Australian Small Business Tax Guide: How To Be Prepared for Tax Season Year-Round

March 25, 2024

Small businesses are the lifeblood of the Australian economy. According to the Australian Taxation Office (ATO), there are around 3 million small businesses in Australia, making up a staggering 96% of all businesses.

If you’re part of this overwhelming majority, it’s crucial to understand your tax obligations and be prepared for tax season throughout the year.

What is a Small Business in Australia?

Small businesses play a vital role in the Australian economy, contributing significantly to employment, innovation, and economic growth.

Perhaps the most obvious question you should ask yourself is whether or not you qualify as a small business for tax purposes. 

According to the Australian Taxation Office (ATO), a small business is defined as an entity with an aggregated annual turnover of less than $10 million

This includes: 

  • Companies
  • Partnerships, and 
  • Trusts  

4 Ways To Determine Your Small Business Status in Australia:

It’s important to note that the definition of a small business can vary depending on the government program, agency, or organization. 

For example, the Australian Bureau of Statistics (ABS) uses a different definition for statistical purposes, classifying businesses with fewer than 20 employees as small.

  • Your annual turnover is less than AUD$10 million
  • You have fewer than 20 employees
  • Your assets are valued at less than $3 million
  • You’re not in the agriculture, forestry, or fishing industries*  

*Certain industries, such as primary production have different thresholds for determining small business status.

Why Should You Get Ready for Tax Season All Year?

While tax season may seem like an annual event, effective tax planning and preparation are ongoing processes for small businesses. 

By adopting a proactive approach to tax preparation and planning, small business owners can:

  • Reduce your stress at finding all your paperwork
  • Save more money by tracking all your expenses throughout the year that can be used as tax deductions  
  • Maintain compliance with Australian tax laws–to avoid scary fees 

This ongoing effort ensures that you are ready for tax season whenever it arrives, rather than scrambling at the last minute.

Here are five compelling reasons why you should get ready for tax season all year round:

1. Avoid Last-Minute Stress

Preparing for tax season throughout the year helps you avoid the stress and rush that often comes with last-minute tax filing. By staying organized and on top of your tax obligations, you can minimize errors and ensure a smoother tax season.

2. Maximize Deductions and Credits

Understanding and tracking eligible deductions and credits throughout the year can help you maximize your tax savings. 

This includes keeping accurate records of business expenses, asset purchases, and other deductible items.

3. Better Cash Flow Management 

Proper tax planning allows you to anticipate and budget for your tax liabilities, preventing unexpected cash flow issues or penalties for late payments.

4. Compliance with Tax Laws

Staying up-to-date with changes in tax laws and regulations throughout the year ensures that you remain compliant and avoid potential penalties or audits.

5. Identify Opportunities for Tax Savings

By regularly reviewing your financial situation and tax obligations, you may uncover opportunities for tax savings or restructuring that could benefit your business.

Seek Professional Advice

Working with a bookkeeper throughout the year means that you’ll have all your books in order–because an accountant won’t be able to help you until they are. Or, they’ll charge you extra fees to do the reconciliations that should’ve been done all year. 

Contact a First Class Accounts bookkeeper near you

Small Business Tax Frequently Asked Questions

Let’s go over some commonly asked questions about small business taxes. 

How much does a small business need to earn to pay tax?

The tax-free threshold for individuals is established for the following financial year, and it depends on how much you earn. 

The taxable income of sole traders in Australia includes income from personal services. There is no tax exemption for companies, as you are liable for tax on the company’s total revenue.

For instance, sole traders are taxed on their business profits that exceed the tax-free limit of $18,200. 

This means that after you subtract all allowable business costs from your total earnings if the remaining amount is over $18,200, that’s what you’ll be taxed on.

Read more on small business taxes

How much tax do you pay on an ABN?

The taxes you are liable for with an Australian Business Number (ABN) are usually dictated by the company’s total income. This is measured after the fiscal year ending June 30th. 

An ABN is a unique identifier for your business, but it does not replace your individual tax file number.

How much tax do I pay as a sole trader?

