If you are paying taxes, you are making money. All small businesses have tax and reporting obligations, and this guide will help you understand what is required to do a tax return for a small business and where you can get help.
A tax return is the completion of documentation that calculates a business’s income earned with the amount of tax payable to the Australian Tax Office (ATO).
WHY should you do a tax return?
- It’s the law
- You may get a refund
- It helps you understand the true position of your business
Irrespective of your business structure, you must submit an annual tax return. Sole traders and partnerships will be taxed at the individual income rates as part of your personal income. Companies must lodge a tax return as a separate legal entity and pay tax at a rate of 26% (in 2020/21 dropping to 25% in 2021/22 details here) of every dollar earned.
WHAT do I need to understand about small business taxation?
Your taxable income = assessable income – deductions
Assessable income is your total earnings before tax from an everyday business source such as sales and other business activity like capital gains. It does not include GST.
Deductions are any expenses incurred in running your business.
Sole traders must include any salary or wages in their tax returns, and the ATO will calculate if any tax is owing or a refund is due. A sole trader not paying themselves a salary, including PAYG withholding tax, is likely to receive a PAYG instalment for estimated income to be earned.
Partnerships must lodge a partnership tax return. Then as an individual partner, you must lodge an individual tax return for your share of income or losses. The partnership does not pay income tax; rather, the partners themselves do.
Trusts and beneficiaries must lodge a trust tax return. Then as an individual trust beneficiary, you must lodge a company or individual tax return for your share of income or losses.
Companies lodge a company tax return and pay company tax on assessable income. Companies might pay PAYG (pay as you go). The ATO will inform you if you need to pay PAYG instalments; however, as a general guide, expect to pay it if your assessable income exceeds $2 million. PAYG is a means to collect tax throughout the year versus waiting until the end of the financial year. You can also make a voluntary payment or apply for a variation if you feel your circumstances have changed.
HOW do you lodge a tax return?
A tax return should be lodged by 31 October for the previous year. Exceptions may apply if you use a registered tax agent or file a company tax return. A tax return must be lodged every year you run a business, even if you don’t expect you will have to pay tax.
You can lodge a tax return:
- By paper
- Online via myTax if you are a Sole Trader
- Via a registered tax agent
- If you are a company, trust, or partnership by standard business reporting (SBR). See our guide on accounting software
If you are required to pay PAYG on your business earnings, this will become part of your BAS reporting and payment requirements. More details on this can be found in our BAS guide. The benefit of having PAYG is that tax is paid during the year, and you can budget to make these payments rather than having a large lump sum payable at the end of the year.
After you have lodged an electronic tax return, the ATO aims to finalise the return in approximately two weeks. The ATO warns that processing may be delayed if there are incorrect or incomplete details in your return.
When completing your income and deductions for business:
- keep accurate and complete records of your assessable income and expenses
- use the correct method for calculating and reconciling the amounts you claim
- report all income and deductions to ATO at the right time
- pay any amounts owed on time
- only use valid business deductions
- the expense must have been for your business, not for private use
- if the expense is for a mix of business and personal use, you can only claim the portion that is used for your business
- you must have records to prove it
Types of expenses that are not deductible include entertainment expenses, traffic fines, and private or domestic expenses such as childcare fees or clothes for your family. GST cannot be claimed as an expense if you have already claimed it as a GST credit.
If a prepaid expense exceeds $1000 and you will not receive the goods or service within 12 months, or it is not eligible for an immediate deduction, the expense will need to be apportioned over time.
A capital expense for items such as machinery or equipment will normally be needed to be apportioned over time.
The Australian Tax Office provides an online search engine to assist small businesses http://www.sba.ato.gov.au/
You can also book an after-hours phone call http://www.sba.ato.gov.au/Forms/Book-an-after-hours-call-back—small-business-support/
The ATO provides an app providing tax and super information and tools https://www.ato.gov.au/General/Online-services/ATO-app/
If you employ people, you will also have PAYG withholding tax payments you will need to make from your workers’ wages. See our guide on payroll.
SUMMARY – PAYG small business tax
You must pay tax on your assessable income minus deductions. The way you submit a tax return is based on your business structure. You will likely pay PAYG tax in instalments throughout the year, with your tax return determining if any further payments are required or if you are due a refund. Accurate records must be maintained; deductions will only be accepted for valid business deductions.