How Do Small Businesses Prepare Taxes?

This guide explains where you need to begin and what you need to know at tax time for small businesses as well as some tips to get more money back. It will also explain what you can expect from the government in terms of tax refunds and waivers in response to the COVID-19 outbreak.

Tax can be tricky for small business owners. There are lots of deadlines to make, and even more, rules to follow.

Please note that this guide will give you a general understanding of what to expect concerning your taxes and what changes to anticipate as a result of the government's response to COVID-19. However, for more in-depth information, it will link you to other relevant guides.

How Income Tax Works?

The amount of income tax your business has to pay depends on your taxable income. It’s calculated from your assessable income less any deductions.

  • Assessable income is generally income your business earns. It includes all gross income (before tax) from your everyday business activities (sales etc.) as well as other income that is not part of your day-to-day business activities, for example, capital gains. It does not include GST payable on sales you make, or GST credits.
  • Deductions are amounts you can claim for expenses involved in running your business.

You must lodge an income tax return for any year you run your business. You need to install even when you don’t expect you’ll owe tax.

Tax time is an opportunity to obtain essential business advice from your professional advisor, especially if the impacts of COVID-19 have disrupted you. Your CPA Australia-registered tax agent can help you explore options to innovate, pivot, restructure or even exit your business. We've produced a wide range of resources to help your business, including recovery roadmap, business recovery guide and financial information factsheet to help you prepare for discussions with your advisor.

Small businesses need to ensure their bookkeeping and lodgments are correct and up to date. You should obtain professional tax advice, especially in areas where more complex tax issues arise. This includes refinanced debt, losses, restructures, capital gains tax, personal services income, trust declarations and distributions, and private company loans.

What Is Tax Filing?

Businesses generally have to file three main types of tax return:

  • GST & BAS
  • This is a tax that you may have to add to your prices. The government expects you to collect that cash on their behalf and send it their way at set times.
  • Income tax
  • This is calculated as a proportion of your profits.
  • Employee-related taxes
  • You’re expected to withhold income tax from your employees’ wages and hand it over to the ATO. There may also be payroll taxes for the employer to pay.

What are the main taxes, and how do I pay them?

  • GST. You need to pay 10% of your taxable goods and services. You add 10% to the cost of these goods in order to pay it.
  • PAYG. These are deductions from the gross wages paid to any staff you employ.

 

Why Does It Matter?

Paying too much tax is like giving money away. Paying too little can get you in trouble. Getting it right greatly increases your chance of running a profitable and relatively trouble-free business.

Tax Reporting Requirements

 Payroll reporting

As of 1 July 2019, small businesses with fewer than 20 employees are required to lodge reports with the Australian Tax Office (ATO) using Single Touch Payroll software. There is however a transition period for small businesses to prepare for this new way of reporting which ends on 30 September 2019.

Monthly or quarterly business activity and instalment activity statements

The Australian Tax Office (ATO) requires businesses to submit a business activity statement (BAS) monthly, quarterly or annually (annual GST return, if eligible).

It is used to report and pay goods and services tax (GST), pay as you go (PAYG) instalments, PAYG withholding tax and other tax obligations.

When you register for an Australian business number (ABN) and GST, the ATO will automatically send you a BAS when it is time to lodge. All businesses registered for GST must lodge a BAS before the due date.

An instalment activity statement (IAS) is similar to the BAS but without GST and some other taxes. Businesses that are not registered for GST would submit an IAS to pay PAYG instalments.

Financial year reporting

In Australia, the financial year for tax purposes runs from 1 July to 30 June.

Businesses are required to lodge an income tax return for this period. If you operate your business as a sole trader, you can declare your business income as part of your income tax return.

Reporting JobKeeper payments

JobKeeper payments are taxable and need to be included in tax returns.

If you’re a sole trader who has received JobKeeper payments, you need to include the payments as business income in your individual tax return.

If your business is a partnership, trust or company, and you received JobKeeper payments, you don’t need to include it as assessable income in your individual tax return. If your business is a partnership or trust, you will report JobKeeper payments as business income in your partnership or trust tax return. If your business is a company, you will report it as income in your company tax return.

Your employees won’t need to do anything different as the payments will be included as salary and wages, or an allowance, in the regular income statement, or payment summary, you provide as an employer.

