The first draught of the new tax plan that the government is proposing to implement for small enterprises has been made public. The proposed changes are intended to stimulate more investment and creativity in the economy by offering stronger support to start-ups, expanding research and development operations with an additional $1 billion funding over the course of four years, and introducing measures that will help enterprises take advantage of possibilities in Asia.
It is vital that we concentrate on growing other industries such as technology, which have been identified as development areas in light of the fact that Australia's economy is transitioning away from being primarily dominated by exports of mining products. Because of this, these tax cuts are going to be extremely crucial for our children and grandchildren.
A new website created by the Australian government is aimed at assisting smaller firms in navigating the country's tax system. People who are thinking about beginning their own business or who already have one up and running will find this to be an extremely helpful resource.
The website offers information on a wide variety of subjects, including how to establish a company, what information is required to understand GST and PAYG withholding, how earnings are taxed, and much more. If you are considering launching your own company, then you will find this website to be of tremendous assistance in familiarising yourself with the fundamentals of taxation in Australia.
Small Business And Tax
By analysing how well small business taxpayers in Australia perform with regard to their income tax obligations, we can observe that this population willingly contributes more than $85 billion in income tax; this is almost 88% of the money we anticipate receiving from them.
Our research programme evaluates the effectiveness of taxes in each individual market category. The efficiency of the tax and superannuation systems can more accurately be evaluated with the assistance of this research.
In addition, we incorporate the measurement of the tax gap into our overall study programme. The gap can be thought of as an estimate of the difference between the amount of tax that was collected and the sum that would have been collected if everyone had been in complete compliance with the tax legislation.
We have calculated that the income tax deficit for small businesses for the year 2017–18 will be around 11.5%, which is equal to $11.1 billion.
Our estimate was derived from the findings of a survey that was administered to a selection of small business taxpayers at random; this survey was part of what we refer to as the "random enquiry programme."
The programme that conducts random enquiries enables us to:
- Determine the kind of assistance that companies require to properly file their taxes.
- Develop plans to expand the number of people who voluntarily participate in the tax system.
- We will direct our efforts where they will have the greatest impact on fighting tax evasion and fraud.
- Consider the effectiveness of the current tax system.
Taxpayers Representing Small Businesses
The Australian economy is significantly bolstered by the contributions made by small enterprises, which also play an essential part in the administration of our tax system. Businesses on a smaller scale:
- employ about 500,000 Australians
- 30% or so of the total income tax taken in.
Measuring the performance of small businesses when it comes to paying their income taxes enables us to evaluate how we can better support small business owners and where we should concentrate our efforts to ensure that they pay the correct amount of tax.
In Australia, there are around four million different types of small companies.
From the point of view of the tax code, our country's population of small enterprises is composed of the firms themselves, as well as all of the linked individuals who are obligated to pay tax on the income earned by the businesses. As a result, we refer to the businesses as well as the individuals who are linked with them as "entities."
There are roughly six million different entities that make up the ATO's population of small businesses. These categories make up a large part of this population:
- organisations such as partnerships, corporations, and trusts whose annual revenue does not exceed ten million dollars
- persons who are affiliated with the aforementioned firms and organisations, including beneficiaries of trusts, directors and shareholders of companies, and partners of partnerships
- independent contractors who can make up to $10 million in company profits.
When we are computing the income tax gap, the entities that are subject to an income tax liability are the primary focus of our attention. This pertains to our population of small businesses and includes the following:
- businesses having an annual revenue of up to $10 million
- individuals who are involved in the operation of small enterprises, such as partnerships, trusts, and companies
- independent contractors who can make up to $10 million in company profits.
As a general rule, partnerships and trusts are exempt from paying income tax because the money they make is typically given to persons or other businesses. Despite this, we continue to look into the financial and operational aspects of partnerships and trusts. We make sure that people who are responsible for paying taxes on the income have submitted the correct amounts to the government.
