When and how a new business will be taxed will be very much dependent on type of business structure that is used to operate the business. The most common structures are a sole trader, company or a Trust. It is so important to set up the most effective structure that will best meet your needs as the cost of changing structures down the track can be expensive with potential stamp duty and capital gains tax implications to consider.
This is where investing in some time with your Accountant to get this right will be money well spent.
Let’s assume that you are running new your business through a company, the most common for small business being a proprietary limited company. If the company generates a profit for the financial year being the 12 months to 30 June each year, currently that profit will be subject to income tax at the rate of 30%.
At the moment, that tax rate is the same for all companies, regardless of their size or type. A reduction in the tax rate to 28.5% from 1/7/15 was announced in the May Budget. There has also been an announcement of a cut in the tax rate for small businesses with large businesses bearing the brunt of the costs for the paid parental leave scheme. This initiative has been recently been abandoned, so we will have to wait and see exactly what the tax rate(s) will be for the next financial year.
Please note though that the above applies to companies only; the tax rates may well be different if another structure is used.
If your company generates a profit in its first year and it is a small business (which is defined to be if it has a turnover of less than $2 million), it will need to lodge an income tax return and pay the income tax on that profit by 28 February. That is for the year ended 30 June 2015, the tax return will be due by 28 February 2016. If it is lodged through a tax agent, the due date will be 15 no earlier than 15 May 2016 .
Different due dates apply to medium and larger businesses as well as small businesses who lodged their previous year’s tax return after its due date.
It is always a good idea to check with your tax agent what the exact due date of your return will be.
If your business makes a loss in the first year of trading or subsequent years, in most cases, those losses can be accumulated and used to offset future profits. So it will be only when your business has “used up” all its losses that it will need to pay tax on its profits. Unfortunately you can’t go backwards; so of you make a profit in year 1 and loss in year 2, you can’t offset the years. The ability to use losses only works for the future. So if you make a loss in year 1, you can usually use those losses to offset any profit you make in year 2.
The Tax Instalment “Double Hit”
Where a lot if new businesses really hit cash flow problems is when their income tax instalments kick in.
If your business has had to pay income tax on its profits for the first time, the Tax Office will then immediately force you to pay quarterly instalments towards the company’s income tax bill for the current year.
So in effect, not only are you paying income tax for last year, your immediately paying income tax instalments for the current year. Naturally when you ultimately lodge your return for current year you will get a credit for the tax paid and if too much has been paid, a refund will result or if not enough then the balance will be payable. Each year, the Tax Office bases your quarterly “Pay As You Go Instalments” on the last year’s tax return for the company that has been lodged.
This can be a major cash flow hurdle for the business in the early stages and makes completing realistic cash forecasts so important that take into account these tax obligations as well as any capital investment that the company might be planning to make.
Capital Gains Tax
Capital Gains tax may also apply to sale of businesses and certain assets such as properties. This is usually not an issue for new businesses in their growth phase.
Goods and Services Tax
Provided your business turns over more than $75,000, you must register for GST. For most but not all goods and services, you must collect 1/11th of the sale price and remit this amount to the Tax Office. You are then able to claim as a credit any GST you pay on 1/11th of your expenses.
Be careful though, not all goods and services have GST applied.
For most small businesses, you provide details of your GST collected and paid to the Tax Office by way of a quarterly Business Activity Statement.
There are a raft of other possible statutory taxes and charges, the main ones being:
- Payroll tax
- Fringe Benefits Tax
- Superannuation Guarantee payments
- Luxury Car Tax
- Wine Equalisation Tax
And of course, there is the tax on your employees’ wages (Pay As You Go Withholding) that has to be remitted to the Tax Office, for small businesses on a monthly basis.
The tax laws can be very confusing and contain many exemptions and special requirements. It is vital that you consult with a qualified accountant who can advise you based on your business’s specific circumstances.
For professional assistance: www.bellpartners.com
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