How Much Tax Does a Small Business Pay in Australia?

Posted by Mary Milorrie Campos

Jan 6, 2021 10:00:00 AM

Business tax is intricate, tricky, and time-consuming. Its several types — and tons of requirements — can overwhelm the senses of even the experienced professionals. But just how much tax does a small business pay in Australia?

how much tax does a small business pay in Australia

 

Key Business Taxes in Australia for 2020-2021

According to the Australian Trade and Investment Commission (Austrade), the key business taxes in the country are:

  1. Company (income) tax
  2. Capital gains tax (CGT)
  3. Goods and services tax (GST)
  4. Payroll tax

Australian states, territories, and local governments also follow certain regulations and impose taxes relevant to specific business activities. Examples of these are the fringe benefits tax (FBT) and land tax. To know which ones apply to your business, it is best to check with your local regulator.

It is also good to note that all small businesses registered as a company are required to pay the company tax. There’s no exception; you pay tax for every single dollar your company earns.

Sole traders, on the other hand, follow the individual tax rate. If you’re a sole trader, you can proceed to the latter part of this article to know your specific tax obligations in running a business.

 

RELATED: Corporate Tax Laws to Check Before Starting Your Business in Australia

 

How Much Tax Does a Small Business Pay in Australia?

The total amount of tax you need to pay depends on several factors: the types of taxes your business needs to fulfill, your gross and passive income, the applicable concessions to your business, and other factors that may be unique to your business or state.

The company tax rates in Australia for the income year 2020-2021 are 26% and 30%. The same rates apply to the capital gains tax. Meanwhile, the goods and services tax follows a flat rate of 10% that is normally added to the base price of your products or services. The payroll tax rate, on the other hand, depends on your region and the total wages you pay each month. If your total wages do not exceed a certain threshold, you don’t have to pay the payroll tax.

Read on to know which taxes apply to your business and how you can lower the amount you need to pay.

 

Company Tax

Company tax, or income tax, is a tax imposed on all registered businesses in Australia.

Both resident and non-resident companies, corporate unit trusts, and public trading trusts pay company tax at a rate provided by the Australian government.

There are two types of company tax rate, the full company tax rate and the lower company tax rate.

  • The full company tax rate is 30%. Companies subject to this are the ones who are not eligible for the lower company tax rate.
  • Meanwhile, the lower company tax rate is 26% for the income year 2020-2021. This rate will drop to 25% in the 2021-2022 income year, as stated by the Australian Taxation Office on their website.

So how do you know if you’re qualified for the lower company tax rate or not?

Following the updated regulation, your business needs to be a base rate entity to avail of the 26% rate. Your business is considered as a base rate entity if it falls under these two provisions:

  • Your aggregated turnover or assessable income for the entire income year is less than the aggregated turnover threshold. For 2020-2021 and future years, the threshold is $50 million.
  • Your passive income should be less than 80% of your assessable income.

Aside from the lower tax rate, your small business may also be eligible for income tax concessions which can help you reduce your taxable income. To know the list of available concessions, and if you can apply for one, visit this page.

 

Read next: 5 Reasons Why it’s Easier to Plan your Taxes with Cloud Accounting

 

Capital Gains Tax

Capital Gains Tax (CGT) is the tax you need to settle if you made a profit from selling an asset. It falls your company’s assessable income and follows the same rates used in computing the company tax.

In most cases, you can determine your capital gain by subtracting the initial cost of your CGT asset from the amount you get after selling it.

For example, if you buy a $50,000 worth of shares from another entity and you’re able to sell it for $100,000, your taxable capital gain is $50,000.

There are two methods available to work out your capital gains. You can use any of the two to lower the amount of your capital gains — and ultimately, your taxes.

There is also the so-called CGT discount method. However, it is only available to individuals and eligible life insurance companies.

Another way to lower your CGT tax is by applying for these small business CGT concessions

 

Goods and Services Tax

Goods and Services Tax (GST) is a 10% tax added on consumer goods and services in Australia. This means that consumers are the ones who shoulder the cost.

You should register your business with GST if it falls to any of the following:

  • Your business has more than $75,000 GST turnover
  • Your non-profit organisation has more than $150,000 GST turnover
  • Your business provides taxi, limousine, or ride-sourcing services
  • You have plans to claim fuel tax credits for your business.

Failure to do so can lead to costly consequences. The government may require you to pay the total GST due on all sales you’ve made starting on the day you’re mandated to register. Moreover, you may also need to pay penalties and interest.

Meanwhile, your small business may be eligible for GST concessions if your aggregated turnover is less than $10 million.

 

Payroll Tax

Each state or territory follows a certain threshold and tax rate when computing the payroll tax. See the list below to determine if your business is liable or exempted from the payroll tax.

Read next: The Basics Of Paying Payroll Tax

 

Australian Capital Territory (ACT)

  • Annual threshold: $2,000,000
  • Tax rate: 6.85%

Northern Territory (NT)

  • Annual threshold: $1,500,000
  • Tax rate: 5.5%

New South Wales (NSW)

  • Annual threshold: $1.2 million
  • Tax rate: 4.85%

Victoria

  • Annual threshold: $650,000
  • Tax rate: 4.85%
  • The tax rate for regional Victorian employers*: 2.02%

*The state of Victoria will further lower the tax rates for regional Victorian employers:

  • 2021-2022 income year: 1.62%
  • 2022-2023 income year: 1.2125%

Queensland

Tax rates and thresholds:

  • 4.75% for employers who pay $1.3 million to $6.5 million in Australian taxable wages. For regional employers, the tax rate is 3.75%.
  • 4.95%  for employers who pay over $6.5 million in Australian taxable wages. For regional employers, the tax rate is 3.95%

The regional rates are valid until 30 June 2023.

South Australia

Tax rates and thresholds:

  • Variable between 0% to 4.95% for businesses who pay $1.5 to $1.7 million in Australian taxable wages
  • 4.95% for a business that pays more than $1.7 million in Australian taxable wages

Tasmania

Tax rates and thresholds:

  • 4% for businesses who pay $1.25 million to 2 million in Australian taxable wages
  • 6.1% for businesses who  pay more than 2 million in Australian taxable wages

Western Australia

Tax rates and thresholds:

  • 5.5% diminishing for businesses who pay $100 million in Australian taxable wages
  • 6% for businesses who pay $100 million to $1.5 billion in Australian taxable wages
  • 6.5% for businesses who pay more than $1.5 billion in Australian taxable wages

 

Tax for Sole Traders

A sole trader is a person who runs and manages the entire business. Under this arrangement, you can simply follow the individual income rate when filing taxes instead of the company tax rate.

As of the 2019-2020 financial year, sole traders who earn less than $18,200 are free of tax obligations.

The computation for both CGT and GST is the same as the rules applied for companies. You can also apply for small business tax concessions as long as you meet the requirements.

Tax preparation requires a tremendous amount of time, energy, and patience. While doing it yourself may make you believe that you are saving money, its long-term implications can be your worst nightmare. Hiring a professional tax accountant for your small business can make the job easier for you.  Download our Solutions for Startups white paper below and learn how D&V Philippines can address your finance and accounting needs. You can also talk with our financial experts to see the solutions suitable for your business.

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