How much tax does a small business pay in Australia?

Tax can be one of the trickiest things to get your head round when starting a new business. But it is very important to understand your tax responsibilities as a small business, as well as budgeting for tax you owe.

In this guide, we’ll give an overview of taxes for small businesses. We’ll cover all the main points you need to know, such as types of tax and exemptions for small business owners.

But remember though, we’re here to provide you with information rather than advice. It’s recommended to consult an experienced tax practitioner for advice on your specific situation.

We’ll also touch on cost-effective ways to manage your finances as a small business. For example, get a Wise Business account and you can make international payments with low fees and the real, mid-market exchange rate. Even better, you can get paid by overseas clients and customers for free.

But more on this later – let’s start with an overview of Australian business taxes.

Business taxes in Australia¹

There are two main taxes businesses in Australia are required to pay. These are:

1. Goods and Services Tax (GST) – this equates to 10% of your taxable good and services, and is added to your prices in order to cover it.

2. Pay as you go (PAYG) – this refers to tax deductions from the wages paid to your employees.

For some small businesses, there may be other taxes to pay on top of these two main categories. For example, if you have a registered company, you may need to pay business income tax. A company is its own legal entity, with different legal responsibilities compared to other business types such as sole traders.

Taxes are paid through business activity statements (BAS), which you’ll need to lodge quarterly. Although in some situations, a BAS can be submitted monthly or annually.

Small business taxes

We’ve covered the main taxes affecting most Australian businesses, but is the situation different for small businesses?

The first difference relates to whether or not your business will register for Goods and Services Tax (GST). Here’s what you need to know²:

• If your business earns (or expects to earn) $75,000 a year or more, it’s mandatory to register for and pay GST.

• Many small business owners earning less than this choose to register for GST anyway. This is because it could give you access to GST credits if you’re eligible – more on this in the next section.

• There’s another reason to register for GST, even if you don’t have to. You may be able to submit your business activity statement (BAS) annually instead of quarterly – which can save some time and effort.

The next thing to know is the rate of tax you’ll pay as a small business.

In Australia, a business is considered small if it has an annual turnover of $10 million or less. If you have a company, you’ll need to pay business income tax. But if your annual turnover is less than $10 million, you’ll pay a reduced rate of 27.5% rather than the full rate of 30%.³

If you’re a sole trader though, you’ll pay tax at the individual income rate, with a tax-free threshold of $18,200⁴. This is because this kind of business structure is taxed as part of your own personal income. You may not need to submit a business activity statement (BAS), as you’ll lodge an individual tax return instead.

Lastly, there’s payroll tax⁵. You can employ people to work for you whether you’re a sole trader or company. If your total wage bill exceeds a certain threshold (this varies depending on your state), you’ll need to pay payroll tax.

Tax exemptions for small businesses

The good news for cash-strapped small businesses is that there are a number of tax exemptions, concessions and deductions available if you earn less than $10 million a year.

You’ll need to check with your local revenue office if you’re eligible for:

• Concessions for income tax, PAYG instalments, fringe benefits tax (FBT), payroll tax and GST⁶.
• The instant business asset write-off – this is a rule which allows you to claim asset purchases (i.e. vehicles, equipment and machinery) up to the value of $150,000 each⁷
• Depreciation of business assets⁸
• Prepaid expenses – tax deductions for expenses paid ahead of time⁹
• GST credits – you may be able to claim credits for GST included in the price you pay for business purchases.¹⁰

Remember that tax can be quite complicated, and your business may not be eligible for any or all of the above. You may even be able to claim other exemptions and deductions not listed here. This is why it’s always worth getting proper tax advice from a professional.

Wise Business

Money is always a concern for small businesses. If your budget is tight (and your tax bill unpleasantly large), you’ll need to make sure every cent is wisely spent.

If your business trades overseas, open a Wise Business account and you’ll get a low-cost way to send and receive money internationally.

Your borderless business account, which you can manage fully online, lets you manage 40+ currencies at once. Receive money from overseas for free, and send to 70 + countries¹¹ for low fees and bank-beating exchange rates. You’ll even get a linked Wise Platinum debit Mastercard to cover all your business spending.

To make it easier to manage your business finances (and your tax obligations), you can integrate your multi-currency account seamlessly with your accounting software. Plus, you can automate payments and connect business tools with a powerful Open API, and get payroll sorted in a few clicks with the Mass Payments tool.

After reading this guide, you should have a better idea of what the tax situation looks like in Australia for small businesses. We’ve covered the main taxes, plus exemptions and concessions for smaller enterprises.

But it’s also a very smart idea to seek advice from a tax specialist, who can give you tailored information based on the exact circumstances of your business. This helps to ensure you meet all your tax obligations, and structure your finances in the best possible way for your business.

Sources used:

Sources checked on 19-October 2020.