Starting a New Business: Tax Basics    

When starting a new business there are many issues that an entrepreneur must address. On of the most important of these issues involves taxation. In this article we will discuss some of the basics of business taxes for new business owners.    

How will my business’s income tax be calculated? In Australia, the income tax system operates based on a principle of self-assessment. This is similar to the principle of “innocent until proven guilty” in the criminal justice system, and it means that the information you provide will be initially accepted without question. However, you may be asked to provide proof of that information at a later time, so it is imperative that you maintain accurate records.  

The taxable income of a person or business is calculated using the following formula:  

Assessable income less allowable deductions=taxable income  

Assessable income includes most of the wealth accumulated by a business, but there are some exceptions; for example, loans received, money the entrepreneur personally contributes to the business and GST collected or GST credits. If your business operates on a trade or barter system whereby you exchange goods and/or services for some compensation other than cash, you must include the value of goods and services you receive as payment in your assessable income.  

Allowable deductions include the majority of money spent in order to keep your business operational. You can deduct the expenses necessary for every day function of the business, and you may claim a deduction over a number of years for other business expenditures such as capital assets like computers, tools and equipment.  

Some expenses that cannot be deducted are: loans a business makes, money borrowed from the business by the proprietor, domestic or private expenses and GST if it can be claimed as a credit on an activity statement. We will discuss the activity statement shortly.  

Your business’s taxable income is the amount on which you are required to pay taxes. This amount should not be confused with the amount drawn from the business as salary for the business owner(s). Tax must be paid on the taxable income of a business no matter how much is drawn over the course of a year for the entrepreneur’s living expenses.    


Will I have to file an income tax return on behalf of the business?

Yes, even if you don’t expect to have any income tax liability, an income tax return must be filed for any year in which you conduct business in Australia. An income tax return is different than an activity statement, and you must submit an income tax return regardless of whether or not you submit an activity statement.    

What is an activity statement?

Activity statements are used by business owners to report and/or pay PAYG installments, PAYG withholding, GST (goods and services tax) and related tax obligations, fuel tax credit, fringe benefits tax installments and some company and superannuation fund installments.  

An activity statement will be sent to you when you apply for your ABN (Australian Business Number) and provide the anticipated start date for your business. The statement you receive will be personalized, and some sections will already be filled out in order to save you time. Typically, and activity statement will only show sections pertaining to relevant obligations for your business. If you do not have a PAYG withholding obligation, for instance, this section would be omitted from your activity statement.    

Are all business required to file an activity statement?

Businesses that have any of the financial obligations described above must submit an activity statement at the end of every reporting period. This is true even if you have nothing to report for a given period.  

Normally, business owners submit activity statements monthly or quarterly. However, some who are voluntarily registered for GST elect to file their activity statements annually.  

The deadline by which you must submit an activity statement is printed on the statement when you receive it. You must file the statement by the due date even if you are unable to pay the amount you owe. Should you find yourself unable to pay the amount owed, you should call 13 11 42 to discuss alternate arrangements before the deadline. Penalties can be assessed for filing or paying late.    

How do I file my activity statement?

Different submission methods exist for your convenience. Activity statements may be filed online using the Business Portal. Businesses that need to submit multiple activity statements each period may file online using the electronic commerce interface. You may file online through a tax advisor. You can also feel free to simply mail back the paper statement sent to you. Additionally, if you have nothing to report on your activity statement, you may file it over the telephone by calling 13 72 26.    

Some activity statement tips:

Photocopies are not acceptable—use only the original form sent to you, and fill it out in black ink. Replacement forms can be sent in the event of a lost form. You should not fill in any boxes you are not required to. Always file by the deadline printed on the activity statement—even when you have nothing to report. Remember to send your activity statement to the Tax Office if you pay at a post office. And, finally, be sure to maintain a copy for your records.    

Special Rules

The assessable income of your business and the deductions you may claim can be affected by special rules if you or your business fall into any of these categories: ·       

You are taking advantage of small business tax concessions ·       
You are participating in the simplified tax system ·       
A sale or disposal of business assets resulted in a capital gain ·       
Your business suffered a loss (sole or dual proprietorships) ·       
You are a contractor and, therefore, earned personal services income ·       
You are a primary producer    

What tax concessions are made for small business owners?

If your business has an annual turnover of less than $2 million, you may qualify to take advantage of certain tax concessions. However, the turnover of any other business(es) with which you are affiliated must be factored in when calculating the turnover of your small business.  

Tax concessions for small businesses include:

An option to account for goods and services tax (GST) on a cash basis, the option to pay GST in installments, the option to apportion GST input tax credits annually, simplified trading stock and depreciation rules, entrepreneurs’ tax offset, CGT 15-year asset exemption, CGT 50 percent active asset reduction, CGT rollover provisions, a concession regarding the car-parking fringe benefits tax, installment pay plans based on GDP-adjusted notional tax, an allotment of two years for amending assessments (exceptions may apply) and immediately deductible prepaid business expenses for certain items.    

Where can I go for more information?

Visit the Australian Taxation Office’s website at: http://www.ato.gov.au/businesses/     

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