The Australian Banking Association reports that there are nearly 2.5 million SMEs in the country, and that means millions of us are self-employed. Working for yourself can be a rewarding experience. It comes with a few challenges, but the good news is that professional help is always available.
One of the most difficult aspects of self-employment is navigating Australia’s taxation system. Meeting tax obligations is a critical part of doing business, but the legislation is complex, and many people are unsure how to properly tax their businesses. In this article we’ll discuss how to tax yourself when self employed, and go over the requirements for each of the primary business structures.
How to Tax Yourself as a Sole Trader
Sole Traderships are the largest category of Australian businesses, accounting for more than 60% of all entities in the country. Working as a sole trader is a simple way to operate a small business without the complexity of a formal company structure. As a sole trader, your business income is reported as part of your individual tax return. When you lodge your tax return, the Australian Taxation Office (ATO) will calculate your tax liability on your behalf, and you can pay any outstanding amount online.
This is a simple system, but it means you need to pay your entire tax obligation as a lump sum at the end of the income year. A better way to meet your tax obligations is to request to start Pay As You Go (PAYG) Instalments with the ATO. This can be done through your myGov account. Once you are registered for PAYG Instalments, you will receive quarterly activity statements from the ATO and can pay your tax obligations in smaller instalments.
How to Tax Yourself in a Partnership
If you operate a business as a partnership, you will need to lodge a partnership tax return. This tax return reports the partnerships’ income and any expenses or deductions you wish to claim. The partnership itself does not pay income tax. Instead, each partner needs to lodge an individual tax return that reports your share of income or loss from the partnership, as well as other income due to the partnership, such as wages, dividends and rental income.
How to Tax Yourself as a Company
If your business makes a substantial amount of money then it’s worth establishing a company structure. Companies with a turnover of less than $50 million benefit from a flat income tax rate of 25%. Paying the company tax rate can dramatically reduce your tax liabilities. Your company is a separate legal entity that must pay tax and make its own tax lodgements. This is done monthly, quarterly or annually when you lodge your Business Activity Statement (BAS). Your BAS allows you to report the following business tax obligations:
- GST
- PAYG Withholding (tax withheld from employee wages)
- PAYG Instalments (tax paid on the company’s income)
- Wine Equalisation Tax
- Luxury Car Tax
- Fringe Benefits Tax
When you lodge your BAS, you will also need to pay your outstanding tax liability for the income period covered by the statement.
At the end of the income year, the company also needs to lodge a tax return. The company’s tax return reports taxable income, offsets, tax credits and PAYG Instalments. This information is then used to calculate the company’s tax liability or tax return. As the owner of the company, you must also lodge an individual tax return. Your tax return should include information about taxable income you received due to the company, such as salary, wages, benefits, dividends and rental income.
Paying Goods and Services Tax (GST)
If your business earns $75,000 or more in a financial year, you are required to register for Goods and Services Tax (GST), regardless of how the business is structured.When you sign up for GST, your business collects a 10% tax on most goods and services on behalf of the ATO. The tax you collect is then paid to the ATO when you lodge your BAS or activity statement.
You can sign up for GST even if your business doesn’t meet the income threshold. Signing up for GST is a good way to boost the credibility of your business. It also allows you to claim GST tax credits on goods and services that are purchased as business expenses, which can offset your total tax liability.
Find out more about claiming GST credits on the ATO website.
Avoiding Tax Disputes When Self Employed
Australia’s taxation system can be incredibly complex. Navigating it alone is a struggle, so it’s always worth investing in professional accountancy services. An accountant can take care of all the hard work and help you meet your tax obligations. Even with the support of an accountant, you may find yourself dealing with the ATO during an ATO tax audit or dispute. This can be a stressful, time-consuming and costly experience.
Wherever possible, it’s best to avoid dealing with the ATO by taking the following actions:
- Work with a professional accountant when lodging your BAS and tax returns
- Double check all tax lodgements to make sure the figures are correct
- Only claim genuine tax deductions and avoid the temptation to inflate deductions
- Keep evidence of all business expenses you wish to claim as deductions
- Sign up for GST if you expect to earn more than $75,000 in any given income year
- Sign up for PAYG Instalments so you can pay your tax obligations in more manageable chunks
If you do find yourself dealing with the ATO then you should contact a professional taxation lawyer immediately. The ATO is flexible about honest mistakes on business tax lodgements, but professional representation will ensure the best outcome possible. Your taxation lawyer will work with you to assess the situation and develop a plan of action. That may include representing you in meetings with the ATO, objecting to ATO decisions, and helping you reach a more manageable agreement regarding outstanding tax liabilities.
Keep Your Business on Track with the Professional Tax Lawyers at FP Lawyers
Meeting tax obligations can be complex, especially if you are self employed. Understanding the relevant legislation, paying tax and protecting your business from ATO scrutiny can seem like a full time job. While you don’t need to stress about honest mistakes, you should contact FP Lawyers immediately if you find yourself dealing with the ATO.
FP Lawyers is a team of experienced taxation lawyers working throughout the Brisbane and Gold Coast region. We support sole traders, partnerships and companies with advice, services and representation during ATO disputes. If you require a tax lawyer Brisbane wide, our team are available to support your business in resolving any ATO matters, including audits, disputes, negotiations and objections.
Contact us for a confidential discussion if you need support in dealing with ATO of if you are needing a business advisor Brisbane wide.
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