As a small business owner if you don’t allocate money to pay your taxes, then tax time can come as a nasty surprise. If you haven’t allowed for tax on income then you could be hit with a bill for thousands. If that money has already been spent, you may find yourself in trouble with the ATO. Depending on your earnings and business structure, you could be paying anywhere from 0 to 47% tax. If your business is registered as a company you will pay a flat rate of 30% on all business income, which is a disadvantage for low-income businesses, but a significant advantage for very high-income businesses. If you operate as a sole trader, or are in a partnership, you will be paying tax at the individual tax rate. By estimating the amount of income you expect to earn over the year, you can refer to the ATO’s Individual Income Tax Rates to get a good indication of the amount of tax you’ll need to pay.
Goods and Services Tax (GST)
Depending on the amount of income your business generates, you may need to do business activity statements (BAS) monthly, quarterly or yearly. Your GST obligation is separate from your income tax, so you will also need to set aside money to pay your GST in accordance with the frequency of your required BAS submissions. Basically, the more money your business makes, the more often you need to file your BAS, and the more frequently you need to pay GST. The reason for this is that GST is not a tax on your income, it is a tax that consumers pay on the goods and services they buy, with the businesses selling those goods and services acting as collection agents for the ATO. In essence, you are simply handing over other people’s tax that you have collected to the ATO. In normal circumstances, businesses will have to pay GST because the 10% they have charged to all of their customers should be more than the 10% that their suppliers have charged them. If you paid your suppliers the same amount of GST as you charged your customers, you wouldn’t have to pay any GST, no matter what your income was. Unless you have some form of exemption this is unlikely, so it is a good idea to set aside 10% from any income you receive in a separate account to cover your GST obligations.
By following these fairly simple suggestions you can greatly reduce the hardship on your business when the taxman comes calling.
By Jennifer Lowe