Is Business Tax on Revenue or Profit?

May 20, 2024
minutes to read
Alice Surdy
Table of Contents

Running a small business in Australia can be a rewarding experience, but it also comes with its fair share of financial responsibilities. One of the key aspects of managing your business finances is understanding how taxes work. The Australian Taxation Office (ATO) keeps a close watch on tax compliance, and as a small business owner, it's crucial to have a clear grasp of how your taxes are calculated. One question that frequently arises is whether taxes are based on your revenue or profit. In this blog, we'll delve into this topic and provide the insights you need to navigate the world of small business taxes in Australia.

How Does the ATO Calculate Taxes for Small Businesses? 

Before we address the revenue versus profit question, let's first understand how the ATO calculates taxes for small businesses. The ATO plays a significant role in collecting taxes from businesses of all sizes, and several factors influence the process. 

  • Income Sources: Your business's income is the primary determinant of your tax liability. This includes money earned from various sources such as sales, services, investments, etc. The ATO considers all income sources when calculating your taxes. 
  • Deductible Expenses: On the flip side of income, the ATO also considers your deductible expenses. These are the costs of running your business: rent, employee salaries, office supplies, and utilities. Deductible expenses help reduce your taxable income. 
  • Business Structure: Your business's legal structure is crucial in tax calculations. Common business structures in Australia include sole proprietorships, partnerships, companies, and trusts. Each has its tax implications, and the ATO calculates taxes accordingly. 

Is Business Tax on Revenue or Profit? 

Now, let's tackle the central question: Is business tax in Australia based on revenue or profit? To answer this, we need to clarify the difference between these two terms. 

Revenue refers to the total income generated by your business from its operations. It includes all sales, fees, and other income forms before expenses are subtracted. 

Profit, on the other hand, is what remains after you deduct all business expenses from your revenue. It's the money your business earns and the basis for determining your taxable income. 

The ATO uses profit (taxable income) to calculate your business taxes. While revenue is a crucial metric for assessing your business's overall performance, your profit is subject to taxation. 

Revenue-Based Taxes 

While profit is the primary basis for business taxes, it's essential to note that some taxes are directly related to your revenue. One example is the Goods and Services Tax (GST). If your business's annual revenue exceeds a certain threshold (currently $75,000), you must register for GST and collect it from your customers. However, you can also claim GST credits for the GST included in the price of goods and services you purchase for your business. 

Profit-Based Taxes 

For most small businesses in Australia, income tax is primarily based on profit. The taxable income is calculated by subtracting deductible business expenses from your total revenue. The ATO then applies the relevant tax rate to this taxable income to determine your final tax liability. 

The income tax rates for small businesses vary depending on your business structure and income levels. The tax rate for small companies with an aggregated annual turnover of less than $50 million is 25% as of 2023-2024 financial year. For sole traders and partnerships, the individual tax rates apply to your business income. 

How Can You Reduce Business Taxes? 

Now that we've established that business taxes in Australia are primarily based on profit let's explore how you can legally and ethically reduce your tax liability. 

  1. Deductible Expenses: Maximising your deductible expenses is one of the most effective ways to lower your taxable income. Keep thorough records of all business-related expenses, including receipts and invoices, to ensure you claim all eligible deductions. 
  2. Tax Offsets and Concessions: The Australian government offers various tax offsets and concessions to small businesses. These can include small business income tax concessions, capital gains tax concessions, and research and development (R&D) tax incentives. Familiarise yourself with these opportunities and take advantage of them where applicable. 
  3. Proper Record-Keeping: Accurate record-keeping is essential for claiming deductions and complying with tax regulations. Consider using accounting software like Thriday to streamline this process and ensure you don't miss any deductible expenses. 
  4. Tax Planning: Consult with a tax professional or use advanced accounting software like Thriday. They can help you structure your business and finances to minimise your tax liability while staying within legal boundaries. 

Why Thriday is Perfect for Small Businesses 

Speaking of accounting software, let's delve into why Thriday is an ideal choice for small businesses in Australia. Thriday is an automated accounting and bookkeeping solution designed to simplify the financial management of small businesses. Here's why it's worth considering: 

  1. Automated Accounting: Thriday automates many aspects of accounting, from invoicing to expense tracking. This saves you time and reduces the risk of manual errors. 
  2. Accurate Tax Calculations: Thriday ensures that your tax calculations are correct, reducing the chances of costly mistakes in your tax returns. 
  3. BAS & Tax Lodgment: Thriday can help you stay on top of your tax lodgment deadlines, ensuring you submit your returns to the ATO on time and avoid penalties. 
  4. User-Friendly Interface: You don't need to be a finance expert to use Thriday. Its user-friendly interface makes it accessible to small business owners with varying financial expertise. 
  5. Cost-Effective: Thriday offers cost-effective pricing plans tailored to the needs of small businesses, making it an affordable choice for startups and growing enterprises. 
Thriday's all-in-one platform is powerful yet simple

When are Business Taxes Due? 

Understanding the deadlines for tax lodgments is crucial to avoid penalties. In Australia, business tax deadlines can vary based on your business structure and reporting method. As a general guideline: 

  • Sole Trader Tax Returns: Individual tax returns are typically due by 31 October each year. 
  • Business Activity Statements (BAS): The frequency of BAS lodgments (monthly or quarterly) depends on your business's turnover. For most small businesses, quarterly BAS lodgments are the norm. The due date is usually 28 days after the end of the quarter. 
  • Company Tax Returns: Companies typically have seven months from the end of their income year to lodge their tax returns. For example, if your income year ends on 30 June, your tax return is due by February of the following year. 

It's essential to mark these dates on your calendar and consider using Thriday to help you meet your tax lodgment deadlines efficiently. 

Business Tax FAQs 

Let's address some common questions that small business owners often have about business taxes in Australia: 

1. Can I write off all my expenses? 

No, not all expenses are tax-deductible. Business expenses must be directly related to your business activities and should be incurred to generate income. Some costs may also have specific rules or limits on deductibility. Always consult with a tax professional or refer to ATO guidelines for clarification. 

2. What tax rate applies to my business? 

The tax rate that applies to your business depends on your business structure and income levels. Companies are taxed at 25%. Sole traders and partnerships are taxed at individual tax rates. 

3. How often should I report and pay taxes? 

The reporting frequency for taxes, such as BAS, varies depending on your business's turnover and registration with the ATO. Most small businesses submit BAS quarterly, but some with higher turnovers may report monthly. Consult the ATO or your accountant to determine your reporting schedule. 

4. What happens if I make an error on my tax return? 

If you make an error on your tax return, correcting it as soon as possible is essential. The ATO provides processes for amending your returns. You may be subject to penalties and interest charges if the error results in an underpayment. 

It's crucial to seek professional advice or use accounting software like Thriday to minimise the chances of errors on your tax returns. 

Key Takeaways 

Understanding the difference between revenue and profit is critical in Australia's intricate world of small business taxes. While revenue is a vital indicator of your business's success, profit is the basis for calculating your taxes. To navigate this landscape effectively, leverage strategies like maximising deductible expenses, exploring tax concessions, and utilising accounting software such as Thriday. 

By staying informed, planning strategically, and utilising tools designed for small businesses, you can reduce your business tax liability while ensuring compliance with ATO regulations. Remember, managing your taxes wisely is not just about saving money; it's about securing the financial health of your business for years to come.  

Ready to simplify your small business accounting and tax management? Explore the benefits of Thriday, your trusted partner in automated accounting. Join Thriday for free today and take control of your financial future.

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.

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