11 Ways to save tax on business income

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How to save income tax on business

Before you become overly preoccupied with intricate tax structures and planning, you must decide whether you are genuinely operating a business or just engaging in a hobby. 

The number of people selling online full-time has increased over the past ten years. The Australian Taxation Office ATO considers selling a few used items around the house that you no longer use to be merely a "hobby," As a result, the income is not taxable. 

However, the Australian Taxation Office will consider you "in business", and any profits you make will be taxable if you start selling new goods and actively trading in used goods you find along the way.

Be sure to undertake extensive due diligence if you're considering purchasing an established company to verify that you're purchasing only the company's assets and not any surprises. The acquisition of a corporation is rife with unknown possibilities, unrecognized issues, and potential dark secrets.

This article assists you in maintaining control over your tax affairs as your firm progresses through its many stages. The most significant cost a firm will incur is taxes. Your tax situation will vary and expand as your business does. There will be extra tax duties, such as reporting and paying tax and superannuation, as well as how to pay employees and other firms.

The following are the most typical tax registrations required when opening a business:

  • a TFN (sole proprietors don't need one; they can utilize their current TFN)
  • an Australian business number (ABN)
  • the GST
  • PAYG withholding.
11 Ways to save tax on business income

1. Select the suitable business structure

Before you give away half of your money in taxes, you might want to consider your business structure if you are expecting to create a fortune.

The ATO states that the exact structure picked must be suitable for the business owner's unique circumstances and consider future events that are anticipated to occur (such as getting married, having children or admitting new partners).

A company's organizational structure will impact:

  • How much tax must your company pay
  • How other companies interact with you
  • How much you spend on administration
  • How well do you secure your assets?

Small enterprises desperately need assistance but cannot pay for it full-time. Don't just consider getting counsel from outside sources as a cost. Sometimes you have to spend a little more money to surround yourself with a team of competent advisors, including an accountant and a lawyer, to put the company on the path to financial success.

Australian companies most frequently employ the following structures:

Select the suitable business structure

Sole proprietors

The taxation of sole proprietors is identical to that of persons. A company with healthy profits can anticipate paying tax at higher marginal rates. If you operate as a sole proprietor, you have no asset protection; therefore, be wary of "creditors and predators."

Partnerships

Husband-and-wife enterprises and situations where personal services are offered frequently choose partnerships. Although they have a straightforward and economical structure, their most significant drawback is that they don't provide asset protection. Partnerships do not pay taxes on their own.

Instead, each partner pays tax at their marginal tax rate on their portion of the net partnership income.

Companies

The most typical business form for running businesses is a private company, mainly when capital gains are unlikely and where small business capital gains tax incentives will not be applicable. Unlike sole proprietors and partnerships, companies have limited liability, albeit occasionally, directors may need to provide personal guarantees.

Tax Saving Tip for Business:

For businesses close to the $50 million threshold, careful tax preparation is necessary because a mistake might result in $500,000 in additional tax (5%) for those operating with a 20% net profit margin.

Trusts

A family trust is an excellent tool for reducing a business's overall income tax liability. A trust can provide flexibility for estate planning objectives and assistance with managing assets and liabilities.

Family trusts are exempt from direct taxation. Instead, income tax is applied to the trust's beneficiaries' portion of the trust's net income. Additionally, beneficiaries can benefit fully from any franking credits and small business capital gains tax breaks. 

To provide some level of security for the business owners' assets against potential claims made against the entity, companies frequently serve as the corporate trustee of trusts.

Consider creating a corporate beneficiary to reduce the total amount of tax owed if a family trust used by a business generates a sizable revenue. All the beneficiaries are subject to marginal tax rates higher than the company tax rate.

2. Tax responsibilities 

Meeting your tax requirements is one of the most crucial duties in running a business, even though most business owners will tell you they detest doing it. They consist of obtaining and disclosing GST, submitting business activity statements (BAS), and filing an annual tax return.

Tax responsibilities

GST

If your company provides taxi service or has a gross business income (GST turnover) of $75,000 or more, you must:

  • Sign up for GST
  • Add 10% GST to the cost of a taxable supply.
  • Send consumers tax invoices that include your ABN.
  • To the ATO, report and remit GST charged on the taxable supplies in the monthly and quarterly instalments.

