When it comes to Business taxes it is a bit of a minefield. We have all kinds of acronyms which don’t help. It’s the fault of the ATO. Okay, maybe we accountants don’t make it easy either, but I’m sticking to blaming the ATO.
We love our acronyms. People think acronyms are used to save time. They aren’t. They are used to make you feel part of a club, and to exclude those who aren’t.
So, in the business world, we have CT, BAS, PAYGW, PAYGI, SGC, FBT, PT, GST, CGT, SBC and fuel credits to name a few. Some of these you will know about. The others? No chance. You haven’t got a clue.
It’s hopeless and useless even to try. And painful. Having piles would be easier. Now you could ask Mrs Alexa or Mrs Google to find out, but most of you will come back more confused than when you started. This is assuming Mrs Alexa understands exactly what you said in the first place. If not, she might give you a few more acronyms to deal with.
But not only do you need to know what the main ones are you also need to know how best to manage them so that when the time comes you not pulling your hair out trying to work out how you are going to pay. You may even have to raid your kids’ piggy banks to make the taxman go away.
One thing is for certain. You will die, and you will pay taxes. And the non-payment of business taxes is the number one cause for businesses going out of business. It makes sense to manage it.
So, what are the main ones?
Income taxes (or corporate taxes if you have a company)
A company pays corporate taxes on its profits.
Individuals receiving a distribution from a trust will pay income tax on profits on the trust. A sole will pay income tax on profits in their business.
Business taxes on income is usually paid quarterly in advance so the tax is spread out.
If a business has just started, taxes will not be paid quarterly. It is paid 9 months after the end of the first tax year the business started. But then quarterly payments also need to be paid so it is possible that your newly formed business must pay two years of taxes in one year. Not an easy thing to do.
Goods and services tax (GST).
You do not know this, but you are an unpaid tax collector.
It gets worse because not only do you work for the ATO for free, if you get the calculations wrong you get fined. Sometimes if you get it badly wrong, you end up in jail.
Now I have petitioned the Government to bring in a Fair Work Award for all of us unpaid tax collectors, but it seems the Government is not interested in paying us for our hard work. If business owners were employees and treated this way all hell would break loose.
Anyway, tax law states any business that had earned, is earning, or otherwise expected to be earning at least $75,000 of GST income annually to register, charge and report GST on all its taxable sales. This means, for example, your charge of $10,000 for a job will need to be billed as $10,000 + GST = $11,000, with the $1,000 portion being collected on behalf of the ATO.
At the same time if you pay $5,000 plus GST ($5,500) you will collect $500 (the GST portion) from the ATO.
This is all done on a BAS (Business Activity Statement) completed and filed either monthly or quarterly.
Employee Withholding tax (PAYGW)
If you employ staff you will pay them a wage.
The ATO want you to collect your employees’ taxes for them (for free). Again, if you get it wrong, you get fined or go to jail.
So, you calculate the taxes, pay the net amount to your employees and then send the employees’ tax to the ATO. This is also done on a monthly or quarterly BAS.
Superannuation currently 10% (Increases to 10.5% from 1 July 2022, and by further 0.5 % each year thereafter until it reaches 12% by 1 July 2025) of your employees’ total earnings must be paid to their nominated superannuation fund account.
Superannuation is paid quarterly by the 28th days after the end of the quarter.
Again, you must do this for free or be damned.
Worker’s compensation insurance is insurance you must pay to the state government for employees. The premium you pay depends how risky your business is. If you are an accountant, the risk is low. If you are into dangerous manufacturing, be prepared to sell your house to pay for the premium.
Basically, if an employee suffers a work injury an insurance claim is made, and the employee receives the money. You get nothing – except an employee who probably cannot come in to work.
Payroll Tax (PT)
I have yet to find anyone who can explain to me with a straight face why this tax exists. There is no logic or reasoning and I have not yet found a single business that thinks is it fair It is an excuse to collect more taxes.
Each state is different, but in QLD if your business pays $1.3M in wages, you must pay 4.75% tax on anything over and above $1.3M
Yes, your thinking is correct. You employ people, which helps the Government and the economy, and they thank you by asking you to pay more taxes.
Payroll taxes are usually paid monthly or quarterly.
There are dates by which most of the above needs to be filed and any taxes paid.
As expected, any late payment or lodgement can result in fines. Interest on late payments is automatic.
Speak to your accountant for your specific lodgement dates and make sure you meet them to avoid fines and interest.
Most businesses that are organised make sure that lodgements are made on time.
However, I often get calls from clients who tell me that they do not have the money to pay the taxman. And this can become a slippery slope.
You see, once a business falls behind making a payment is usually causes more problems going forward. That’s because you must put money aside in the first place for current payments and for old payments. And it tends to add a burden that is hard to keep ahead of.
How do you ensure you have money for the taxman?
Well, my basic rule is that money you collect for GST or PAYGW is not yours. It belongs to the taxman so put it aside immediately. If you don’t, you will spend it.
This is what we advise and do ourselves.
Every week, look at monies received in our bank account. Take the GST and put it in a separate bank account. Every week take the tax deducted from employees and also any Superannuation due and transfer that too.
Every month, once we know what profit we have made for that month we transfer the income tax and put that away too. You do the same for any payroll taxes.
By doing this you achieve two things:
- When the time comes to pay the taxman, you have it without having to empty your kids or your piggy bank.
- Whatever is left in your operating business account is yours for spending. If you find you are running out of money it is because:
- You have insufficient sales and need to increase sales
- Your expenses are too high considering sales so you must cut back expenses.