYG withholding (see page 05). This is different to registering for an ABN. If you are withholding from employee wages you are probably already registered for PAYG withholding. Add the withheld amount to any other amounts you may have withheld from your employees or other withholding payments, and send the total amounts withheld to the Tax Office with your next activity statement. BUSINESS TIP: PUT YOUR ABN ON YOUR BUSINESS STATIONERY...especially your invoices. Other businesses will need this information so they don t withhold from payments for supplies that you ve made. If you re registered for GST, other businesses will also need your ABN on your tax invoice to claim GST credits for GST included in the price of goods and services you supply to them. To check an ABN with the Australian Business Register: c visit c phone the automated checking service on For information on PAYG withholding see: c PAYG withholding for small business (NAT 8075) c Should your suppliers quote their ABN? A guide for business (NAT 3346) which includes a statement that the supplier can complete to show why they don t need to quote an ABN c PAYG withholding: Q and A (NAT 5931) Stocktakes. Stocktakes If you operate a business, the value of all trading stock you have on hand at the beginning of the income year (generally 1 July) and the end of the income year (generally 30 June) is taken into account in working out your taxable income for the year. If the value of stock at the end of the income year is more than at the beginning of the year, you must include the difference as part of your assessable income when you lodge your tax return. If the value of stock at the end of the year is less than at the beginning of the year, your assessable income will be reduced by the difference. Note that the stocktake rules are different for taxpayers who have entered the simplified tax system (see business tip). An annual stocktake may be sufficient to meet your tax obligations, because the value of your stock at the end of a financial year will be the same as its value at the start of the next financial year (except for the first year you are in business). In most cases you will need to do a physical count as close as possible to the end of the income year. Complete a payment summary form and give it to the supplier at the same time you pay them the net amount or as soon as practicable thereafter. The supplier will need this payment summary to claim the withheld amount as a credit when they lodge their income tax return after the end of the income year. 36 TAX BASICS FOR SMALL BUSINESS

43 06 RECORD KEEPING, REPORTING AND PAYMENT BUSINESS TIP: SIMPLIFIED TAX SYSTEM (STS) Taxpayers who elect to enter the STS will only need to conduct stocktakes and account for changes in the value of trading stock if the value of their stock on hand at the start of the income year and the reasonably estimated value of their stock on hand at the end of that year varies by more than $5,000. While in the STS you can still choose to conduct a stocktake and account for changes in the value of trading stock in any income year. c Simplified tax system: simplified trading stock rules (NAT 4107) c Simplified tax system: simplified trading stock rules reasonable estimates (NAT 7170) REPORTING AND PAYING TAX Activity statements Businesses use a single form, called an activity statement, to report and pay their PAYG (instalments and withholding), FBT instalments, GST and related tax obligations, and to pay deferred company and superannuation fund instalments. The Tax Office will send you the appropriate activity statement before you need to lodge it. Your activity statement is personalised, with some parts already filled in to save you time and effort. Your activity statement will generally show only the obligations that relate to you. For example, if you do not have a PAYG withholding obligation, this section will not appear on your activity statement. Who should use an activity statement? You must complete an activity statement at the end of each reporting period if you have any of the obligations mentioned earlier, even if the amount to report is nil for that period. You may receive more than one activity statement. For example, if you are a partner in a partnership registered for GST, the partnership will receive an activity statement for GST and you may receive an activity statement for individual PAYG instalment obligations. How often to lodge You are generally required to lodge your activity statement monthly or quarterly. The Tax Office pre-prints information on your activity statement to show when you have to lodge, and the period covered by the activity statement for each of your obligations. BUSINESS TIP: DO YOUR ACTIVITY STATEMENTS ONLINE There s now an easier way for small businesses to do their activity statements the Business Portal. The portal is a new part of the Tax Office website that also gives you free, secure online access to your business tax details. This means less time on the phone finding out about your business tax affairs. Using the Business Portal, you can view your accounts online (including activity statements, income tax and fringe benefits tax), request transfers and refund of credit amounts, view and update some of your business registration details, and send and receive secure messages. To find out more, visit c Activity statement instructions FBT( NAT 7389) c Activity statement instructions - WET (NAT 7390) c Activity statement instructions - LCT (NAT 7391) c Activity statement instructions - PAYG instalments (NAT 7393) c Activity statement instructions - PAYG withholding (NAT 7394) c Activity statement instructions GST (NAT 7392) Payment There are a number of options for paying amounts you owe the Tax Office: direct credit, direct debit, BPAY, mail payments and post office payments. Pay by BPAY using your financial institution s phone or internet banking service and follow the prompts. You need to quote the Tax Office biller code (75556) and the EFT code from the front of your payment advice. To make a payment by direct credit you can use a desktop computer banking software package or a third party/pay anyone option through your internet banking facility. If you wish to pay by direct debit, you need to complete a direct debit request form and initiate payment through a tax practitioner authorised to use the electronic lodgment service. If you wish to make a voluntary or early payment to offset a future liability, you can do so by direct credit or BPAY using your EFT code, or by ordering a book of personalised payment advice forms. You can order a book of personalised payment advice forms by phoning us on TAX BASICS FOR SMALL BUSINESS 37

