How much tax does a business pay in Australia?
Setting up business in Australia comes with a whole new set of taxes. Being aware of these taxes up front will not only help you budget but also plan which is the most cost-effective set up that suits your business, now and in the future.
The Australian taxation system is set by the Federal Government, administered and collected by the Australian Tax Office (ATO). There are also a few taxes set at a state or territory level.
How much tax does a business in Australia pay?
When you register your Australian business, federal taxes will apply.
These are the numerous taxes that a business should be aware of –
The main tax that an Australian resident company is subject to is called company tax.
The rate is set by the Federal Government. The current company tax rate is 27.5% of profits for a base rate entity – companies with an aggregated turnover less that $50 million for the 2018-2019- and 2019-2020-income year and 26% for 2020–21 income year. For businesses with a greater turnover the company tax rate is 30%.
A non-resident company is taxed on its Australian source income at the same rate as a resident company. Taxable income and the tax rate may vary under limited circumstances, such as industry or business structure.
The amount of company tax is calculated at year end company returns. If an Australian company made a profit and company tax was paid the previous year, company tax instalments (calculated by the ATO) for the following tax year, are payable every quarter.
It is important to note that the company tax rate or the annual turnover will be falling over the next couple of years. This is in a bid to make Australia an attractive place to set up business as well as be more competitive with countries who have lower company tax rates.
Future year company tax rates
The lower company tax rate applies to base rate entities with an aggregated turnover less than $50 million from the 2018–19 income year. The rate will then reduce to 25% by the 2021–22 income year.
Progressive changes to the company tax rate
Goods and Services Tax (GST)
The Goods and Services Tax (GST) is a broad-based tax of 10% on the cost of most goods, services and other items sold or consumed in Australia.
For consumer products and services, the 10% GST is included in the charge for goods and services.
For most business to business transactions, the cost for products and services is shown as ex GST. The business must show the GST amount on their tax invoice as a separate entry as well as their Australian Business Number.
Businesses and other organisations registered for GST can also claim credits for the GST included in the price of goods and services they buy for their business.
For most business, the GST collected on sales and paid on purchases is recorded on their quarterly Business Activity Statement.
There are other product and service particular taxes payable such as luxury car tax on cars or the wine equalisation tax on imported wines – talk to your Abdera accountant for more details on these specific taxes.
Paying GST on imported goods
GST is payable on all goods that are imported into Australia, regardless of their value. The Department of Home Affairs collects GST on taxable importations. The GST payable is 10% of the value of the taxable importation.
It is payable at the Australian border directly to the Department of Home Affairs, before the goods are released into your possession.
The value of taxable importation is calculated as the sum of:
- the customs value of the goods in Australian dollars
- any customs duty payable
- the amount paid or payable to transport the goods to their place of consignment in Australia
- the insurance cost for that transport
If your business will be importing goods into Australia, read our blogs below, for more detail –
PAYG Withholding Tax
Your business in Australia will have Pay As You Go (PAYG) withholding obligations if any of the following apply:
- You have employees – when you make salary and wages payments to employees and some contractors, you need to withhold an amount and send it to the Australian Taxation Office at regular intervals, either monthly or quarterly. This is called Pay As You Go (PAYG) withholding.
- You have other workers, such as contractors, and you enter into voluntary agreements to withhold amounts from your payments to them. More information can be found here.
- You make payments to businesses that don’t quote their Australian Business Number (ABN), your business will generally need to withhold 47% from payments made to them.
Fringe Benefits Tax (FBT)
Fringe Benefits Tax (FBT) is a tax payable by employers to the Australian Taxation Office, for any benefits paid to an employee (or an employee’s associate such as a family member) in the place of salary or wages.
These payments can be a way to attract quality employees to your business, however, there are some tax obligations that come with them.
FBT is separate to income tax and is calculated on the taxable value of the fringe benefits provided.
Some examples of the fringe benefits that companies can provide include –
- Motor vehicles and car parking
- Expense payments – payment of private expenses as part of a salary package e.g. health insurance or private school fees
- Low interest loans
The current FBT tax rate for 2019-2020 is 47% of the value of the benefits paid to an employee. Your business will need to register with the ATO for FBT and report yearly on the total value of fringe benefits provided by the business.
More information on fringe benefits tax can be found here.
State or territory taxes
There are several state and territory taxes which will vary, so you will need to investigate which state taxes your business is obligated to report and pay.
In certain circumstances, when a business meets a set salary threshold, payroll tax is collected by each state and territory government on the total gross wages paid by employers each month.
You must register for Payroll Tax in each state or territory that your staff are located in if your monthly Australia-wide wage bill is above the thresholds set by that state or territory government.
For example, if your head office is in Sydney, and you have a satellite office in South Australia, you will need to check the thresholds for the employees in both NSW and SA to see if your wages and salary payments meet the threshold in each state. If your wages and salaries payments pass the threshold, you will need to pay payroll tax to each state government.
Click here to find out the payroll tax rates and thresholds. If your business intends on hiring a larger workforce, it may be worth investigating the amount of payroll tax – there are differences between the states and territory.
Tax relief to encourage businesses to set up in Australia
Tax treaties, formal bilateral agreements between two jurisdictions may have been agreed to reduce the burden of businesses tax and encourage business in both countries. They have been arranged between Australia and more than 40 jurisdictions across the globe.
A tax treaty is also referred to as a tax convention or double tax agreement (DTA). They prevent double taxation and fiscal evasion, and foster cooperation between Australia and other international tax authorities by enforcing their respective tax laws.
Under some tax treaties, if a person or entity is considered an Australian resident for income tax purposes they may be entitled to a reduction in, or exemption from, withholding tax on certain classes of their foreign source income.
More information on income tax treaties, can be found here.
What you will need to set up your business in Australia
During the process of setting up your business in Australia, you will be required to obtain two identification numbers as part of the process. These are needed to collect and report your tax obligations.
Australian Business Number
An Australian Business Number (ABN) is your unique 11-digit number that identifies your business to the government and business community. This number is required for legal and financial documents such as, collecting GST on behalf of the ATO, setting up a bank account and generally identifying your business.
Tax File Number (TFN)
If you’re operating a business as a partnership, company or trust, you will need to register for a TFN for your business.
You can apply for the ABN and TFN through a registered tax agent, such as Abdera Business Services. We are happy to run through your tax obligations as a new business setting up in Australia or help you with the details and sourcing the documents required to ensure a smooth set up. Call us now on +61 2 8231 6540 or contact us,