How much do you get taxed in Australia?

May 10, 2024
7
minutes to read
by
Jelina Rosin
Table of Contents

Owning a small business is awesome, but tax time can be a real headache. Unlike a regular job where taxes automatically come out of your pay (PAYG or Pay As You Go), business owners need to have enough money set aside at the end of the tax year to pay the bill. 

If you don't save enough, tax time is stressful, and if paying the amount you owe isn't stressful enough, wait until you see the fines and the interest for late payment... 

Sound scary? You're not alone. Lots of small business owners are flying blind throughout the year, asking themselves: 

  • How much tax do I really owe? 
  • Am I saving enough for taxes? 
  • Can I afford this expense?

Don't worry. Thriday is here to help! We'll explain the taxes small businesses may need to pay, how much they might owe, and some tricks to make tax time easy. 

Thriday all-in-one financial management platform for small business
Thriday all-in-one financial management platform for small business

How is business tax different to personal tax? 

The short answer is it depends on your business structure.

Let's break it down:

Sole Traders:

Taxed at individual income tax rates, with a tax-free threshold of $18,200 in 2023-24.

Lodge one tax return under their personal tax file number (TFN) for both personal and business income.

Thriday customer
Thriday customer

Companies:

Subject to a federal company tax rate of 30%, except for 'small or medium business' companies, which pay a reduced rate of 25% if they meet certain criteria.

For more information, check out the tax differences between a sole trader and a company on business.gov.au.

No tax-free threshold, pay tax on every dollar of taxable income.

Lodge one company tax return under the company's TFN.

Partnerships:

The partnership itself does not pay income tax.

Individual partners pay tax on their share of the partnership's income (profits) at their individual income tax rates.

Partners can claim a tax-free threshold and lodge their own individual tax returns.

Trusts:

Trusts are a little more complicated.

"The trustee must lodge an annual trust tax return. Who pays tax on the trust’s income is determined by how the trust income is distributed and to whom it is distributed.

Generally, the beneficiaries will be responsible for paying tax on the trust net income distributed to them.

The trustee is liable to pay tax on any undistributed income and may be liable to pay tax on behalf of certain beneficiaries, like non-residents or minors.

There may be other circumstances where the trustee is responsible for paying tax.

If the trust makes a loss, it cannot be distributed to the beneficiaries, and they cannot claim it as a loss against their income.

However, the trust may be able to carry forward losses and offset them against future income it earns."

https://www.ato.gov.au/businesses-and-organisations/starting-registering-or-closing-a-business/starting-your-own-business/business-structures-key-tax-obligations#Trust 

In summary, sole traders and partners are taxed as individuals, companies pay a flat corporate rate, and trusts have a more complex tax treatment depending on how income is distributed.

Small business tax considerations

As a general rule, it's good practice to keep your business income and expenses separate from your personal income and expenses.

Mixing them causes headaches you just don't need.

Here are some common challenges faced by small business owners (especially challenging if you mix personal and business : 

Unclear deductions: Determining what qualifies as a business expense for tax purposes can be confusing. This can lead to missed deductions and potentially paying more tax than necessary. 

See our guide to what businesses can and can't claim here.

Record-keeping: Keeping track of receipts, invoices, and other financial records throughout the year is essential for tax time. However, it can be a time-consuming task for busy business owners.

Thriday makes this easier than ever before. You can scan, send and save receipts on the go. Send quotes and invoices from your app at any time, from anywhere, with smart settings designed to help you get paid fast.

Tax return mistakes: Filling out tax returns can be tricky, and mistakes can lead to delays or penalties from the ATO. 

Thriday can help simplify tax payments for small businesses through its smart tax management feature. Thriday's system automatically calculates the amount of tax you should have set aside based on your current income and expenses. This ensures you know exactly where you stand. 

Wanna know how Thriday can help you save a HUGE amount of money with its amazing automated accounting feature? Check this out: https://www.thriday.com.au/blog-posts/thridays-automated-accounting-platform-saves-small-businesses-3000-a-year  

Tax Differences Between Sole Trader vs Company  

You need to know the tax implications between sole traders and companies, as it will highly affect your financial decisions. Let's break down the tax differences between being a sole trader and running a company. This will make it easier to pick the option that saves you the most money. 

Sole trader tax in Australia

Your business income is seen as personal income. You'll pay tax at the same rate as an individual and lodge one tax return combining your business profit and personal income. Here's where the individual tax-free threshold (currently $18,200 for the 2019-20 financial year) comes in.  

Think of it as the income you can earn without paying income tax. So, if your total income (business profit + personal income) for the year is below $18,200, you won't owe any income tax in Australia. However, if your income exceeds the threshold, you'll only pay tax above $18,200 according to the individual income tax rates. 