44 06 RECORD KEEPING, REPORTING AND PAYMENT BUSINESS TIP: DIRECT CREDIT PAYMENTS c Direct credit payments are not the same as credit card payments. The Tax Office does not accept credit card payments. c You do not need to send your payment advice form to the Tax Office after making a direct credit payment or advise the Tax Office by fax that you have made a direct credit payment. (However, you must still lodge your activity statement.) For more information about making your activity statement payment by: c direct credit payment (BPAY, mail payments and post office payments) c by phone, contact c by , contact [email protected] c direct debit payment c by phone, contact c by , contact [email protected] BUDGETING TO PAY YOUR TAX Budgeting for your tax obligations is the same as budgeting for any other expense of the business. You will need to estimate how much tax has to be paid and then put sufficient money aside to cover the tax bill when it falls due. Because tax bills are often payable on a quarterly or yearly basis they may be overlooked when you budget for more frequent bills or expenses. When the time comes to pay your tax bill the money may not be there, or you may have to find extra money because your bill is larger than you anticipated. The following suggestions will help you to budget for your tax: c Monitor business cash flow: see the Record keeping guide for small business (NAT 3029). It has tips on managing cash flow, and an example of a spreadsheet for monitoring cash flow. c GST reporting: even if you are eligible to report your GST quarterly, consider reporting monthly. Monthly tax periods may suit you if you are likely to claim regular GST refunds, for example, if you have a large volume of GST-free compared to taxable sales. You can claim GST credits sooner if you have monthly tax periods. c Income tax: estimate your income for the current financial year and your likely tax liability. Update your projection during the year as more information on sales and expenses becomes available. This is especially important in your first year of business, when you may not be paying PAYG instalments towards your end-of-year tax liability (new businesses usually don t pay PAYG instalments in their first year because the Tax Office won t require instalments until after you lodge a tax return showing business income). c Record keeping: save time and effort by using an electronic record keeping system. A basic electronic record keeping system, e-record, can be downloaded from or is available on CD-ROM free from the Tax Office by phoning Alternatively, there are a number of commercially available products. c Voluntary payments: you can make a voluntary or early payment to offset a future liability. You can do this by direct credit or BPAY using your EFT code. Problems paying? If you have problems paying a tax liability, contact the Tax Office as soon as possible. There are a number of options for paying amounts owing, such as staggered payments. If your payment problem relates to an activity statement, lodge the activity statement even if you can t pay the full amount owing. If you don t lodge your activity statement you can be fined up to $120 for failure to lodge. 38 TAX BASICS FOR SMALL BUSINESS