Tax On Business Income
The amount of income tax that your company is required to pay is directly proportional to the amount of income that is considered taxable. It is determined based on your income that is subject to assessment, minus any deductions.
- Assessable income is often the amount of money that your company makes. It comprises all of the gross revenue that you have earned (before taxes) from your regular business activities (such as sales) as well as any additional income that you have earned that is not associated with your regular business activities (such as capital gains). It does not include the Goods and Services Tax (GST) that is payable on sales that you make or any GST credits.
- Deductions are amounts that you are allowed to claim as deductions for costs associated with operating your firm.
Any year in which you operate your business, you are required to file an income tax return. Even if you don't think you'll owe any money in taxes, you still have to turn in your return.
Pay As You Go (PAYG) Instalments
You will be required to make instalment payments towards your income tax liability once the total amount of money you make from your business and investments reaches a certain threshold. The frequency of these payments is typically every three months. This helps you to prevent having to pay a significant amount of additional taxes once you have submitted your tax return.
Concessions On Taxes For Small Businesses
The Australian Taxation Office (ATO) may be able to provide small business tax reductions to organisations that meet the requirements of having an annual revenue of less than $10 million.
On the ATO website, you can find information on the various tax concessions that are offered, as well as eligibility requirements and any related tax adjustments.
The Reduced Corporate Tax Rate
The standard rate of taxation for businesses is 30%, whereas the reduced rate for businesses is 27.5%. If your company is considered a base rate entity beginning with the 2017–2018 tax year, you will be able to take advantage of the lower tax rate.
A corporation is considered a base rate entity if it both:
- has a cumulative sales volume of less than $50 million for the 2018–2019 fiscal year ($25 million for the 2017–2018 fiscal year)
- 80 percent or less of your total assessable income must come from passive base rate entity revenue (such as interest, dividends, or rent, for example).
Over the past few years, both the reduced business tax rate and the eligibility standards have been revised. Visit the website of the ATO to find out more information about the adjustments to the company tax rates.
Pay As You Go (PAYG) Withholding
As an employer, you are required to deduct sums subject to payment as you go (PAYG) withholding from payments made to the following parties:
- your workers
- additional employees, such as independent contractors with whom you have voluntarily entered into agreements
- companies that do not provide their Australian business number (ABN) when asked to do so
Tools For Exercise How Much Tax Will Be Withheld From Your Pay
It is imperative that you determine the appropriate amount of tax to deduct from the wages of your employees. There are helpful tables to assist you with the payment:
- casual workers
- employees receive regular payouts on a weekly, fortnightly, or monthly basis.
There are various tables that can be used to determine the appropriate amount to withhold for the following:
- the Medicare levy
- grants and loans for education and vocational training
- superannuation contributions
Put the amount of your wages into the appropriate tax table for the ATO. After that, it will inform you of the appropriate amount of tax to deduct.
Use the tax withholding calculator instead to determine how much tax should be deducted from payments made to your employees or any other payees.
A Second Pay Period During A Fiscal Year
In most workplaces, a year is divided into either 52 weekly pay periods or 26 fortnightly pay periods. On the other hand, certain years have an additional pay period than others. You may discover at the end of the fiscal year that not enough money was deducted from your paycheck due to the additional compensation.
In certain years, it is a good idea to give your employees the option of withholding additional pay as you go (PAYG) withholding amounts from their salary in order to avoid a possible debt. This can be accomplished by providing them with the pay as you go (PAYG) withholding form.
Improve the Small Business Friendliness of the Tax System
More than 98% of all registered firms in Australia are classified as being small businesses, making up the vast majority of the country's company population. However, it has grown increasingly difficult for the typical small business to remain in compliance with the several tax statutes as time has passed.
The fact that the current tax system in Australia is built on a number of individual pieces of legislation, each of which is long and complex in its own right, and that the subject of income tax is dealt with in approximately 47 separate pieces of legislation indicates that the system as it stands is confusing. Therefore, our recommendations consist of straightforward reforms that, in addition to assisting in the post-COVID-19 economic recovery effort, would be of significant advantage to owners and operators of small businesses.