Sole traders are taxed the same way as individuals, which simplifies the tax process compared to operating as a company. 

The sole trader tax rate mirrors the personal income tax rate, making it easier to handle your business taxes.

The current tax rates for sole traders are:

Taxable IncomeTax Rate
Up to $18,2000% (tax-free threshold)
$18,201 to $45,00019 cents for each dollar over $18,200
$45,001 to $120,000$5,092 plus 32.5 cents for each dollar over $45,000
$120,001 to $180,000$29,467 plus 37 cents for each dollar over $120,000
Over $180,000$51,667 plus 45 cents for each dollar over $180,000

Is it better to be a sole trader or a Pty Ltd company?

The decision between a sole trader structure and a proprietary limited (Pty Ltd) company structure is influenced by several factors, including risk tolerance, tax implications, and administrative preferences. 

A company structure is a way to limit personal liability, which can provide a better company tax rate and planning efficiencies as business revenue increases.

Tips for Small Businesses to Stay on Top of Their Taxes Year-Round 

The ATO provides a range of calculators and tools to assist with managing and running your small business so that you can:

  • Consider all relevant factors when hiring employees, such as your obligations for employee compensation policies, and how to pay payroll tax 
  • Ensure your business is registered for GST and has an active ABN
  • Access funds for the costs of reasonable legal expenses if they qualify

1. Get Help from Capital Gains Tax (CGT)

Special CGT concessions apply to small businesses and include a 50% CGT general discount for individuals, trusts, and super funds–but not corporations. 

There are four CGT concession options that can help a small firm reduce its capital gains when selling its “active” assets. 

These reliefs can be provided to small business entities that carry on an active business and meet the $2 million turnover test if the net CGT value of the taxpayer (along with its affiliates) exceeds certain thresholds.

2. Don’t Blur the Lines Between the Company’s Money and Your Own

Many small businesses fail to comply with the ‘deemed dividend’ rule in tax law. 

This rule prevents private companies from distributing their profits as tax-free loans to their shareholders or associates. 

In general, it’s advisable to ensure that any debt incurred by the borrower is repaid by the day after the end of the income year in which the loan was made. 

If this is not feasible, you should declare the loan as a dividend and include it in your assessable income, or the dividend may be treated as an unfranked distribution.

3. The Golden Rule – Keep Records

Tax laws require businesses to keep records for at least five years, and in some cases, up to ten years. 

These records should include:

  • Income and expense records
  • Records of any assets purchased and sold
  • Records of any stock on hand at the end of the income year
  • Taxation records, including tax returns and calculations

Records can be stored in either physical or digital format, but they should be easily accessible. 

Despite the support provided by the ATO, many businesses struggle to provide sufficient evidence to substantiate their transactions during an audit or review.

Stay on top of your small business bookkeeping year-round. Contact a First Class Accounts bookkeeper near you

4. Claim Borrowed Money as a Tax Deduction

Expenses incurred for borrowing money can be claimed as deductions, provided that the money is used to derive assessable income. 

These expenses include legal fees and monetary costs associated with the loan. 

Additionally, you may be able to claim a tax deduction for the interest charged on the borrowed money if the funds were used to generate income.

5. Claim Tax Management Expenses as a Business Deductible

Tax planning and management expenses for businesses may be deductible. 

This can include the costs of preparing and filing a tax return, undergoing a tax audit, or appealing or objecting to a tax assessment.

6. Travelling for Work? Claim Business Travel As a Deduction 

Travel expenses incurred for business purposes are generally claimable as a deduction for tax purposes. 

It’s essential to keep detailed records, including receipts, itineraries, diaries, and notes on the nature, purpose, date, and duration of the travel.

The Bottom Line? Stay Prepared All Year

Tax time doesn’t have to be a scramble.

With a bit of preparation and understanding of your obligations, you can keep your business in good standing and focus on what you do best–running your amazing business!

Not keen on diving into the tax nitty-gritty? Contact a First Class Accounts bookkeeper today and make filing your tax return a stress-free zone!

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