Do small businesses need to pay taxes in Australia? Dealing with tax laws can be quite a complicated task. However, you should obey the rules in the country or the state and comply with the regulations.
That is why you should precisely know what kind of taxes should a small business pay. In this article, we will briefly overview the different kinds of taxes a small business has to pay in Australia. If you are running a small business, make sure to read until the end to get valuable insights.
What are small businesses?
Most people think only sole proprietorships and partnerships are considered small businesses. However, that is not the case. Not only sole proprietorships and partnerships but companies and trusts can also be considered small businesses.
There are different methods to decide whether a business is a small business. These methods are:
- The previous year’s turnover is less than $10 million
- The current year’s turnover is estimated to be less than $10 million
- The actual income of the current year is less than $10 million
Read more: ATO
What kind of taxes should small businesses pay
There are various taxes applicable to businesses in Australia. Some of these taxes are regulated by the state governments. The state-regulated tax laws can be different from one state to another, while country-wide regulations would remain constant.
Here are some of the basic taxes in Australia applicable to small businesses.
Income tax
Talking about income tax can be quite a complicated topic. This is a tax imposed on the income earned by the businesses. Generally, it is imposed on taxable income. The taxable income is derived by deducting allowable expenses from assessable income.
The income tax rate would depend on the structure of your business. Even if your business falls into the small business category, the tax rate will change among different structures.
If you are a sole trader or a partnership, you must lodge the tax returns under individual tax rates. And the threshold to pay individual tax returns is when the taxable income is more than $18200.
Read more: Individual tax rates (ATO)
If you run a company, there is no tax-free threshold. A small and medium scaled company should pay 25% as taxes from the taxable income. The rate was amended in 2022, whereas it was 26% in 2020/2021.
So like we said before, this is a highly complex topic that few words cannot describe. However, you should know the basics of income tax applicable to your small business. These rates would stay constant country-wide.
Capital gains tax (CGT)
What is the most straightforward way to make a capital gain? It is by selling an asset. Yes, you have to pay a tax when you make a profit by selling an asset.
However, there is good news for small businesses. The Australian Government gives various concessions to reduce the CGT liability of a small business.
For example, you can reduce the capital gain by 50% if you have owned the asset for two years or more. Likewise, there are various CGT concessions. Read more about them from here.
Read more: CGT(ATO)
Goods and services tax (GST)
This is a tax charged on goods and services offered by the business. The current GST rate is at 10% country-wide.
If you have a business that earns a GST turnover of more than $75,000 per year, then you should register for GST.
However, there are certain benefits of registering for GST even if your business doesn’t exceed
this threshold. One such benefit is the ability to claim GST credits.
If you are not registered for GST, you cannot charge GST from your customers. However, you should still pay GST for the goods and services you obtain from a GST-registered business. You cannot claim these GST payments if you are not registered.
Payroll taxes
This is another tax that small businesses should pay if they employ individuals. This is a state tax, and its regulations can change from one state to another. For this article, we will consider the State of Victoria.
The State Revenue Office in Victoria collects this tax. You should pay taxes as the employer on the wages you pay in Victoria. The payroll tax rate in Victoria is 1.2125% at the moment.
The current annual tax-free wage threshold is $700,000, while the monthly threshold is $58,333. When calculating the wages paid, you should consider the following payments too.
- Salaries
- Wages
- Remunerations
- Commissions
- Allowances
- Bonuses
- Employer (pre-tax) super contribution etc.
Read more: State Revenue Office
Wrapping up
As we said before, this is not a simple topic. There are various criteria and regulations to consider when deciding your tax liability as a small business.
However, there are four basic taxes applicable to a small business. They are income or business tax, capital gains tax, goods and services tax, and payroll tax. There are various concessions and exemptions for small businesses by the Australian Government and each State Government.
Therefore you should know about these conditions when calculating your tax liability. We know it can be quite difficult for you to do it alone. That is why SPS consultants have designed tailor- made packages to help your business with tax accounting.
Our expert team has helped many clients in Narre Warren, and Melbourne. We have expanded our services to various locations in Victoria. We can help you to do your taxes accurately and take this burden away from your shoulders. Don’t hesitate to contact us today to schedule a consultation session.