Recommendation 1: In order to better promote the economic recovery of businesses, the Fringe Benefits Tax (FBT) should not be applied to small company entities, and all fringe benefits purchased from small business suppliers should be exempted from the tax.
Recommendation 2: Reform the FBT regime so that all defined "work" benefits are exempt from taxation and all "choice" benefits (such as a car used for personal purposes or other private benefits) are taxed as "income" in the hands of employees with simple and straightforward valuation rules. This would eliminate the need for double taxation.
Recommendation 3: Make the $150,000 cap for the Instant Asset Tax Write Off permanent, and restrict the concession to just those assets acquired through Australian-registered businesses.
Recommendation 4:The ATO is responsible for collecting and disbursing a wide variety of employee withholding duties, such as contributions to retirement funds and child support payments. This might be expanded to incorporate other recurring payments like membership dues to employee unions.
Recommendation 1
Remove FBT However, these are rather minor revisions that fiddle at the edges of a system and do not go far enough. We acknowledge the improvements to FBT that were announced in the Federal Budget for 2020-21; however, we find that these amendments do not go far enough.
Following the advice that FBT should not be payable by a small business that was included in our 2020 COVID Recovery Plan, we urge that FBT be eliminated from transactions that are carried out with a small business supplier.
As stated in the Recovery Plan, a growing number of benefits, such as memberships to gyms, on-site cafes, restaurants, and refreshment bars, as well as child care, are being provided on-site by large businesses. Since these benefits constitute a direct expense, the provision of these perks by a small business would result in the payment of FBT.
This disparity is helped to be alleviated somewhat by the first portion of this recommendation. In addition, in order to stimulate business-to-business relations with the small business sector, my office suggests that any transactions that are conducted with a small business supplier should be exempt from FBT.
With the growing availability of regtech, it is possible to determine whether or not a supplier is a small business; with the now accessible searchable register of small businesses – the Small Business Lookup Tool, which was implemented as part of the Payment Times Reporting Framework – there should be a minimal increase in the administrative burden associated with determining whether or not a transaction has been conducted with a small business.
Because of the exemption on transactions with a small firm, there will be a greater allure to conducting business with this industry. We are aware that the FBT brings in a total of approximately $3.9 billion per financial year, and we are also aware that this figure has been declining over the course of the past three years and is expected to continue decreasing over the course of the next two years.
In the first part of our recommendation, we propose that small businesses be given the opportunity to compete on an equal footing with large businesses. In the second part of our recommendation, we propose that small businesses be made an attractive proposition for general business-to-business engagement. Both of these ideas, in our opinion, will lead to an increase in economic activity, and we believe that any shortfall should be made up for by other areas of the government's revenue generation.
Recommendation 2
Improve the way that FBT is handled currently. A comprehensive evaluation of the FBT system has garnered popular support, not the least of which is due to the fact that its rate has been maintained at the same level as the highest marginal personal income tax rate. The FBT regime has been criticised for being over-engineered and needlessly complicated on multiple occasions.
We are aware that the goal of the policy is to create a level playing field between cash salary and non-cash benefits provided by employers. However, we believe that the current system could be improved by making the valuation rules simpler and allowing individuals to self-assess the exemption for otherwise deductible expenses.
Recommendation 3
Put an end to the temporary status of the Instant Asset Write-Off. The Instant Asset Write-Off (IAWO) should have its present ceiling of $150,000 maintained as a permanent deduction. What should be a straightforward incentive for small businesses to invest in plant and equipment has been made more complicated due to the frequent changes that have been made to the thresholds and the uncertainty over whether the instant asset tax write-off will apply in any given year. This information is noted in our COVID Recovery Plan. Recent standards of $20,000 and $30,000 are insufficiently high for primary farmers and manufacturers respectively.
