Taxes for sole traders and small businesses in Australia
When you run a small business or work as a sole trader, you become responsible for managing your company taxes, which involves charging sales tax, lodging tax returns, and claiming tax credits. It’s therefore important to understand which taxes you might be accountable for if you run your own business in Australia.
In this blog post, we take a look at some of the main business taxes in Australia and explain how they might affect sole traders and small business owners.
GST: sale tax on income and expenses
Goods and Services Tax (GST) is a consumer tax that's charged on most goods and services sold or consumed in Australia. GST is charged at a rate of 10%.
If you’re a sole trader or small business owner with a taxable turnover of $75,000 or more, you’re required to register for GST; however, you will also need to register for GST if you want to claim GST credits or if you provide taxi services.
Once you’ve registered for GST, you will need to:
- Charge GST on every taxable sale that you make
- Claim GST credits for the GST paid on business purchases
- Keep GST accounts and lodge annual tax returns
- Issue tax invoices rather than standard sales invoices, and make sure that the invoices you receive for business purchases are tax invoices instead of regular invoices.
Income tax: individual rates or company rates?
Income tax is a tax charged on the money generated through employment or running a business. You pay income tax whether you run your own business or work for somebody else, but the rates you pay depends on how much you earn and how your business is structured.
Sole traders pay the same individual rates as employees, and the specific rate depends on your total income. On the other hand, incorporated businesses pay the company tax rate, which is fixed at 30% (or 27.5% if you’re a base-rate entity).
Whichever rate of income tax you pay, you need to complete an annual tax return through the ATO’s website. If you lodge your own tax return, you need to do so by 31 October in the following tax year. For example, if you want to complete a tax return for the tax year 1 July 2018 to 30 June 2019 it needs to be lodged by 31 October 2019.
Capital gains tax: concessions for small businesses
In many countries, Capital Gains Tax (CGT) is a stand-alone tax that is charged and processed separately from other taxes, but in Australia, CGT is part of your income tax.
Everyone who makes capital gains is subject to CGT, and the most common way to make a capital gain is to sell or pass on an asset. However, small businesses can apply for four different concessions, which reduce the value of the capital gain and therefore the amount of tax you pay:
- Small business 15-year exemption: if you sell a business asset that has been owned for more than 15 years, the capital gain is reduced to zero.
- Small business 50% active asset reduction: this reduces the value of the capital gain by 50% Reduce your capital gain on a business (active) asset by 50%.
- Small business retirement exemption: if you’re under the age of 55%, you can pay up to $500,000 of a capital gain into a superannuation fund or retirement savings account.
- Small business roll-over: this allows you to defer the capital gain for a year.
Payroll tax and FBT: do you need to pay?
Payroll tax is a state tax paid on the wages of employees, while fringe benefits tax (FBT) is a federal tax on benefits you provide your employees. You’re only liable for these taxes if you hire other people, so many sole traders and small businesses won’t need to deal with either payroll tax or FBT. However, if you do have employees, it’s important to know about the possible taxes you might need to pay.
Payroll tax is collected in each state or territory that your employees are located in, and because each state and territory manages their own payroll tax, the rates and thresholds vary from state-to-state.
You’ll only be liable for payroll tax if your total payroll bill (the amount you spend on wages and salaries per year) crosses the state’s threshold. The lowest threshold is $650,000 in Victoria, while businesses with employees in the ACT won’t start paying payroll tax until their annual payroll bill is more than $2,000,000.
It’s therefore unlikely that small businesses cross the payroll tax threshold, but it’s still worth bearing in mind that you might become liable for payroll tax once your business grows.
There is no threshold for fringe benefits tax, which means that any business that provides benefits to its employees will be liable (unless the benefits are exempt). FBT is charged at a rate of 47%.