The Australian Tax Office’s raids last month on 170 businesses in Chinatown were against suspected black market businesses. The Tax Office has the resources to check if raided businesses have been paying their share of tax.

Tax Office raids make it harder for dishonest operators to get away with tax evasion – making it fair for everyone. The Tax Office can catch black market practices with computer data matching for specific industries.

The tax system in Australia is based on self-assessment. The system assumes that the taxpayer has the knowledge and honesty to accurately pay tax. A registered tax agent who has relevant qualifications and experience is authorised to complete tax returns on behalf of taxpayers and to make representations to the Tax Office.

Is your business free of these common cash economy practices that expose you to penalties?

  • Does it pay wages as “cash-in-hand” with no pay slips, withholding of tax or superannuation?
  • Does it skim cash transactions?
  • Does it run two sets of books (one legitimate, one under the counter)?
  • Does it sell at a discount for cash and with no receipt?
  • Does it provide false invoices? 

Without compliance with tax law the operators of businesses are exposed to Tax Office raids, penalties, late fees, interest and even potential jail.

So what questions should a micro, small or medium sized business ask to comply with tax law obligations? What should tradies, private operators, beauty salons and cleaners do with their lawyers, accountants and bookkeepers? This article answers seven questions to set out tax law requirements.

Read the questions below and check your business systems or with your bookkeeper. Call for guidance.

1. The first question is – are you carrying on a business?

The question of whether you are carrying on a business or not, is determined by the circumstances of your business.

If you intend to make a profit (even though, in fact, no profit was made), then you will probably be considered as carrying on a business.

The size of an activity is also important. If you have a place (eg shop or restaurant) that will also show that you are carrying on a business.

Apart from the above there may be other circumstances that can determine that you are carrying on a business.

2. Who should file an annual tax return?

Individuals who prepare their own tax returns must lodge them with the Tax Office before 31 October every year. However not every individual needs to lodge a tax return.

Failure to lodge tax returns on time can result in tax law penalties and interest being imposed.

If you are not required to lodge a tax return, you should inform the Tax Office in writing, before the due date for lodgement.

In Australia a business can be conducted using a number of different business structures. These include business as a sole trader, company, trust or partnership. Many individuals prepare and lodge their tax returns directly with the Tax Office.

Sole traders: In Australia it remains common for micro or small businesses to be carried on by owner operators or sole traders. These individuals often have part-time or casual work earning a salary or wage and at the same time run a side business of their own. These individuals are carrying on business as sole traders. In that case their assessable income includes the income from their business.

Companies, trusts and partnerships usually lodge annual tax returns through registered agents. These types of business structure have more issues or documents to deal with.

Companies, partnerships and trusts: An individual who is a shareholder in a company, a partner in a partnership or a beneficiary in a trust must also lodge his or her separate tax return. To illustrate, when a partnership business structure is used, although a tax return is lodged by the partnership, it is the partnership income of each partner that is subject to tax. The partnership income of each partner must be included in an individual partner’s tax return.

3. What is goods and services tax?

In addition to income tax, the other common tax applicable to a business is goods and services tax (“GST”). The current rate of GST is 10%.

GST must be imposed on the sale of goods and services. Therefore an invoice to a customer must include 10% GST. There are some exceptions. GST is a tax that a business must pay to the Tax Office. This collected tax is then payable by the business to the Tax Office after deducting any GST paid by the business on its own expenses.

If the GST paid is more than the GST collected, the Tax Office will refund the difference to the business.

There are two GST accounting methods:  (i) cash and (ii) accrual. The calculation below illustrates calculation of GST by Cash Accounting method.

4. Does your business need to register for GST?

It is compulsory to register for GST if the business turnover for a year (or in any period of a year) is $75,000 or more.

It is important to note that a GST registered business remains liable for GST to the Tax Office even if the business does not include or collect GST from its customers.

Once your business is registered as a GST supplier, a 10% GST must be included and shown in tax invoices.

If the annual turnover is less than $75,000, a business is not required to register nor to pay or to claim GST. Therefore no GST has to be invoiced to customers. This helps to keep prices low. Even if you are not required to register for GST, you may want to register and you can do so. It depends on the nature of your business. For example registration may be attractive if your GST payments on expenses is greater than your GST collected from customers.

5. Does your business need to lodge a Business Activity Statement?

A GST registered business is obliged to lodge Business Activity Statements (“BAS”). For a small and medium sized business (defined here as having annual turnover less than $2 million), the frequency of the BAS to the Tax Office can be either:

  • quarterly with payment annually, or
  • quarterly with payment quarterly.

Businesses with annual turnover over $2 million have to lodge BAS monthly.

The BAS reports on many things – GST received or receivable, GST paid or payable, luxury car tax, wine equalisation tax, PAYG withholdings, PAYG instalment and FBT instalment.

It is essential to lodge BAS or IAS on or before the due dates below.

6. Are Pay As You Go Income Tax instalments needed?

PAYG instalment is a system for paying amounts towards your expected end of year income tax liability.

A non-GST registered business does not require lodging the BAS. However, Instalment Activity Statement (“IAS”) must be lodged quarterly, reporting on Pay As You Go (“PAYG”) instalments.

A non-GST registered business is not eligible to claim GST paid on purchases, but the component can be included as business expenses in financial statements.

7. Which of these dates should you diarise?

Select and put into your calendar key tax dates:

  • GST registration – Sales volume reaches the threshold of $75,000 at given period of a financial year
  • Business Activity Statement (BAS), Individual Activity Statement (IAS) 28th day of the month of October, February, April and July.
  • Bookkeeper times, ideally should be not less than once a week
  • Monthly profit and loss statement preparations to monitor business operations
  • Income tax return – 31 October

At Dilanchian we assist clients with tax advice and referrals to bookkeepers and qualified accountants to deal with business needs, income tax returns and BAS preparation.

The services you require will depend on the stage you’ve reached in your business and your specific circumstances. Call or email us for a conversation on your needs and a free of obligations discussion.

Contact us with any questions or requests.

Noric Dilanchian