Individual income tax rates and thresholds from 1 July 2024. 

Income of 0 – $18,200 tax is Nil

Income of  $18,201 – $45,000 tax is 19c for each $1 over $18,200

Income $45,001 – $120,000 tax is $5,092 plus 32.5c for each $1 over $45,000

Income $120,001 – $180,000 tax is $29,467 plus 37c for each $1 over $120,000

Income $180,001 and over tax is $51,667 plus 45c for each $1 over $180,000

The above rates do not include the Medicare levy of 2%.

Company tax in Australia

A company is a separate legal entity. It pays tax on its profits at a flat rate (currently 30%). However, smaller companies classified as base rate entities with a turnover under $50 million enjoy a lower rate of 25%.  

Companies have no tax-free threshold, so they pay tax on all their earnings. Companies require separate company tax returns detailing income, deductions, and tax liabilities. Directors/employees still file individual tax returns. 

Wanna know when is the best time to file a tax return? Read this: https://www.thriday.com.au/blog-posts/when-can-i-do-my-tax-return-2024  

How does capital gains tax work for businesses?

You consider Capital Gains Tax (CGT) for business taxes when you sell a business asset for more than you paid for it. This applies to both sole traders and companies, but there are some key differences: 

  • General 50% CGT Discount: This applies to individuals, sole traders, and some trusts that have held the asset for more than 12 months. This halves your capital gain for tax purposes.
  • Small Business CGT Concessions: There are four specific concessions available to eligible small businesses:
    • 15-year Exemption: Assets owned for more than 15 years may be exempt from CGT entirely.
    • 50% Active Asset Reduction: Reduce your capital gain on active business assets (like equipment) by 50% (in addition to the general discount).
    • Retirement Exemption: Up to $500,000 of capital gain from selling a business asset can be exempt if certain conditions are met.
    • Rollover: Defer paying CGT by reinvesting the proceeds from selling an asset into a replacement asset.

How much tax should I set aside as a business owner?

Unlike a job where tax is automatically deducted from your paycheck, business tax is your responsibility as a business owner. This means you must be proactive and set aside money throughout the year to cover your tax bill at the end of the financial year (30 June). 

Failing to save enough can be a real headache. If you come up short at tax time, you may face penalties and interest charges from the ATO. This can significantly impact your business cash flow, leaving you short of money for other business expenses and generally yourself. 

How much should you save for tax?  

This question plagues many, especially new business owners. Every business structure (sole trader, company, partnership, trust, etc.) has different tax implications. 

Thriday takes the guesswork out of tax planning. Here's how it streamlines the process: 

Thriday's integrated bank accounts enable the automation of your bookkeeping and accounting. As money comes into your Thriday accounts, we enrich the transaction data and use AI to apply the category and chart of accounts. 

As you spend money on business expenses you can scan, send and save receipts to Thriday, and we automatically reconcile them so you don't have to spend your Sunday evenings doing it manually.

As part of this process, we calculate your tax in real time so you know how much you should have set aside at any point in time.

You can create up to 10 bank accounts* in Thriday; for most people, one of these accounts is dedicated to tax.

You can even set up automatic allocation rules so that a percentage of your income is deposited into your tax account as soon as you receive it, so you don't even need to think about it.

Saving your receipts and making sure you account for every business expense you can is the best way to minimise your tax.

Thriday automates your bookkeeping and accounting
Thriday automates your bookkeeping and accounting

Wrap Up 

Running a small business is like riding a roller coaster – exciting, fast-paced, and sometimes a little overwhelming. Between chasing leads, managing projects, and keeping customers happy, the last thing you need is another headache. Tax time shouldn't add to the chaos, but keeping track of receipts, figuring out deductions, and estimating your tax bill can feel like a never-ending loop. 

Thirday makes tax-time relax-time!

This guide gave you the lowdown on Aussie business tax, from company tax basics to tax brackets. Now you're prepped! 

But why fight the tax monster alone? Thriday is your secret weapon. It tracks income and expenses, clarifies deductions, and gives real-time tax estimates. 

Thriday = No more receipt piles. No more surprise tax bill. Just smooth sailing! 

DISCLAIMER: Team Thrive Pty Ltd ABN 15 637 676 496 (Thriday) is an authorised representative (No.1297601) of Regional Australia Bank ABN 21 087 650 360 AFSL 241167 (Regional Australia Bank). Regional Australia Bank is the issuer of the transaction account and debit card available through Thriday. Any information provided by Thriday is general in nature and does not take into account your personal situation. You should consider whether Thriday is appropriate for you. Team Thrive No 2 Pty Ltd ABN 26 677 263 606 (Thriday Accounting) is a Registered Tax Agent (No.26262416).

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