All other businesses must utilize the accrual method, except for small businesses.

From the GST-inclusive price, GST is calculated as follows:

Tax Saving Tip for Business:

Consider switching your company's GST reporting cycle to monthly reporting if cash flow is a problem so you may obtain your legal GST refunds more quickly.

Activity declarations

Businesses must submit an activity statement to report and pay for various taxes, including GST, PAYG installments, PAYG withholding, and fringe benefits tax (FBT).

Every GST-registered firm must regularly submit a BAS to the ATO, either monthly, quarterly or annually. GST collected from customers is subtracted from any GST paid on purchases. Your BAS transmits the net sum to the ATO.

Large entities with a $20 million or above annual revenue must pay PAYG income tax installments monthly rather than quarterly.

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3. Record keeping

While keeping company records for tax purposes is required by law, it is also a good practice to keep thorough records to maximize your income tax return claims.

Good record-keeping techniques include:

  • Keep track of all information from your bank account in a cashbook.
  • Maintaining proper records of employment.
  • Preserving all paperwork in a secure location for five years.
  • Meeting tax obligations like:

- PAYG tax withholding

- keeping track of all GST duties

- making superannuation contributions to superannuation funds that adhere to the law.

Here is a quick list of what the ATO requires regarding record keeping.

Documents about employee payments:

  • Payroll records for employees
  • Summary of termination payments to employees
  • Employees receive fringe benefits
  • PAYG payment breakdowns

PAYG withholding data for payments made to businesses:

  • PAYG withholding voluntary agreements
  • Amounts withheld from payments where no ABN was specified.
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4. Deferring tax

Everyone must pay their fair share of taxes, but if there is a good reason to postpone the necessity to a different tax year, you should do so. Any tax delay will improve cash flow because you may have an additional year before you must make a tax payment. Moreover, tax rates can be decreased in upcoming years.

There are two primary methods for postponing your taxable income to the following fiscal year: delaying the derivation of income and bringing forward deductions.

Deferring tax

Delaying payment

You must understand how the ATO will initially evaluate your business income to determine the best approach to defer assessable income to subsequent tax years.

Most small enterprises will be evaluated using a cash basis, in which income is only recognized when cash is received. Since constructive reception is crucial in this situation, reducing revenue by delaying receipts until after July 1 is conceivable.

The accruals basis, which recognizes income as it is earned rather than as it is received, is required for larger enterprises. You may choose to postpone your invoicing until the following tax year if your company runs on an accrual basis.

Increasing deductions

Pay any yearly expenses, such as subscriptions and insurance, due in July by June 30 to save on this year's taxes. As a small business, you can take advantage of the prepayments tax concessions, which entitles you to a deduction for the amount you prepaid if the products or services are fully received within 12 months. '

Bad debts, depreciation on business assets, revaluing your trading stock, and making superannuation contributions before year-end are further deductible items to examine.

You must have spent no money to " incur" a loss or outlay. It will be deductible if you have made a firm commitment or fully submitted yourself to the expense. Because the employer is not firmly committed to the expense, simple provisions like those for annual leave and long service leave are not deductible.

Tax Saving Tip for Business:

Consider purchasing Successor Liability Insurance if you are purchasing an existing company to reduce your exposure to unforeseen liabilities.

5. Trading stock 

Anything you generate, manufacture, acquire, or buy for use in your business—including livestock—is considered trade stock, according to the ATO.

If your trading stock's value at the income year's conclusion is: 

  • More significant than at the beginning of the financial year - the difference is added to your assessable income.
  • Less than at the start of the fiscal year - the difference may be deducted.

Businesses typically conduct an annual stock take to assess the worth of trading stock on hand on June 30, generally as close to the end of the financial year as practicable.

There are just three techniques permitted for valuing your trading stock for tax purposes, regardless of how they are evaluated for accounting purposes:

  • Cost
  • Market selling price
  • Replacement value.

The technique that yields the lowest trading stock value should be used to value stocks. Although these calculations can be complicated, if you have various classes of stock, you can apply a separate basis of valuation for each class as well as for each share of stock.

6. Bad debts

Customers who won't pay for your goods or services are one of the issues you will inevitably face as a business owner. Some clients will challenge the debt, while others lack the financial resources. Then some are just plain jerks and do not intend to pay you.

