Taxes for Businesses – An Overview
Paying taxes is an important responsibility for businesses and with a plethora of tax types, it is essential that a business understands how each of them work. As taxes are administered and collected by the Australian Taxation Office (ATO), a business’s failure to pay their taxes will result in severe penalties from the ATO. Below is a basic summary of the main types of taxes that businesses are responsible to pay for.
Income Tax – Sole Traders and Partnerships
The most common type of tax is the Income Tax that is applied to any taxable income for a business including sole traders or a partner in a partnership. With sole traders and partners, any income made from their business will be added to their personal income and income tax will apply to that total sum at the relevant marginal rate of tax. If the business is a company, the amount taxed is 30% of the business’s turnover. If the company’s total annual turnover is less than $25 million than the company tax rate is reduced to 27.5%. This will not apply where business operates through a trust as it will be the beneficiary’s responsibility to pay tax on any income made through the tax.
Capital Gains Tax
Capital Gains Tax (CGT) is a tax over profits made from the sale or disposal of capital assets (known as the Capital Gains Tax event). In essence, it is the difference between the amount the business acquires the asset for, and the amount they later sell it for. The most common example of a CGT event for a business is the sale of a property.
Capital loss from a CGT event can be weighed against capital gains and reduce the overall amount of tax that a business will pay. However, capital loss cannot be used to minimise the amount paid for other types of tax.
Small businesses may also be eligible for CGT concessions allowing them to maintain a portion of their capital gains. If the business operates as a sole trader, partnership, or trust, it will be entitled to a 50% discount off the capital gains tax over assets owned for longer than 12 months. However, this is not provided to companies.
Goods and Services Tax (GST)
As described by its name, this type of tax applies to goods and services sold in Australia except for basic food, medicine and health care, education, childcare, and exports. Businesses with a turnover over $75,000 must pay the flat rate of 10% of the sale, however, the responsibility of payment is typically passed to consumers as they pay it as part of the price of the goods or services. Non-profits with a turnover of $150,000 and taxi/ transport services regardless of the turnover, will also need to pay this tax. All required businesses will need to register for the GST and this can be done through the ATO’s business portal. As businesses pass this tax onto its consumers, they will bear the responsibility of issuing tax invoices to customers and then passing the tax onto the Australian Taxation Office.
Fringe Benefits Tax (FBT)
If an employer provides its employees with extra benefits such as a gym membership or free concert tickets, they will need to pay tax on those benefits. These fringe benefits are often given to employees instead of a portion of the salary which can reduce their total amount of taxable income. However, note that superannuation contributions by employers do not count as a benefit.
Businesses that provide benefits will need to register for the Fringe Benefits tax through the Business Registration Service.
The Payroll Tax is a tax on the total amount of wages a business pays each month including superannuation contributions and fringe benefits. Businesses will only need to register and pay the Payroll Tax if the total amount of wages is above the tax-free threshold. However, the amount of tax will vary depending on the state and territory. Businesses will need to register for the payroll tax in all states and territories where they employ staff in addition to states where the business operates.
This type tax applies to any real estate/ land that a business owns such as investment properties, commercial spaces, and land leased from state or local governments. The value of all the real property combined will be taxed and this amount will be determined by looking at the unimproved value of the property. This unimproved value is essentially the market value of the land under normal sale circumstances meaning that the value will include any structural improvements made. Paid annually, this tax regime will differ depending on each state and territory. This tax also does not apply to land under the land tax threshold or land with agriculture as its primary purpose.
Stamp Duty is a tax applied to transactions charged by state and territory governments. Therefore, the amount and the method of calculating the tax will depend on where the transaction took place and the state or territory law applying. This tax most often applies to transactions involving real property, however, other transactions include setting up a trust, transferring a lease or a sale of a business.
There are many responsibilities that come with being a business owner and paying tax is an important one to avoid serious penalties by the ATO. Therefore, all businesses should do their research and identify which types of tax apply to their business. As this is a summary of the main types of tax, it is advised that business owners seek further advice to ensure that they are following the correct process when paying their tax.
If you need any assistance with any taxation matters, our commercial lawyers are here to help. Just call us at 1300 337 997 or complete the form on this page.