45 DEFINITIONS Activity statements You use an activity statement to report your business tax entitlements and obligations, including GST, PAYG instalments, PAYG withholding and FBT instalments. You can offset tax payable against tax credits to arrive at a net amount. Associates Associates include people and entities closely associated with you, such as relatives, or closely connected companies or trusts. A partner in a partnership is an associate of the partnership. Australian business number Your Australian business number (ABN) is your identifier for certain dealings with the Tax Office and other government departments and agencies. Enterprise An enterprise includes a business. It also includes other commercial activities but does not include: c private recreational pursuits and hobbies c activities carried on as an employee, labour hire worker, director or office holder (unless the person accepted holding of the office in the course of, or in connection with, an enterprise), or c activities carried on by individuals (other than trustees of charitable funds) or partnerships (in which all or most of the partners are individuals) without a reasonable expectation of profit. It includes the activities of entities such as charities, deductible gift recipients, religious and government organisations, and certain non-profit organisations. Entity For the purposes of this publication, an entity means an individual, a body corporate, a corporation sole, a body politic, a partnership, an unincorporated association or body of persons, a trust or a superannuation fund. The trustee of a trust or superannuation fund is taken to be an entity consisting of the person or persons who are trustee/s at any given time. That entity is a different entity to the person acting in their personal capacity. If reference is made to an entity of a particular kind (for example, trustee), it refers to the entity only in its capacity as that kind of entity. GST input tax credit You are entitled to a GST input tax credit, or GST credit, for the GST included in the price of purchases or importations you make for use in your business. But you are not entitled to a credit to the extent you use the purchase or importation for private purposes or, in many cases, to make input taxed sales. You must have a tax invoice to claim a GST credit (except for purchases with a GST-exclusive value of $50 or less, although you should have some documentary evidence to support these claims). GST-free sales You do not include GST in the price of GST-free sales that you make, but you are entitled to GST credits for things you have purchased or imported for use in your business. Some examples of GST-free sales include basic food, exports, sewerage and water, the sale of a business as a going concern, noncommercial activities of charities and most education and health services. Input taxed sales You do not include GST in the price of input taxed sales you make, but neither are you entitled to GST credits for things you have purchased or imported that relate to making those input taxed sales. In some cases you may be entitled to claim reduced GST credits. Some examples of input taxed sales include most financial supplies and supplies of residential rent and residential premises (other than new residential premises). Instalment rate A percentage figure worked out by the Tax Office (if you are required to pay PAYG instalments) that approximates the proportion of your business and investment income that is paid as tax. It is based on the information in the most recent assessment for your most recent income year for which an assessment has been made. You multiply your instalment rate by your instalment income to work out the amount to pay in your PAYG instalment. Instalment income Generally speaking, instalment income is your total ordinary income for the period for which you are paying your PAYG instalment. TAX BASICS FOR SMALL BUSINESS 39

46 DEFINITIONS Tax invoice A tax invoice is a document generally issued by the seller. It shows the price of a sale, indicating whether it includes GST, and may show the amount of GST. It must show other information, including the Australian business number of the seller. You must have a tax invoice before you can claim a GST credit on your activity statement for purchases of more than $50 (excluding GST). Tax period A tax period is the length of time for accounting for GST in your GST return which is usually your activity statement. There are quarterly, monthly and annual tax periods. Quarterly tax periods are periods of three months ending on 30 September, 31 December, 31 March and 30 June. Monthly tax periods end on the last day of each calendar month. An annual tax period is the financial year or that part of the financial year for which the entity is a GST instalment payer. An activity statement must be lodged for each quarterly or monthly tax period. An annual GST return is lodged by GST instalment payers. Turnover Income earned by a business before deducting any costs for expenses. Turnover is sometimes referred to as gross receipts, gross sales or gross revenue. It does not include any amounts of GST collected. For GST purposes, the annual turnover of an entity does not include all sales. For example, sales that are not connected with Australia are not included in the calculation of current annual turnover or projected annual turnover. 40 TAX BASICS FOR SMALL BUSINESS

47 INTERNET c Visit download publications, rulings and other general tax information for small business. c Business Entry Point: this is an interactive service providing easy access to business information and transactions with government. It can be used to register for an ABN and GST, or to apply for a tax file number. PHONE c General business enquiries phone most small business tax issues, including GST rulings, Australian business number (ABN), pay as you go (PAYG) instalments, deductions from employees wages, business deductions, preparation of activity statements, account information for activity statement lodgment and payment, wine equalisation tax, luxury car tax, fringe benefits tax and issues for non-profit organisations. c Superannuation enquiries phone c Personal enquiries phone individual income tax and general personal enquiries. FAX c Get information faxed to you about business and individual taxes, superannuation and the Higher Education Contribution Scheme (HECS). Phone and follow the instructions to order information to be faxed to you. FREE SEMINARS c Seminars for small business these include sessions on GST, PAYG, activity statements and record keeping. For more information, visit our website at or phone OTHER SERVICES c If you do not speak English well and want to talk to a tax officer, phone the Translating and Interpreting Service on for help with your call. c If you have a hearing or speech impairment and have access to appropriate TTY or modem equipment, phone If you do not have access to TTY or modem equipment, phone the Speech to Speech Relay Service on TAX BASICS FOR SMALL BUSINESS 41