For tax purposes, most enterprises must report their income on an accrual basis. It means that even if they don't get any money, they must still report all sales as taxable income!

Paying income tax not received can significantly impact cash flow because some obligations to a corporation might be pretty sizable. Fortunately, the ATO permits a deduction for bad debts, but a few requirements must be met.

Similar to obsolete stock, the ATO will only allow your company to deduct income taxes for bad debts if all of the following conditions are met:

  • The debt was in existence.
  • It was physically written off before June 30.
  • It wasn't good according to the terms of the agreement or other reasonable criteria.
  • The debt was originally reported as income in the current or prior fiscal year.

Most business owners are perplexed by bad debt deductions and why there should be no effect on their taxes when they have already paid for the goods and services in question. They neglect to consider the fact that they are already entitled to deductions for the expenditures (including rent, labor, and materials) incurred in the creation of the items.

Sadly, having to write off bad debts is just a fact of doing business yourself. Nevertheless, be sure to act quickly.

You must record the amount received in the year of receipt as assessable revenue if your company lodges a claim for bad debt but the debtor later pays the debt.

7. Home-based companies

A home-based business might be one of the most satisfying ventures you can embark on. Working from home has several advantages, including flexibility, reduced commute time, and additional tax deductions. A bonus is not having to pay any additional rent.

You might be able to deduct the following "running" costs in their entirety:

  • Depreciation of home office furniture, fixtures, and equipment, including computers and desks.
  • house telephone
  • heating, cooling, and lights
  • A computer with an internet connection
  • Stationery
  • Furniture and fittings repairs for your home office.

The ATO is very picky when it comes to the reimbursement of "occupancy" costs for home offices. If you run a business out of your house, you are permitted to deduct a portion of your mortgage or rent depending on the actual square footage you utilize for the enterprise.

If your home is your place of business, the ATO will consider several considerations. The location must meet the following criteria:

  • Be easily identified as a place of business.
  • Be challenging to utilize for personal purposes
  • Be used nearly entirely for business purposes
  • Be frequently visited by clients or customers.

8. Sharing economy

The sharing economy has exploded over the past five years, with companies like Uber, GoCatch, Airbnb, Stayz, Spacer, Camplify, Car Next Door, HomeKey, and Airtasker rising to prominence not just in Australia but also around the world.

Not only are we gaining confidence in these services as users, but more and more people are also providing these services and making a small weekly profit in addition to their regular pay. 

What matters most is that you have tax obligations if you offer your goods or services through any of these apps or websites. All payments you make through the sharing economy are subject to income tax after deductions for related costs.

You will be seen as running a business, necessitating an ABN, and you must report the income in your tax return for business income.

You might need to register for Goods and Services Tax and submit quarterly business activity statements if your annual revenue exceeds $75,000. While there is no GST on residential rent, all ride-sourcing businesses must have an ABN and be registered for GST regardless of turnover.

When you eventually sell the parking space you rented or the home it was attached to, you might be required to pay CGT. Today's small income could result in a vast, unforeseen tax obligation.

If you have expenses for both company and personal usage, you can only deduct the amount of the expense that is relevant to your business. You can claim income tax deductions related to the income you receive. A sharing economy facilitator may deduct any fees or commissions they levy.

Tax Saving Tip for Business:

If you anticipate a profit from your business and are worried about receiving a tax bill, you can prepay your taxes now rather than waiting to receive a large one at the end of the year. To make it simpler for you to manage your taxes, you can make this optional advance payment as often as you'd like.

9. Hiring people

So you started your own business as the first step. You need to hire someone to help you handle the increase because business has gone insane, and sales are over the roof.

It is usually exciting when a small business begins to expand, and you need to hire personnel for the first time. Still, you also need to be aware of the responsibilities of being an employer. Penalties for non-compliance may include fines and legal action.

Hiring people

Pay and working conditions

According to the Fair Work Act of 2009, which mandates that you maintain a basic standard of pay, conditions, and benefits for your employees, all issues relating to wages and employment conditions in the private sector must comply. All companies and employees must abide by ten national employment standards.

Employment records

Each employee must get a pay slip, and you must maintain complete and accurate time and pay records for at least seven years.

