The most tax effective business structure for you must be considered carefully, as each business is individual. Professional advice should be sought from your accountant or business advisor. By paying the right amount of tax you can avoid late payment penalties.
In Australia taxes are applied at both the Federal and State level. In New South Wales the Office of State Revenue (OSR) administers State taxes and the Australian Taxation Office (ATO) administers Federal taxes that apply to all Australian States.

Federal Taxes

The Federal Government levies a range of taxes. Taxes affecting small businesses include Goods and Services Tax (GST) and Income Tax.

The ATO administers Federal taxes and further information can be obtained on its website.

Income tax is collected in two ways:

• through the pay as you go (PAYG) system, and
• through annual income tax returns.

In business you are probably required to pay quarterly instalments to provide for your income tax as you earn your income. These quarterly PAYG instalments are credited against your annual income tax liability.

For most businesses, the income tax year runs from 1 July to 30 June.

Self Assessment

Australia’s income tax system works on a self assessment principle but you must show records to support your information. Income tax is levied on the taxable income of a person or business using the formula:

assessable income LESS allowable deductions = taxable income [ the amount you pay tax on]

Assessable income

Most money you receive in running your business is assessable income however the following exceptions include:

• Loans received
• Money the owner contributes
• GST you collect, or GST credits

Allowable deductions

Most expenses incurred in carrying on your business are deductible and you can generally:

• claim an immediate deduction for expenses that are necessary for the everyday running of your business, and
• claim a deduction over a number of years (decline in value) for other expenses, for example, capital assets such as machinery, tools or computers

But not all payments are allowable deductions, including:

• loans made by the business
• money drawn or borrowed from the business by the owner
• private or domestic expenses, and
• GST (if you can claim it as a credit on your activity statement).

If you trade or barter for goods or services other than cash, you must include in your assessable income the value of goods or services you get in exchange.

Taxable income

Once you have worked out your assessable income and allowable deductions, you can calculate your taxable income. This is the amount your income tax return will show as the net taxable income from your business. It is the amount you pay tax on.
Sole traders and partners should not confuse amounts drawn from the business to live on (‘drawings’) with taxable income. You have to pay tax on the taxable income of the business, regardless of the amount of drawings you make over the year.

Goods and Services Tax (GST)

GST is a transaction-based tax imposed on the consumption of goods and services. GST is levied on the sale of most goods, services and other business activities at the rate of 10%. GST is levied at all stages of production, from manufacturing to distribution to retail.
Businesses must register for GST to be entitled to charge GST and claim input tax credits. Businesses with an annual turnover exceeding $50,000 must register for GST. Businesses that do not exceed the registration threshold may voluntarily register for GST.

While every registered business will charge GST, the final consumer ultimately bears the burden of the consumption tax. This occurs by the operation of an input tax credit system. A registered business will charge GST on its sales, however, any GST paid for purchases of the business will be credited back to the business. The business will, therefore, only pay the difference between the GST collected from sales and the GST paid on purchases.

Registered businesses are required to lodge a Business Activity Statement, either monthly or quarterly, to report the amount of GST collected on sales as well as to claim their input tax credits. The difference between these two amounts is either payable by or refunded to the business.

For more information on GST refer to www.ato.gov.au

Income Tax

As an individual sole trader, partner or company you are required to register for an income tax file number.

Individual sole traders do not need a separate tax file number and should use their individual tax file number. On the other hand, companies and partnerships need to register a separate tax file number.

A partnership needs its own tax file number for lodging its annual income tax return, though tax is levied on the partners and not the partnership.

Pay As You Go (PAYG) Tax

The PAYG system applies to the process of paying tax on the business' income and in deducting employees' income tax obligations from their pay. You are obliged to make PAYG instalment payments for your business during the year as instalments for your business' end of year income tax liability.

The amount of instalment varies from business to business and is often dependent on your previous year's income. Instalments may be made on a monthly, quarterly or annual basis. Certain conditions apply for electing a quarterly or annual basis for payment.
Businesses employing people also need to account for PAYG withholding payments. This is similar to the previous PAYE system for withholding taxes from employees' wages and salaries as a credit for the employees' income tax liability. You must register for PAYG withholding to receive a Withholding Payer Number.

PAYG instalments and withholding are reported and paid by completing your Business Activity Statement (BAS), if you are registered for GST, otherwise on your Instalment Activity Statement (IAS).

NSW State Taxes

State taxation includes payroll tax, land tax and stamp duties. For more detailed information about NSW State taxes refer to the NSW Office of State Revenue website.

Payroll Tax

In New South Wales payroll tax is levied on wages (and other employment-related payments) paid by an employer or a group of related businesses for services performed wholly within the State.

You are liable for payroll tax if the total wages paid in Australia during the payroll tax year exceeds $600,000. If you are liable for payroll tax, the tax is levied at the rate of 6% on wages and other employee-related expenses above the $600,000 threshold paid during the financial year.

There are further special rules on who is liable for payroll tax for related businesses as well as employment agents. Contact the NSW Office of State Revenue.

Land Tax

In New South Wales land tax is levied on the ownership of land. Your annual land tax liability is calculated on all the taxable land you own at midnight on 31 December the previous year. Exempt land such as land used for principal residence or primary production is excluded from this calculation.

A tax-free threshold of $330,000 has been reintroduced.

The following rates of land tax apply for the 2006 land tax year:

• Land valued up to $330,000 - no tax payable.
• Land valued at more than $330,000 - marginal rate of 1.7% (plus $100) on the unimproved value of land.

In calculating land tax there are different rules that apply depending on which entity owns the land. It is advisable to contact the NSW Office of State Revenue for more information.

The land tax threshold will be indexed annually to estimated average increases in land values for commercial, industrial and residential properties.

Stamp Duties

Stamp duty is payable on certain transactions that may relate to the operation of your business. In general, you must pay stamp duty within three months of the transaction in which the duty arose.

Stamp duty is payable, at different rates, on the following transactions:

• Acquisition of a business, including plant and equipment, goodwill and intellectual property.
• Acquisition of business premises.
• Lease of business premises.
• Mortgages.
• Hire of goods.

For more information on stamp duty view the NSW Office of State Revenue website.

Other Taxes

Fringe Benefits Tax

Fringe Benefits Tax is a tax payable by employers for benefits (as defined by the Act) paid to an employee or the employee’s associate. Examples of benefits include a car, car parking, low interest loan and payments of private expenses. Salary, wages and superannuation are specifically excluded.

Fringe Benefits Tax is payable by employers and is assessed on the value of the fringe benefits payable to the employee or their associates.

Capital gains tax

Capital gains tax (CGT) is the tax you pay on any capital gain you make that you include in your annual income tax return. There is no separate tax on capital gains – rather, it is a component of your income tax. You are taxed on your net capital gain at your marginal tax rate.

Your net capital gain is the difference between your total capital gains for the year and your total capital losses (from your business and other assets), less any relevant CGT discount or concessions. Any net capital gain you make for an income year must be included in your assessable income.

Excise duty is a tax levied on alcohol, tobacco and petroleum products manufactured in Australia. Refer to the ATO website.