The tax opportunities and implications of small business in Australia

Small business is the engine room of the Australian economy and with the numbers of small businesses growing rapidly, allied to the explosion in the ‘gig’ or ‘sharing’ economy, there are many confronting the challenge of getting a business off the ground for the first time.

So, if you’re a budding entrepreneur, what do you need to know about the tax opportunities and the likely pitfalls that starting a new business brings along and entails?

Save tax and get your business structure right

Choosing the right legal structure for your business is crucial. If you opt to operate as a sole trader, you’re taxed at your normal individual tax rates.

The same applies if you run business through a trust, though there may be opportunities to save tax by distributing profits to beneficiaries with lower incomes and tax rates.

You could also operate your business through a company.

This is a separate legal entity to the people who run it, meaning that the company lodges its own tax return and pays tax on its profits at the company tax rate – currently 26% (provided the company’s aggregate turnover is less than $50m).

The company can then distribute profits to shareholders in franked dividends. These dividends are taxable to the shareholders less a credit for the tax already paid by the company.

Some companies don’t pay out profits to shareholders but retain them for future investment.

In that sense, companies can be regarded as tax shelters since the rate of tax payable by the company (26%) is significantly lower than the higher rates of personal taxation.

That is only part of the story of course; ultimately the cash in the company needs to be extracted and at that point tax will need to be paid, so the tax is deferred rather than avoided.

Get an early tax break

It’s quite common to incur costs relating to a proposed business even before you start trading. Certain costs that you incur can be claimed even before the business starts.

These can be claimed by whoever incurs them, even if the business ends up in a different entity (you incur a cost personally but end up running the business through a company).

Examples of what could be claimable include:

Payments to accountants and lawyers for structuring advice, setting up entities, due diligence and business plans (deductible even if the business doesn’t go ahead)

Government fees and charges relating to setting up an entity (stamp duty)

Avoid tax traps

For small businesses operating through a company, the biggest tax trap is failing to distinguish the company’s money from the individual business owner’s money.

Small businesses owners often fall into the trap of taking money out of their company and failing to account for it properly as either salary or a dividend.

The ATO can deem the amount to be a loan and tax it as an unfranked dividend if the situation isn’t rectified by repaying the outstanding amount or creating a complying loan agreement.

The same treatment can be applied where business owners use company assets at no cost, for instance a company owned property or boat.

There are also many examples of people particularly in the sharing economy like Uber drivers who argue that they are not really in business at all but are undertaking a “hobby”.

They aren’t – they are in business.

The sharing economy, through sites like Uber and Airtasker is causing an increase in the number of small businesses as people move to offer services by sharing economy facilitators.

Other major issues include:

“Cash only” businesses failing to correctly record all turnover

Not realising you need to register for GST (particularly common for taxi drivers and Uber drivers, because they need to register from the first dollar earned)

Not focusing on keeping records (for example, because you are too busy running the business) leading to missed BAS and tax return deadlines, missed tax payments and poorly kept records

Maximise your tax refund. Book an appointment today.  

Mark Chapman is the Chief Executive Officer at H&R BLOCK TAX ACCOUNTANTS. Mark Chapman has over 25 years experience as a tax professional in both the UK and Australia, specialising in tax for individuals and SMEs. He is a fellow of the Institute of Chartered Accountants in England and Wales and CPA Australia and a member of the Chartered Institute of Taxation.