Tax Saving Tip for Business:

If the ATO overpaid your company for JobKeeper payments, contact the ATO to report the problem by calling them at (13 28 66) or sending an email to [email protected]

Suppose there is evidence of deliberate actions to access JobKeeper payments incorrectly. In that case, the ATO may further impose administrative penalties in addition to applying the general interest charge to any sums that need to be repaid.

Entitlements to leave and holidays

All employees must be paid on public holidays, except contract workers and casual employees, who are only compensated for their work hours. Annual, sick, and long-service leave should be considered additional paid leave.

You should also consider the following employment-related issues -  

  • Anti-discrimination laws
  • Equal opportunity laws Occupational health and safety regulations
  • Public liability insurance
  • Workers' compensation.

10. Personal services income

Suppose you're a contractor or consultant who operates through a partnership, firm, or trust. In that case, you must comply with the personal services income (PSI) requirements or risk being personally liable for tax on the income. Some contractor business expenses may not be deductible.

If most of your income comes from labor rather than materials or tools, you must follow PSI regulations.

PSI regulations are waived if you pass the outcomes test, determining if you got income after obtaining a specified result.

To pass the outcomes test, you must meet all three conditions for three quarters.

  • You are paid to obtain a result
  • You offer tools and equipment for the job.
  • You must fix work flaws.

If you fail the outcomes test, you must apply the 80/20 rule, which states you can't produce more than 80% of your money from one client and meet one of the following conditions:

  • You've got money from unconnected clients (unrelated clients test)
  • You hired or contracted people to help (employment test)
  • Distinct business premises (business premises test).

You can also request an exemption from the ATO, although it's usually only granted in extreme cases.

11. Crowdfunding

As more of us spend more time in front of a computer and on social media, crowdfunding has exploded. There are tax repercussions for crowdfunding agreements with commercial or businesslike activity and a profit motive, such as raising money for your pet's operation.

If you're the promoter in a crowdfunding arrangement, the monies you get or earn may constitute assessable income, especially under a donation-based or reward-based arrangement.

  • Employ crowdfunding
  • Make a profit through trade or scheme
  • Receive money or property in business.

If you borrow money, it's not taxable, but the interest you pay may be deductible, depending on how you spend it. The contributor's interest income is taxed.

If your firm gets disaster assistance payments from a crowdfunding platform and utilizes that money for business expenses, such as buying livestock feed, the net tax effect is $0. The ATO will not assess if the monies are utilized for personal emergency food and clothing.

Crowdfunded funds used to buy business assets are taxable. Suppose the purchases are not eligible during the interim, full expensing rules or below the instant asset write-off criteria. In that case, there may be a timing gap between the revenue received, and the depreciation claim lodged, resulting in an undesirable tax deficit.

Suppose a crowdfunding arrangement is structured as an equity-based fundraising model, where contributors donate money to the promoter in exchange for an equity interest. In that case, the funds will become part of the share capital and will not be accessible in the promoter's hands.

Future dividends given to donors will be taxable, and selling firm shares will have CGT ramifications. Any capital return reduces the initial investment's cost base.

By taking advantage of these above strategies and tips, you can save money on taxes and keep more of your hard-earned profits. When it comes to taxes, it’s always best to consult with a professional to ensure that you're taking advantage of all the opportunities available to minimize your tax bill. 

FAQs

What records need to be kept for the ATO for a small business?

There are a few key records that the ATO requires small businesses to keep on file. These include:
- The name of your business and its ABN (Australian Business Number)
- Your business structure and who owns it
- Income and expenses, including cash flow statements
- GST returns, if applicable
- Asset purchases and sales
- Payroll records, including amounts paid and withheld
- Bank statements and other financial records

Is home business taxable in Australia?

Yes, home businesses are taxable in Australia. The tax rules are different for businesses run from home than for other types of businesses, but the end result is the same - you need to pay tax on your income.

There are a few different things to consider when it comes to taxes and your home business. First, you need to work out whether your business is actually classed as a home business. There are certain criteria that must be met in order for a business to be considered a home business, and if your business doesn't meet those criteria then you'll be taxed as a regular small business.

How beneficial is sharing economy?

The sharing economy has definitely been beneficial for a lot of people. For consumers, it generally means lower prices and more convenience. Sharing economy businesses also tend to be pretty good for the environment, since they often involve sharing resources that would otherwise go to waste.

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