 

Reporting Cash Flow Boost Credits

You don’t pay tax on Cash Flow Boost credits, as they are non-assessable non-exempt income. How this credit is reported in your return or your financial statements is different depending on your business structure. Talk to a registered tax professional for more information.

How To File Taxes

GST Returns

These are often handled by a bookkeeper or registered tax agent throughout the year. They’ll keep tabs on what you’ve collected and made adjustments for the GST you’ve paid on purchases, then put together a GST report or BAS for the ATO. Any taxes due are generally paid when the report is filed.

 

Business Income Tax

This is calculated on profits. The higher they are, the more tax you pay. But there are ways to lower your profits in the eyes of the ATO legitimately. This is where things get technical, and the stakes are high because government tax experts will check your returns. That’s why most businesses get an accountant to prepare their income tax return.

Employee PayG Taxes

These are calculated and collected from employee pay at every pay run. At the same time, you must submit a report to the ATO saying how much you paid your employee and how much tax you withheld. The ATO will tell you when to pay the taxes to them.

Modern tax filing

Tax time isn’t the ordeal it used to be. Accounting software can do a lot of the grunt work, so filing time is easier for your accountant or bookkeeper. For example, accounting software can estimate taxes owed and quickly produce the reports needed to finalise a tax return. These efficiencies make tax season less stressful and less expensive.

Going online

We provide online services to help make it quick and easy for you to manage your tax and super:

  • ATO Online services – sole traders can access ATO Online services on any device to manage activity statements and PAYG instalments, manage accounts, make payment arrangements and more.
  • Business Portal – available to all businesses to prepare and lodge activity statements and annual reports, manage accounts and update registration details.

To access our Business Portal, you'll need an ABN and my Ovid and Relationship Authorisation Manager.

How to prepare and lodge BAS online

Most Australian businesses have to pay GST. Many also make PAYG tax instalments, and some have to collect tax from employees. Find out how to keep track of it all through your BAS.

What is BAS?

A business activity statement (BAS) summarises what revenue you take in over a period of time, and reports on a few key expenditures too. GST-registered small businesses submit a BAS to the Australian Tax Office (ATO) to work out:

  • their GST bill or refund
  • what tax has been withheld from employee pay and must be sent to the ATO
  • their income tax instalments if they’re in the pay-as-you-go (PAYG) system

ABAS can also be used to record other taxes and credits, such as fringe benefits tax, luxury car tax, wine equalisation tax, and fuel tax credits.

Who has to lodge a BAS, and when?

If you’re GST registered, then you have to submit business activity statements. Any business can register for GST, and certain businesses are required to. You have to register for GST if:

  • your income passes a certain amount
  • you provide taxi services
  • you want to claim fuel tax credits

Most GST-registered businesses complete a BAS every quarter. After the quarter closes, you get about a month to complete and submit the report. Some types of businesses must submit BAS reports once a month, and others may only have to do it annually. Check the ATO page on lodging and paying to confirm your requirements.

How to complete a BAS statement?

Anyone who completes a BAS needs to report how much GST was collected from customers, and how much GST was paid to suppliers. Those numbers should be in your business accounts. If not, you’ll need to look back through your receipts and invoices or bank statements.

If you pay employees, your BAS must report how much PAYG tax you’ve withheld from their pay during the period. That information will be in your payroll system.

And if you’re making PAYG instalments on business income, then your BAS must also include an estimate of the tax you owe. That number is based on your sales for the period, which you can find in your P&L report.

You can set up accounting software so that all these numbers flow automatically through to the BAS when you complete it online.

 

How to complete a BAS statement

Anyone who completes a BAS needs to report how much GST was collected from customers, and how much GST was paid to suppliers. Those numbers should be in your business accounts. If not, you’ll need to look back through your receipts and invoices or bank statements.

If you pay employees, your BAS must report how much PAYG tax you’ve withheld from their pay during the period. That information will be in your payroll system.

And if you’re making PAYG instalments on business income, then your BAS must also include an estimate of the tax you owe. That number is based on your sales for the period, which you can find in your P&L report.

You can set up accounting software so that all these numbers flow automatically through to the BAS when you complete it online.

Pay as you go (PAYG) instalments.