While we applaud the temporary increases to the IAWO (for small enterprises that choose the simplified depreciation regime) and the temporary full expensing of qualifying new depreciating assets until the end of the 2021–22 fiscal year, we suggest that at the conclusion of both periods, the IAWO be made permanent at the level of $150,000 and that threshold be routinely reviewed to guarantee its relevance.
Further, in order to guarantee that economic activity connected with the IAWO will result in increased benefits for Australian businesses, our group suggests that the IAWO should only be made available in situations in which the asset in question has been purchased from an organisation that is registered in Australia. Should companies be able to make direct purchases from overseas manufacturers or suppliers, there will be a missed chance for Australian companies to build in further economic gain. If this occurs, the opportunity will be lost.
Recommendation 4
ATO to lessen the administrative load imposed on employers working for small businesses. The recommendation that is contained in our Recovery Plan serves as a foundation for this one. In addition to being responsible for negotiating the intricate personal income tax system, owners of small businesses are also expected to act as collection agents for both the government and superannuation funds.
When a new worker is hired, the owner of a small business has the following responsibilities: Determine the person's correct position as either an independent contractor or an employee; within that status, determine whether the individual will be employed full-time, part-time, or in a casual capacity. The next step is to identify the appropriate award that will serve as the basis for determining the individual's compensation and entitlements. Last but not least, you must determine the appropriate amount of PAYGW tax to deduct from the employee's gross pay and then send that amount to the ATO.
Find out whether or not the employee is qualified to receive Superannuation Guarantee (SG) contributions (noting that this may vary from pay run to pay run). For the time being, ensure that you are in compliance with the Choice of Fund guidelines and enrol as an employer in any number of funds that your employees can nominate or register through the Small Business Superannuation Clearing House.
These rules are going to alter once more in July of 2021, and companies are going to be required to identify a new worker's stapled fund. The next step is to determine the required SG contribution, which might change depending on factors like as hours worked, entitlements, leave, and so on. It is imperative that the SG contributions be paid in accordance with a predetermined schedule; this is typically done on a quarterly basis; however, there are situations in which it must be paid on a monthly basis, along with child support and supplementary superannuation contributions.
The owners of small businesses do not receive any compensation for the administrative burdens they face, and if their companies are found to have made mistakes, those owners are the ones who would be held personally liable for any debts that were incurred as a result. In addition, government agencies invested a significant amount of resources in analysing, auditing, and recouping outstanding employee benefits and entitlements.
Sometimes, small firms spend the sums that have been withheld for working capital, which results in their falling into arrears. This is a situation that is regrettable but understandable, particularly during times of economic difficulty. Similar to the previous point, the difficulty of maintaining compliance with awards, pay rates, and the laws around SG entitlement causes some small businesses to struggle to do so on an ongoing basis.
The current system for the administration of taxes keeps these sub-accounts for taxable entities updated and organised: The Income Tax Account (ITA) is the system that manages the processing of the results of a yearly income tax return as well as any payments or refunds that have been made. Integrated Client Account (ICA) is responsible for processing activity statement responsibilities such as Pay-As-You-Go (PAYGW), Goods and Services Tax (GST), and instalments of income tax (Instalment).
We propose that the ATO establish a third sub-account within its systems, which they should call an Employer-Account (EA). This account would be linked to Single Touch Payroll and would receive a single sum from employers after each pay run (STP).
The ATO would then retain and account for the PAYGW tax, distribute the cash to the 13 respective superannuation funds (SG and supplementary contributions), and other withholdings (child support), based on the amounts that were recorded through STP.
This solution is a straightforward and technologically effective way to simplify the process of ensuring that small businesses meet all of their tax compliance obligations on the first try. In addition, in conjunction with an easier to understand award system Last but not least, with remit and STP, employers of small businesses would be freed from burdensome and unpaid administrative responsibilities.