48 INDEX ABN, 04, 35 6 ACN, 04 activity statements, 37 age of employees, 30 age of suppliers, 36 agents, supplies through, 36 agricultural production, 14, 16, 19 air fares, 21 allowable deductions, see deductions and expenses alternative fuels, 19 annual payment summaries, 29 annual turnover, 13, 24 aquaculture (primary production), 14, 16, 19 arts businesses, 14 assessable income, 10, 11 associates, 39 see also partnerships associations, see non-profit organisations Australian business number, 04, 35 6 Australian Company Number, 04 Australian Customs Service, 26 Australian Securities and Investment Commission, 04 annual return to, 11 bank fees and charges, 18 beneficiaries, see trusts bonds, 14 borrowed money, see loans budgeting to pay tax, 38 business assets, see assets Business Entry Point, 04 business expenses, see deductions and expenses business names, 04 business or hobby?, 02 Business Portal, 37 business premises, expenses for, 18, 20 1 business records, 18, 21, 34 6 business stationery, 10, 36 business structures, 02 3 establishing, replacing, enlarging or improving, 18 see also companies; partnerships; sole traders; trusts cab services, 24 cab travel, 32 capital gains tax, 13, 20 capital nature, expenses of, 18 carpets, 22 cars, see motor vehicles cash flow, GST and, 25 charities, see non-profit organisations child support, 32 children, see young people clubs, see non-profit organisations commercial vehicles, see motor vehicles companies, 03, 14 ABN and ACN, 04 employees/owners/directors, 11, 29 income tax, 11 motor vehicle expenses, 19 PAYG instalments, 12 personal services income, 15 tax file numbers, 05 computer records, 35 computers, 22, 32 concessions for non-profit organisations, 07 consultants, 15 contract workers, 15, 28, 30 cooling and power expenses (utilities), 18, 20 Corporations Act companies, see companies cultural societies, see non-profit organisations curtains, 22 death, payments on, 31 deductions and expenses, 07, 10, business or hobby?, 02 simplified tax system, 13, 22 definitions of terms, depreciating assets (decline in value, depreciation), 20, 22 simplified tax system eligibility, 13 diaries, 18 diesel fuel, 19 direct credit/debit payments, 37 8 directors of companies, 11, 29 domestic workers, 30 early payment of tax, 38 electrical tools, 22 electricity and power (utilities), 18, 20 electronic records, 35 eligible termination payments, 31 employees and other workers, 27 32, 34 pay and expenses, 11, 18, 29 personal services income, 15 employment, travel to and from, 19 energy grants credits scheme, 19 enterprises, 04, 05, 39 entertainment, 31 entities, 39 environment protection societies, see non-profit organisations equipment, 20, 22, 28 ETPs, 31 exempt income payments, 36 expenses, see deductions and expenses fares, 21 farm and fish production, 14, 16, 19 floor coverings, TAX BASICS FOR SMALL BUSINESS

49 food, 24, 31 foreign residents, payments to, 30, 36 freight and transport, 18 fringe benefits tax (FBT), 29, 31 2, 34 non-profit organisations, 07 fuel schemes, 19 fundraising, 07 furniture and furnishings, 20, 22 minor expenses, 18 minors, see young people mobile phones, 32 mortgage interest, 20 motor vehicles, 15, 19, 22 fringe benefits, 31 luxury car tax, 26 museums, see non-profit organisations gifts, tax deductible, 07 grossed-up taxable value, 32 GST (goods and services tax), 24 5, 39 GST credits, 24 5 GST-free sales, 24, 25, 39 health care facilities, 32 health insurance payments, 31 heating and power (utilities), 18, 20 hired cars, 19 hired equipment, 18 hobbies, 02, 36 home, working from, 20 1 home and work, travel between, 19 imports, 24, 26 in-house health care facilities, 32 income tax, non-profit organisations, 07 individuals, see sole traders infrastructure bonds, 14 input taxed sales, 24, 39 instalment income, 39 instalment rate, 39 insurance, 20, 31 interest payments, 18, 20 invalidity payments, 31 investments, passive, 14 invoices and receipts, 18, 25, 35 6 laptop computers, 32 leased cars, 19 leasing expenses, 18 libraries, see non-profit organisations lighting expenses, 18, 20 limited partnerships, see companies loans, 19, 20, 24 to employees, 31 losses, low cost/low value assets, 22 luxury car tax, 26 names of businesses, 04 negative gearing, 14 non-business use, 22 non-commercial losses, 14 non-profit organisations, 07, 36 registering for GST, 24 non-residents, payments to, 30, 36 office furniture and equipment, 20, 22 panel vans, see motor vehicles part-time workers, 30 partnerships, 03, 29 activity statements, 37 income tax, 11 minor expenses, 18 motor vehicle expenses, 19 non-commercial losses, 14 PAYG instalments, 12 personal services income, 15 tax file numbers, 05 when excluded from ABN rule, 36 passive investments, 14 pay, see wage or salary payments PAYG instalments, 12, 39 PAYG withholding, 29, 30 paying tax, 37 8 fringe benefits, 32 PAYG withholding, 29 superannuation guarantee, 30, 31 see also rates payment summaries, 29 personal services income, 15 phones, 18, 20, 32 plane tickets, 21 power (utility) expenses, 18, 20 premises, expenses for, 18, 20 1 prepaid expenses, 18 primary producers, 14, 16, 19 private health insurance payments, 31 professional arts businesses, 14 public libraries and museums, see non-profit organisations TAX BASICS FOR SMALL BUSINESS 43