When your business and investment income reaches a certain amount, you’ll pay your income tax in instalments. These payments are usually quarterly. This helps you to avoid a large tax bill after you lodge your tax return.

Pay The Correct Company Tax Rate And Apply The Correct Rate For Imputation

Most companies with an aggregated annual turnover of less than $50 million will pay tax at 27.5 per cent in 2019–20. However, some companies with a turnover below $50 million will continue to pay tax at 30 per cent, especially companies that earn nearly all their income from passive investments such as rental income or interest income.

To qualify for the lower tax rate:

  • a company must have an aggregated turnover of less than $50 million where aggregated turnover is the sum of the company’s ordinary income and the ordinary income of any connected affiliate or entity, and no more than 80 per cent of their assessable income is base rate entity passive income.

The full company tax rate of 30 per cent applies to all companies that are not eligible for the lower company tax rate. The ATO view is set out in LCR 2019/5 Base rate entities and base rate entity passive income.

As a corollary to the base rate passive entity income rules in determining the tax rate of a company, there have also been changes to the dividend imputation rules that apply to the franking of dividends by a company.

These differential rates create a number of complexities for companies, especially companies holding investments, as well as for the owners of companies. Your CPA Australia-registered tax agent is best placed to assist you with these issues.

Tax Preparation Tips For Small Business

According to the ATO, thousands of small businesses register every month, which means there are a lot of new business owners about to have their first tax time experience—wondering how to get more tax back? We’re here to make things a little easier for you and have compiled some advice to get you ahead of the game.

Be in the know

There are some great initiatives the government has introduced for small businesses. For example, this year’s Federal Budget saw the instant tax write-off extended for another year. There’s also a lower company tax rate for small businesses. Knowing when tax returns are due in Australia, and other key dates will ensure you’re not hit with any late fees—wondering what you can claim back on tax? Keep up to date by following ITP on social media and signing up to our e-newsletter.

Take care of your staff.

If you employ staff, there are a number of obligations you need to follow including providing payment summaries and lodging these with the ATO by 14 July. How much tax they will get back may change this year, as there are now new tax tables that apply from 1 July 2017. To withhold the right amount of tax from your employees, make sure you update your systems, including payroll software, to the new rates.

Get your paperwork in order.

The ATO says that it is important that you keep all records related to establishing, running and selling your business. This includes one-off transactions and those that support the calculations and amounts you show in your tax return. You’ll need to keep these for at least five years. How much tax you will get back will depend on a range of factors including your income and what you claim back, so it’s important to have the right documentation.

Get a little help from the professionals.

Wondering how to lodge your tax return? Around 95 per cent of small businesses use a registered tax professional to lodge their returns, and it’s when you start reading through your obligations it’s not hard to see why. Considering who to trust with your tax return and other financial affairs is a big decision. That’s why we’re proud that more than 300,000 Australians trust us each year with their taxes.

 

What are the changes to taxes as a result of the COVID-19 outbreak?

On 22 March 2020, the Australian government announced a $66 billion stimulus package to support the Australian economy through the COVID-19 outbreak. This is in addition to the $17.6 billion packages announced on 12 March.

This package will benefit up to 700,000 Australian businesses with an annual turnover of less than $50 million that employ staff. These tax-free "cash flow boosts" are available from $20,000 to $100,000 and are to be issued to eligible businesses when they lodge their BAS. These consist of initial cash flow boosts and additional cash flow boosts. The amount your business will qualify for in each set of cash flow boosts will depend on the amount of tax your business pays on employee wages. Eligible businesses will receive a credit equal to 100% the amount of tax withheld on employees' wages up to a maximum of $50,000 each time.

Initial cash flow boosts

The initial cash flow boosts will be issued in two or four instalments (as per whether your business pays tax quarterly or monthly). The total of this 2–4 instalment grant will be a minimum of $10,000 and a maximum of $50,000 per business. Eligible businesses will receive these cash flow boosts from the upcoming BAS due date: 28 April 2020.

Additional cash flow boosts

Eligible businesses that received the initial cash flow boosts will receive additional cash flow boosts for the periods June to September 2020. These boosts will be equal to the total amount of initial cash flow boosts received by said businesses and will also be delivered in either two or four instalments. Again, this will depend on the business's reporting period.

 

 

Scroll to Top