Start Your Business On The Right Foot
Updated: Dec 10, 2019
It’s time. You’ve decided to go out on your own and start a business, you’ve got your qualifications and plenty of experience...why not? Starting your own business is an exciting move, but when it comes to your business requirements and obligations it can sometimes feel like you jumped in the deep end. Regular thoughts like ‘Oh my god, what have I done?’ are totally normal.
For an employee, there is a lot going on behind the scenes that you might not have taken notice of. Now that you’re the boss, there are certain tax obligations you might need to meet. Employees and contractors can add another element, especially when it comes to taxation, but we can help you through that process too.
We see it quite often; someone starts their own business or becomes a contractor, they get an ABN and start working! Yet, they forget that they still have tax and compliance. You might be thinking ‘rules schmules’, but seriously we would rather not be the ones delivering bad news and helping you pick up the pieces, but instead get you started on the right foot from the start. We’ve been there, so let’s talk tax and help you decipher the lingo you’ll be hearing from now on.
There’s so much more to starting a business than this two page spread so we would recommend booking an appointment with us so we can look at your specific business needs and requirements.
TFN (Tax File Number) - this might be one you recognise?!
As an employee, you would already have a TFN, if you’ve not had a job before you’ll need to apply for one. If you’re planning to be the sole trader of your business, you can just keep your individual TFN. However, if you’re planning to operate as a partnership, company or trust, you’ll need to register a new TFN for the business.
Decision time! You will need to decide how you want to structure your business, and if it’s not clear from the beginning exactly what you want, then we would recommend chatting with us to discuss the advantages and disadvantages of each structure for your business. Here are the four most common options:
Sole Trader - As an individual, you are the sole person legally responsible for all aspects of your business. Bonus - you can still employ people in your business under this structure.
Company - This is a legal entity that is separate from its shareholders (you and other people). There are different legal obligations when employing people and tax differences you need to understand under this structure - more about this below!
Partnership - This is when 2 or more people or entities are running a business together, but not as a company. For example, two mates who are both carpenters decide to start a business together, wham-bam you’ve got yourself a partnership!
Trust - A trust is an entity that holds property or income for the benefit of others.
ABN (Australian Business Number)
It is possible to run a business without an ABN, however, we would recommend having one. It will be easier in the future for your business to have an ABN from the start, for example, if you register for GST (Goods & Services Tax) you will need an ABN. And, if you don’t have an ABN, any business that makes payment to you is required to withhold 49% of payments, that’s a lot of money you would be missing out on!
Registering for an ABN is free and can be done here.
ACN (Australian Company Number)
If you decide to register your business as a company, you can get an ACN from ASIC (Australian Securities & Investments Commission). You need to apply for an ACN before you get an ABN.
It’s important to understand that compared to other business structures, companies have different legal, financial and record-keeping responsibilities. Please book an appointment with us to know if your business requires company registration and ensure you understand these obligations. If required, we can then help you set it up.
GST (Good & Services Tax) We’ve all heard the term being thrown around but most of us have no idea what it actually is! GST is a broad-based tax of 10% on most goods, services and other items sold or consumed in Australia. More often than not this tax is passed on to the consumer in the cost of the item.
So how do you know you need to register for GST?
When your business is turning over more than $75,000 annually.
If you’re a non-profit organisation which is turning over more than $150,000 .
You provide taxi travel for passengers in exchange for a fare as part of your business.
You’re an overseas business importing services, digital products or goods worth less than $1000AU to Australian consumers and you make over $75,000AU.
It’s important to note that if you’re just starting out, you may think it isn’t necessary for your business to register for GST and it may not be. However, you will need to keep a close eye on your GST turnover for the year, if it happens to exceed the $75,000 you will have 21 days to register for GST. You can be registered for GST before you exceed this threshold.
When you are registered for GST, the invoices you send to customers will need a component that includes GST. This is still necessary if you are turning over less than $75,000 but have decided to register for GST anyway.
PAYG Withholding (Pay as you go)
If you are paying employee’s wages, it is your responsibility to withhold part of their pay for tax purposes (more responsibility...we know). You must register for PAYG Withholding if you withhold any amount of payment for tax purposes, this includes paying employees, directors or businesses that don’t quote their ABN to you. This is then paid on a quarterly basis.
Ugh, another tax thingy! This one probably won’t apply to you straight away, phew! But it’s still information that’s important to know.
If you are paying employee’s wages, you may be liable for payroll tax. It is different for each state and territory and if you are liable you must register in each state or territory that your staff is located. In Tasmania, you are liable for payroll tax if the wages you paid in Australia are greater than $1.25million per annum. You can find different thresholds for each state and territory online.
FBT (Fringe Benefits Tax)
You might think we’re talking about having to pay tax for your new haircut, but we’re not…
As a business you have the opportunity to provide your employees with perks, however, this can attract FBT. Things that may be included are company cars, discounted or free parking, low-interest loans, Christmas parties and payment of private expenses as part of their salary package (you can get away with giving them a bar of sneaky chocolate here and there though!).
When you provide fringe benefits you are obligated to pay tax on these benefits. As soon as you start providing these perks to your employees it is important to register for FBT. If you think you might need to register for FBT, have a chat with us so we can help you with that decision and set it up correctly for you.
Licenses and Permits
Your business may need approval to legally do an activity and it’s important to protect your business and your employees. Licenses and permits are different for each business structure as well as your business activities. Things to consider may be running a business from home and the zoning it requires, how your business may impact the environment, workplace health and safety, importing & exporting, and industry-specific activities. All the different licenses, permits and registrations can be found here.
We’re almost done, hang in there!
When Do I Start Paying Tax?
Unlike being an employee where your tax is deducted from your pay every week, now you have to do it yourself, ugh!! Tax on your business profit isn’t normally calculated and paid until the end of the financial year, but some businesses are required to pay it quarterly depending on what their setup is, it’s best to speak to us so we can work with you to decide when and how to pay your tax. If you are a sole trader or partnership, you will use your own tax return to report this money. We recommend putting money aside every week to pay this at the end of the year.
If you are a company or trust, you use a different type of tax return just for your business and we can help with that. Same goes though, put the money aside throughout the year.
Typically, for a starting point, we would recommend putting aside at least 15% of your profit to cover your tax obligation. However, it is different for every business and setup which is why we would recommend getting in contact with us to book an appointment. We can then discuss the different factors which may affect you and your business and decide on an appropriate percentage to put aside.
Phew… we know it can seem like a lot to take in and maybe a daunting read when you’re thinking about starting a business. But in the end, it will just be like riding a bike and all this information and the terms we use will become a common language. In the meantime, allowing an expert to guide and advise you is important, which is why we recommend seeking help from a professional accountant who will be able to take care of the day to day accounting for your business long term. By professional accountant, we mean US!