Most people are familiar with personal income tax returns and will feel comfortable lodging business tax in the same way while they are getting started as a sole trader. However, once a company grows the business tax obligations change, stepping up to the more complex company tax.
What is company tax?
Company tax is a particular rate of income tax that is applied to incorporated businesses and standardised by the Australian federal government. The rule for whether you pay this tax as a business owner or not is based on your corporate income in Australia.
Types of company tax
Types of tax will differ from country to country. It’s important to note what falls into separate categories overseas is usually handled as one tax here in Australia. That said there are some different types of tax to be aware of:
● Company tax on profit
Just like Australian residents, companies that reside in Australia are subject to Australian income tax for income earned both locally and internationally. This income includes any capital gains tax earned in a tax year.
GST is a goods and services tax that is applied to many service-based industries and equipment purchases. When applied, businesses add a 10% tax to their prices which is then passed onto the government at tax time.
Smaller businesses and start-ups are not required to pay GST but will need to once corporate turnover exceeds $75,000 annually or $150,000 for not-for-profit agencies.
● Fringe benefits tax
Fringe Benefits Tax (FBT) are separate from corporate income taxes and are applicable when items a business purchases will be solely for staff use and benefit such as:
- Use of a company car
- Staff gym memberships
- Purchased meals and drinks as part of employment (such as during a board meeting)
- Some types of entertainment are in line with well-being and incentives such as movie tickets, massages and hampers.
In these cases, the tax is calculated on the value of the fringe benefit itself and will be assessed separately.
● Payroll tax
Payroll tax will be applied when the amount of company wages to employees exceeds a certain threshold. These thresholds will differ from state to state and be revised periodically. It is self-assessed which requires businesses to track and lodge these amounts accurately to remain compliant.
Who pays company tax?
Any company based in Australia is required to pay company tax on profits earned annually. This doesn’t apply to sole traders who still lodge tax under individual tax returns.
How much is company tax?
There are two tax rates for companies in Australia; the Base Rate Entity which is 25% of your taxable income and the Non-Base Rate Entity Which is 30% of your taxable income. These rates are applied to a company’s profit (not gross revenue).
To calculate taxable income use the formula: Business Income – Business Deductibles = Taxable Income
How to pay company tax
Company tax is assessed using an annual tax return form. This will take all aspects of a business into account and calculate the payments needed to be made to the Australian Taxation Office. You can make periodic payments towards the estimated tax via PAYG.
Paying company tax can be expensive and unexpected if you aren’t informed of current tax laws in your state or territory. Contact a fully certified bookkeeper for a tailor-made solution to ease the stress of tax on your business.