Tax basics for small business

by The FindLaw Team

Goods and Services Tax

The goods and services tax, better known as the GST, is a tax on goods and services at the rate of 10%. The GST is a Commonwealth tax, but the proceeds go to the states, replacing the previous untied grants of income tax collected.

GST free items

Although the coverage of the tax is very extensive, some supplies are GST free. These include:

  • medical and health services
  • education courses
  • childcare
  • exports
  • non-commercial supplies from charities
  • bulk water
  • the sale of a business as a going concern
  • passenger transport.

If an item is GST free the supplier gets a credit of tax already paid on it, so that the effective tax rate on its final value is zero.

Financial services

Some financial services are input taxed; that is, there is no GST paid on their supply, but the supplier does not get an input credit for the tax already paid on the services.  Services in this category include shares, loans, the provision of money generally, superannuation funds and life insurance. Legal and accounting services, general insurance and other advisory services are excluded, and GST is payable.

Residential premises

The supply of residential premises, either by sale or rent is input taxed, so that while no GST is payable there is no credit for any tax already paid.

GST and sales tax

Almost every significant business in Australia – over a million entities – is required to register for GST, compared with the less than 100,000 who paid sales tax.  Even non-profit organisations are affected, since they are liable to collect GST where they charge for certain goods and services.  Very small businesses – those with an annual turnover of less than $50,000 – can elect not to register, and  not obtain credit for tax already paid on goods and services supplied to them. (The threshold for non-profit organisations is $100,000.)

Payroll tax

This is a tax levied by state governments and paid by employers on their employees’ remuneration, whether in cash or otherwise. The payroll tax base includes the value of some fringe benefits to employees. An employee for the purposes of the Payroll Tax Act 2007 is broadly an employee by the common law definition.  The rate in NSW is 6%.

Exemptions

Small payrolls

There is an exemption for small employers with payrolls of less than $600,000 a year. There are complicated provisions to prevent larger employers from splitting up their operation into smaller units to take advantage of this exemption. 

A number of bodies are exempted from payroll tax on wages paid, including:

  • religious or public benevolent institutions, for times when the employee is engaged in the religious or public benevolent work of the institution
  • societies or institutions approved by the commissioner as charitable, for wages paid
    for charitable work.

Fringe benefits tax

Fringe benefits tax is covered by the Fringe Benefits Tax Assessment Act 1986 (Cth). It is payable by the employer rather than the employee.  The method of calculating fringe benefits tax was changed in 1994 to what is called the grossing up method, which had drastic consequences for some employers.

Exempt employers

Employers who do not have to pay are:

  • religious institutions, in relation to religious work (s.57)
  • international organisations, embassies and consulates
  • public benevolent institutions and state health authorities, in relation to benefits to employees only (s.57A).

These concessions are subject to certain limits.

Exempt benefits 

Some benefits exempt from fringe benefits tax are:

  • esidential accommodation for live-in residential care workers and their families( s.58)
  • free or discounted transport, if the employer’s business is providing transport and travel is to and from work or on the employer’s scheduled metropolitan services (s.47)
  • recreational and childcare services provided by the employer on the employer’s business premises (and elsewhere in the case of government-funded childcare services) (s.47)
  • private use of business property on an employer’s premises, in or out of working hours
  • the first $1000 worth of ‘in house’ fringe benefits – discounted goods and services of a type normally sold by the employer in the course of business. Note that no taxable fringe benefit arises anyway unless goods are sold to the employee at less than cost or services are sold at a discount greater than 25% of the employer’s usual selling price
  • workers compensation payments and associated benefits
  • relocation costs (travel, temporary accommodation, furniture removal, costs ncurred in purchase and sale of houses)
  • small, occasional, hard to record and value benefits (for example, a bottle of wine at
    Christmas)
  • accommodation and meals for live-in help for disadvantaged and elderly people
  • emergency relief, safety awards (to $200), long service awards (to $500) and meals for domestic employees.

Concessional benefits

These are benefits taxed at less than their market value or cost to the employer:

  • cars, especially if the statutory formula is adopted. This varies according to the vehicle’s annual mileage. In practice, the great majority of employers adopt the statutory formula
  • loans, if the interest rate charged is equal to or greater than the benchmark rate
  • remote area accommodation and holiday travel (50% of the usual value).

Advantages of fringe benefits

A number of benefits remain exempt from fringe benefits tax, and are income-tax free to the employee.  The employer also gets a tax deduction for the cost of the benefit.  Further, some fringe benefits taxable to the employer are taxed at values well below the cost an employee would incur if they had to pay for them personally (for example, cars, loans, remote area housing, discounted goods and services).  These may be attractive benefits, particularly for employees on the maximum rate of income tax.



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