50 rates GST, 24 income tax, 10: companies, 11 luxury car tax, 26 PAYG instalments, 12, 39 PAYG withholding, 29 superannuation guarantee contributions, 30 wine equalisation tax, 26 withholding when ABN not quoted, 35 receipts and invoices, 18, 25, 35 6 record keeping, 18, 21, 34 6 redundancy payments, 31 registered tax agent fees, 18 registering your business, 04 6 rental property/premises, 14, 18, 20, 24 repairs, 18 reporting tax, 37 fringe benefits, 32 income tax, 12 reporting to employees, 29, 30 retirement payments, 31 salary payments, see wage or salary payments scholarship funds, see non-profit organisations self-assessment principle, 10 shares, 14 simplified tax system (STS), 13, 22 prepaid expenses, 18 stocktakes, 37 societies, see non-profit organisations sole traders (individuals), 03, 29 income tax, minor expenses, 18 motor vehicle expenses, 19 non-commercial losses, 14 PAYG instalments, 12 personal services income, 15 tax file numbers, 05 when excluded from ABN rule, 36 working from home, 20 sports clubs, see non-profit organisations stationery, 10, 36 stocktakes, 36 7 structures, see business structures superannuation, 29, 30 1 superannuation funds, 12 supplier s ABN, 35 6 tax agent fees, 18 tax averaging, 16 tax concessions for non-profit organisations, 07 tax deductions, see deductions and expenses tax file numbers, 05 tax invoices, 25 tax periods, 25, 40 employer superannuation contributions, 31 fringe benefits tax, 32 prepaid expenses and, 18 tax rates, see rates tax returns, 10, 11 activity statements, 37 fringe benefits tax, 32 new business starters, 12 taxable income, 10, 11 see also simplified tax system taxable sales, 24, 25 taxi services, 24 taxi travel, 32 telephones, 18, 20, 32 termination payments surcharge, 31 tools, 18, 22, 28 trading stock, 36 7 traditional service clubs, see non-profit organisations transport and freight, 18 travel expenses, 19, 21 trucks, see motor vehicles trusts, 03, 14, 29 income tax, 11 motor vehicle expenses, 19 PAYG instalments, 12 personal services income, 15 tax file numbers, 05 turnover, 40 registering for GST, 24 simplified tax system, 13 uniform capital allowance rules, 22 utilities (power and lighting), 18, 20 utility trucks, see motor vehicles value, decline in, see depreciating assets value, grossed-up taxable, 32 value of stock on hand, 36 7 vans, see motor vehicles voluntary agreements, 30 voluntary tax payments, 38 wage or salary payments, 10, 34 company employees, 11, 29 employees v contractors, 28 PAYG withholding, 29, 30 superannuation guarantee and, 30 window coverings, 22 wine equalisation tax, 26 withholding tax, 29 ABN not quoted, 35 6 voluntary agreements, 30 work, travel to and from, 19 work termination payments, 31 workers, see employees and other workers working from home, 20 1 young people (minors), 30, 36 beneficiaries, distributions to, 11 child support, TAX BASICS FOR SMALL BUSINESS

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