by Sian Williams
When you begin a small business there seems to be a never ending maze of fees and procedures, complete with a steep learning curve. This article is to assist you with a summary of some of the more common taxes you may encounter during your business life.
For a business GST should have no overall effect on your net income – your business has become a tax collector for the ATO, and it requires good systems and discipline not to absorb this in your business cash flow.
You charge an extra 10% on your goods/services (presuming they aren’t GST free or input taxed) which you later are required to pay back to the government.
Suppliers charge you an extra 10% GST which you can claim back from the ATO at a later date.
I suggest always thinking of income and expenses net of GST in your business so you don’t get caught out thinking your income is higher than it is or your expenses are less.
GST is a consumer tax so businesses generally don’t wear the burden of it and pass it onto the final consumer user.
This is tax calculated on your annual taxable income. It is disclosed in your compulsory annual tax return for the period ending 30 June each year.
From a business perspective it is important to understand that not all expenses you incur may be income tax deductible. For example the ATO does not allow ‘entertainment’ as a tax deduction. It also quarantines the write-off of capital items such as machinery, otherwise known as depreciation.
Let’s use the example of when you purchase a vehicle for business use. The ATO does not allow you to claim the full cost as a deduction in the year your business purchased the car. You will benefit from the use of that car over a number of years therefore you have to spread out the deduction of the car’s cost over that same time period (or an estimate at least).
In business it is always advisable to have a professional prepare your tax return as the law is complicated and the treatment of different situations may need close analysis.
PAYGW refers to the tax an employer withholds from wage payments. It is a sort of saving mechanism. If an employer paid their employees their gross figures and did not set aside amounts for tax it is most probable that employees would lodge their tax and not have any money set aside to cover their tax bill. The PAYGW system ensures this money is available by giving it to the ATO throughout the year. Completing your tax return is just a way of reconciling the payments your employer put aside to the amount of tax you are required to pay for the year.
PAYGI – Pay As You Go Instalments
Leading on from PAYGW, PAYGI are a result of entities not having an ‘employer’ to withhold payments. This payment is a tax instalment that will be used to offset a future income tax liability. This way the ATO is guaranteed to get some tax in advance rather than having to wait almost 15 months to receive tax payments – especially if it is your first year in business.
If you are a new business you can now volunteer to enter the PAYG instalments system – contact team EASE today to find out more.
Fringe Benefits Tax (FBT)
In business employers can reward their employees through non cash benefits. FBT is a way of ensuring these benefits have a tax assigned to them. Otherwise businesses can claim an income tax deduction for a benefit provided to their employees but there is no assessable amount for the end user.
Popular benefits provided are entertainment, cars and property such as Christmas gifts.
There are numerous concession and exemptions that may be applied depending on the situation.
Bear in mind FBT applies to directors and owners, even though they’re not an employee.
Capital Gain Tax
Capital gains tax occurs when an entity sells of an asset which is capital in nature.
A capital asset are things you use over and over again like motor vehicles, land and buildings and plant equipment.
There are specific laws and regulations which govern how you treat capital gain or loss situations. We recommend always getting the advice of a tax professional, if you are considering selling any asset from your business to understand potential capital gains exposure.
Recommended Cash Flow Strategy
A cash flow strategy which we strongly recommend to our clients is to open two business bank accounts; one for managing business cash flows, the second bank account is to hold any tax payments on behalf of the ATO. So, for example if you pay your GST quarterly, once a month (or weekly ) review the total amount of sales that has been paid and calculate how much of this is GST, ie total Sales income received divided by 11. This is transferred into your tax holding bank account for safe keeping and out of temptations way to spend this on your business running costs. Remember you are a tax collector now. If you have staff, when their wages are due, transfer their PAYG withheld and super into the Tax holding account as well. Implementing this suggestion will also ensure that you have the money ready to pay the ATO when BAS time is due.
TIP: If you operate your business on an Accruals basis, you are required to pay GST on sales invoices when they are raised, not when you have received payment from your customer. Even more important to separate this tax out from your cash flow
Contact us if you’d like to learn more on how to set up and manage this strategy: firstname.lastname@example.org