Running a successful small business in Australia requires a comprehensive understanding of the various taxes and financial statements that are crucial for the smooth operation of the company.
In this guide, we will provide a detailed explanation of the different taxes that small businesses in Australia are required to pay, as well as the essential financial statements that every entrepreneur should be familiar with. Let’s dive in!
Understanding Small Business Taxes in Australia
- Income Tax
Income tax is the most common type of tax that small business owners in Australia are required to pay. This tax is levied on the net income generated by the business during the financial year. The rate at which income tax is paid depends on the business structure — sole traders and partnerships pay tax based on individual income tax rates, while companies pay a flat rate of 30% on their taxable income.
- Capital Gains Tax (CGT)
Capital Gains Tax is a tax that is payable when a small business disposes of a capital asset, such as property or shares. The gain or loss from the sale of the asset is calculated by subtracting the purchase price from the sale price. If the business makes a profit, it must pay CGT on the gain.
However, there are certain exemptions and concessions available to small businesses, such as the 50% CGT discount for assets held for more than 12 months.
- Payroll Tax
Payroll tax is a state-based tax that is levied on the wages paid by a business to its employees. The tax is payable when the total wages paid by the business exceed a certain threshold, which varies by state. Payroll tax rates also vary between states, ranging from 4.75% to 6.85%.
- Company Tax
Company tax is a flat rate of 30% payable on the taxable income of companies operating in Australia. Small businesses with an aggregated turnover of less than AUD 50 million may qualify for a lower company tax rate of 27.5%. This rate is set to reduce further to 25% by the 2021-22 financial year.
- Goods and Services Tax (GST)
GST is a broad-based tax of 10% on the sale of most goods and services in Australia. Small businesses with an annual turnover of AUD 75,000 or more are required to register for and charge GST on the goods and services they sell. GST-registered businesses can also claim GST credits for the GST included in the price of goods and services they purchase for their business.
Essential Financial Statements for Small Businesses
- Balance Sheet
A balance sheet is a snapshot of a business’s financial position at a specific point in time. It lists the company’s assets, liabilities, and equity, which together provide insight into the overall financial health of the business. Assets include cash, inventory, and property, while liabilities comprise debts and other obligations. Equity represents the owner’s investment in the business.
- Income Statement
An income statement, also known as a profit and loss statement, summarizes a business’s revenues and expenses over a specific period, usually a financial year. It provides a clear picture of the company’s profitability and helps to identify areas where costs can be reduced, or revenue can be increased. The income statement is crucial for tax purposes, as it forms the basis for calculating the taxable income of the business.
- Cash Flow Statement
A cash flow statement tracks the movement of cash in and out of business over a specific period. It is divided into three sections: operating activities, investing activities, and financing activities.
Operating activities include cash received from sales and cash paid for expenses while investing activities involve the purchase and sale of assets. Financing activities cover the issuance and repayment of the debt, as well as any equity transactions.
Final Thoughts
Understanding Australian business taxes and financial statements can be quite a challenge. Learning about the basics can be a good starting point, but it is always best to work with professionals.
If you need help from the best tax accountant in Perth, work with us at Prosperity Accountants. Our expert team works with businesses of all sizes to navigate tax requirements in Australia. Contact us today for more information.
