Tax Liabilities

What Is Mine?

How do I ensure that with all the work I do, I am going to benefit from all my work? Clarity of purpose is your most important ally. It is important that you clarify what you want your business to do for you. Ask yourself some questions:

  • Why did I go into my business?
  • What do I mean by success in my business?
  • What do I want to get out of my business?
  • Am I looking towards long term goals?
  • What are they?
  • Is my focus short term?
  • What is it?
  • What is my Business?
  • What does success mean to me?
  • What do I need to know to make my business successful?

The answers you have to these questions will have a bearing on what you need to know and how you will conduct your business.

Taxation is a major player in your business, therefore it is essential for you to be aware of the ramifications of decisions you make, or fail to make, regarding taxation. There are many areas of taxation that have an impact on your bottom line, we will cover some of these:

  • GST
  • Business Tax
  • FBT
  • CGT

GST: Goods & Services Tax

When you supply a good or a service you are required to add 10% to the cost, that is then sent to the ATO when you do your Business Activity Statement (BAS).

You receive a GST deduction on a service or goods supplied to you.

Simply

  • You supply a good or service for which you earn your income.
  • You purchase goods or services which you need to run your business
  • If you earned more than you spent you will pay the ATO.
  • If you spent more than you earned then the ATO will refund the difference.
  • There are some things that you will not pay GST on.

Note: You need to get professional help to ensure that you are compliant with the taxation laws.

Your aim is to make a profit, so it’s good if you are the one paying the ATO.
If you’re continually getting refunds you need to have a look at what you’re doing.

Business Tax

All Income minus All Deductible Expenses equals your Operating Profit

  • If you are operating through a company structure then your company pays tax on that profit.
  • If you operate through a partnership structure then the profit is distributed between the partners.
  • If you operate as a sole trader then the profit is added to any other taxable income you may have.

Note: These are not all the available structures however they are the ones usually used by small business owners.

The business structure you choose will play a part in the overall $$ return to you from your business.

What is Income?

  • Income derived from business activity
  • Interest from investments
  • All income derived within your business

What is an expense?

  • Cost of sales items
  • Costs of running your business
  • Costs of training pertinent to your business
  • Costs of Superannuation

It is important to realize that drawings you take form part of the profit.

Types of Business Taxes

FBT: Fringe Benefit Tax

In broad terms, a fringe benefit is a ‘payment’ to an employee, but in a different form to salary or wages.

According to the fringe benefits tax (FBT) legislation, a fringe benefit is a benefit provided in respect of employment. The terms benefit and fringe benefit have broad meanings for FBT purposes.

A benefit includes any right, privilege, service or facility.

A fringe benefit is a benefit provided in respect of employment. This effectively means a benefit provided to somebody because they are an employee. The ‘employee’ may even be a former or future.

Motor vehicle is one on the most common forms of fringe benefit that employees receive. The taxable value of a car fringe benefit may be calculated by one of two methods: the statutory formula method oroperating cost method.

CGT: Capital Gains Tax

Capital gains tax is the tax you pay on any capital gain you make. There is no separate tax on capital gains – rather, it is a component of your income tax. You are taxed on your net gain at your marginal tax rate.

Your net capital gain is the difference between your total capital gains for the year and your total capital losses (from your business and other assets), less any relevant CGT discount or concessions. Any net capital gain you make for an income year must be included in your assessable income.

CGT events

A capital gain or capital loss is made when certain events or transactions (called CGT events) happen. Most CGT events involve a CGT asset. Some CGT events, such as the disposal of a CGT asset, happen often and affect many different taxpayers. Other CGT events are rare and affect only a few taxpayers, for example, events concerned directly with capital receipts and not involving a CGT asset.

CGT assets

The most common CGT assets are land and buildings, shares in a company or units in a unit trust.

Other CGT assets include contractual rights, options, foreign currency, leases, licences and goodwill.

Capital gains and losses

In general, you make a capital gain if you receive an amount from a CGT event (such as the disposal of a CGT asset) that is more than your total costs associated with that event. You make a capital loss if you receive an amount from a CGT event that is less than the total costs associated with that event.

In some cases you are taken to have received the market value of the CGT asset even if you received a different amount or nothing at all, for example, when you give an asset away.

You can use a capital loss only to reduce a capital gain – not to reduce other income. You can generally carry forward any unused capital losses to a later income year and apply them against capital gains in that year.

Generally, you can disregard any capital gain or loss made on an asset you acquired before 20 September 1985.

There are special rules that apply to depreciating assets. A depreciating asset is an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used. Plant and equipment that you use in your business are examples of depreciating assets. You make a capital gain or capital loss from a depreciating asset only to the extent you have used the depreciating asset for a non-taxable purpose (for example, for private purposes).

Small business CGT concessions

The following four CGT concessions are available only for small business.

  • The small business 15-year exemption provides a total exemption for a capital gain on a CGT asset if you have continuously owned the asset for at least 15 years and the relevant individual is 55 or over and retiring, or is permanently incapacitated.
  • The small business 50% active asset reduction provides a 50% reduction of a capital gain.
  • The small business retirement exemption provides an exemption for capital gains up to a lifetime limit of $500,000. If the recipient is under 55, the amount must be paid into a superannuation (or similar) fund.
  • The small business rollover provides a deferral of a capital gain if a replacement asset is acquired. However, you may make a capital gain equal to the deferred gain if the replacement asset is disposed of or its use changes in particular ways. In this case the deferred capital gain is in addition to any capital gain made on disposal of the replacement asset.
  • To be eligible for any of the concessions, you must first satisfy several basic conditions.