Small businesses are everywhere. This means that for every cafe, mechanic, fast food franchise, pet franchise or tradie that you pass, each represents an instance where someone has decided to start their own business instead of working for someone else.
At the 2016 census, 14% of all employed persons in Australia identified as business owners – a figure which is surely likely to rise further in coming years. However, getting into business for yourself can be daunting. In addition to growing and shaping an enterprise you have to be across all of the governmental and corporate requirements, as well as the lingo.
If you’re thinking about joining the small business fraternity, here are 6 terms you should familiarise yourself with to get started on the right foot.
#1 – Financial Year
Known as the busiest time of year for accounting services in Australia, is the financial year. Unlike the calendar year that runs from January 1 through to December 31, financial year in Australia typically starts on July 1st and ends June 30th. Some people may also refer to a financial year as a fiscal year, often abbreviated as FY.
#2 – Sole Trader
A sole trader is someone who owns and runs their own business, and it’s one of 4 ways you can structure a business (sole trader, partnership, company, trust). One of the unique traits of this business structure is that the individual trading as a sole trader is responsible for the business, including any debts and losses.
It is one of the most easy business structures to set up and operate, allowing hobbies to become a real operating business. For example, when a graduate decides to offer dissertation writing services, they also start a small business. Interesting fact, essay and paper writing services are on the rise now, as more and more students seek help with their studies.
Unlike most partnerships or companies, being a sole trader gives you full control of your assets and business decisions. You will also be personally liable to pay tax on all of the income that comes from your business and this is done by lodging tax returns using your individual tax file number (TFN).
As a sole trader, paying yourself superannuation is optional, although recommended as a way to save for your retirement. However, it’s important to consider the opportunity cost of putting money away towards super versus using it to grow your business. If you’re a sole trader and have employees, then you are still obligated to pay their superannuation in accordance with the legislation.
Many sole traders will grow out of this business structure and will change to a company. Doing this has reporting, legal and tax obligations and it is best that you seek professional advice. Generally speaking, there are more costs associated with creating a company compared to operating as a sole trader. The primary differences are found on the business.gov.au website.
#3 – Goods and Services Tax (GST)
Goods and Services Tax (GST) is a 10% tax on many goods, services and other items sold or consumed in Australia. Most products that you buy as a consumer within Australia have a component of GST incorporated into the purchase price.
Registering for GST is optional when your business has a GST turnover of $75,000 or less, and any business in Australia can register for GST. This can be done when you first register your business (sole trader, company, partnership, trust) or at a later time.
To calculate your GST turnover, find your total business income and subtract the following:
- GST included in sales to your customers
- Sales that aren’t for payment and aren’t taxable
- Sales not connected with an enterprise you run
- Input-taxed sales you make
- Sales not connected with Australia.
#3 – Instant asset write-off
Perhaps one of the more confusing concepts, but a handy one nonetheless, is the instant asset write-off. This allows small businesses to claim deductions for new or second-hand assets immediately, without needing to depreciate the asset purchase over multiple years. Assets may include vehicles, tools and office equipment.
For a better understanding on how you can utilise this for your business, in particular with regards to who can access it, refer to ‘How instant asset write-offs could help Aussie business get back on track’ by Westpac. But remember, before making any large purchases, speak to your accountant or tax professional.
#4 – Business activity statement (BAS)
Truth be told, as a business, you are collecting money for the ATO every day. A Business Activity Statement, commonly referred to as a BAS, or simply ‘activity statement’ is used to report and pay your GST, PAYG instalments, PAYG withholding tax, and other taxes.
All businesses registered for GST in Australia must lodge one, even if you have no income to report – this is called a nil activity statement. If you are not registered for GST you are not required to lodge a BAS. You can lodge a BAS monthly, quarterly, or annually.
#5 – Tax offset
Put simply, a tax offset is a way to pay less tax. Specific to running a business, a tax offset will directly reduce the amount of tax payable on your taxable income at the end of a financial year. It can also be called a tax rebate. Click here to access the ATO’s small business income tax calculator.
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