What I have noticed in the past 4 years is that business people, and new start-ups especially are very confused about taxes. In particular, how much will they be paying and the biggest downfall, not including those figures in their cashflow and budgets.
The topic of taxes cannot be fit into one simple manual. There is a lot of legislation and finer detail but I would like to explain it so that it may you help you in instantly in very SIMPLE terms.
The 3 Taxes you MUST to get your head around.
GST – Your business will be providing GOODS and SERVICES. Once you have exceeded the threshold you will HAVE to charge 10% GST on top of your Sales. This GST you charge extra IS NOT YOURS. It belongs to the Australian Taxation Office. Yes, you can claim GST offsets from the purchases of goods and services that you buy to run your business, so your Business Activity Statement will claim these. HOWEVER, in my opinion the best approach is to set aside that 10% you have charged in another bank account or at least in your mind. Do not count this is an income or turnover for your business.
PAYG – Withholding. I like to call this WAGES tax, because once you have employees then this is the tax your take out of their GROSS pay. Again, this is not your money. You are withholding this on behalf of the Australian Taxation Office. It is part of the employee’s earnings and you are required to remit it to the ATO. The Wages you pay your employees is a tax deduction. The Gross Wages i.e. the Net Pay you pay them plus the PAYG Withholding will show as an Expense on your Profit & Loss Report. This expense should be used in your cashflow calculations and assist you in determining how much profit you will make.
PAYG – I. Income Tax Payable. It will depend on the structure of your business. You may be a sole trader, a partnership or a Company. The structure changes how the Income Tax is calculated and when it is payable. However, this tax should never be forgotten. Just when you think you have paid all of your taxes this one gets you at the end. What ever your NET PROFIT is, which will be your Gross Income Less all of your Tax-Deductible Expenses then that NET PROFIT will be taxed for Income Tax Purposes. For example, a company makes $500,000 in turnover less Expenses of $300,000. The Net Profit is $200,000. The Company tax rate (for this exercise) is 30%. You will need to pay income tax of $60,000 for the year.
These taxes are reported to the Australian Taxation Office in your Business Activity Statements either quarterly or monthly. You are required to pay them as they are lodged. Not budgeting or including them in your outgoing cash flows is a mistake that can take a long time to recover from. Spending that money on personal items is a common occurrence and then the debt falls due with nowhere to source the funds from.
Taxes, don’t forget about them. When you start a business make sure you factor them in.
By Rosemarie Horan