How much tax will your small business pay?

Whilst the tax-free threshold for individuals in Australia is $18,200 for the 2022/23 financial year there is no tax-free threshold for companies. Those entities in many cases will be obligated to pay 30% tax on every dollar it earns.

However, some smaller companies can pay a lower tax rate. To qualify for the lower rate, a company has to meet certain requirements about how much money it makes.

The types of businesses and organizations that have to pay company tax are:

• Companies
• Unit trusts that are set up for businesses
• Trading trusts where people trade shares in the trust.

Base rate entity company tax rate

For the 2017–18 income year and onwards, you need to be a base rate entity, rather than a small business entity to be eligible for the lower tax rate. Small companies, known as ‘base rate entities’, pay a lower tax rate of 25% to help them grow their business, as long as most of their income comes from actively conducting business operations rather than passive investments. The limits are checked each year.

To be a base rate entity, a company must meet two conditions:

• Its total revenue for the year must be less than $50 million.
• No more than 80% of its income can come from passive sources. Passive income includes things like dividends, rent, interest, capital gains from selling investments.

The $50 million limit will go up each year. The aggregated turnover threshold is $25 million for the 2017–18 income year and $50 million from the 2018–19 income year.

Pro Tax Tip: Only base rate entities for that specific year matter - not revenue from previous years.

Company Tax Returns

If you run a business as a company (rather than as a sole trader or partnership), you need to file a tax return for the company each year with the tax office.

The tax return shows:

• How much money the company earned (its income)
• Any expenses it can deduct from its income
• How much tax the company owes based on its income after deductions

Since a company is legally separate from its owners, the company itself has to file its own tax return and pay taxes on the profits it made.

Even if you are the owner or employee of the company, you still need to file your own personal tax return as well. On your personal return, you would report any income you earned from the company as your salary, dividends etc.

Pro Tax Tip: As a company you need to lodge an annual tax return for the business, and you also still need to lodge a personal tax return as the individual.

Capital Gains Tax

A capital gain or loss is basically the profit or loss you make when you sell an asset that you own, like a stock, parcel of property, or other investment. To calculate it, you take the amount you sold the asset for and subtract the amount it originally cost you to buy or acquire it.

If you owned the asset for over a year before selling it, then you may be able to reduce your capital gain or increase your capital loss using some special tax rules.

There are also some special tax breaks called "CGT concessions" for small businesses. If you sell an active small business asset that you've owned for over 15 years, you may pay no capital gains tax at all on up to $1 million of the gain. This helps small business owners when they eventually sell their business.

Although a sole trader or partnership can reduce their capital gain tax by using the discount method, the indexation method or the 4 CGT concessions available for small business, companies usually can’t use the discount method.

Taxes and Superannuation

The type of business activities you conduct will determine what taxes and superannuation contributions you need to pay and report to the ATO.

Goods and services tax (GST) is a tax on most goods and services sold in Australia. You need to register for GST if your business makes over $75,000 in sales per year (or $150,000 for a non-profit). You also need to register if you provide taxi or ride-sharing services, or want to claim fuel tax credits, regardless of your sales.

You may need to pay income tax on your business profits through regular instalments to the ATO, called pay as you go (PAYG) instalments.

If you have employees, you are responsible for withholding amounts from their pay for income tax. You must send these withheld amounts, called PAYG withholding, to the ATO. You may also incur state based payroll tax obligations. Payroll tax is a state and territory tax on the wages you pay as an employer. Each state and territory government has its own payroll tax rules that you’ll need to comply with.

You also need to make superannuation contributions for eligible employees and report these to the ATO. Superannuation helps employees save for retirement.

If your employees receive non-cash benefits like a company car, you may need to pay fringe benefits tax on these.

Operating as a company provides limited liability, easier expansion potential, and more options for tax planning compared to being a sole trader where your personal assets and liability are directly tied to the business.

Scott Bailey, Senior Director and Head of Tax Accounting at ITP Accounting Professionals

Scott’s core beliefs of honesty, integrity and transparency in business and tax affairs underline his day-to-day business philosophy as a senior director of ITP Accounting Professionals. Relaying accurate and up to date information to Franchisors, individuals and small business clients, Scott reduces tax obligations and increases profit.  Scott also interprets new and updated tax laws, and regulations to write the ITP tax course to help individuals become responsible and successful tax professionals.