One of the most common questions in relation to tax minimisation is that I get asked from small business owners and contractors are whether I think they are paying too much tax when they report their quarterly business activity statements (BAS) to the ATO. There are generally three primary areas that need to be considered to assess whether your business is paying too much tax or not:
- Goods & Services Tax (GST) – 10% value-added tax levied on most goods and services sold in Australia
- PAYG Withholding – As an employer, you are required to withhold tax from your employees to help them meet their end-of-year tax liabilities
- PAYG Income Tax – Tax on your operating profits
A lot of the time when I find businesses that are over-paying tax can be pinpointed to two main fundamental causes:
- Incorrect reporting by the business owner or accountant
- The business activity has shifted significantly compared to previous years
Rectifying the two situations above can significantly help with your tax minimisation strategy that otherwise would have gone to the taxman! Let’s knock each one off to see where potential savings can be made:
1. Tax Minimisation on GST
Are you paying GST on an accrual or a cash basis? On a cash basis, GST is generally paid when you have received payment into your bank account. However, on an accruals basis, you are paying GST when you are invoicing for your goods or services. Depending on whether your payment terms are 30 days, 60 days or more, you are potentially paying tax even before receiving payment for your goods or service. For the majority of businesses, being paid on a cash basis remains the better of the two options for cash flow and tax minimisation purposes.
Example: A graphics designer has agreed to engage with a client to offer their services for $110,000 based on a 60-day payment term. The graphics designer is potentially facing paying $10,000 in GST prior to even receiving full payment for the $110,000. That’s $10,000 less in cash that could be potentially used on business needs if you are having cash flow issues!
2. Tax Minimisation on PAYG Withholding
Take a good look at your business profits. If your business is struggling to generate a profit, then considerations must be made about the wages and salaries that are being paid in your business to reduce tax liability with PAYG Withholding. Despite the fact that your employee wages and salaries are very unlikely to change, one particular salary that can be flexible is your director’s salary. As a business owner, should you really be paying yourself that $100,000 to $200,000 salary and paying the resulting tax for this? Reducing your salary or wage can significantly minimise your tax liability.
3. Tax Minimisation on PAYG Income Tax
Generally speaking, a company’s profit is taxed between 27.5% to 30% of its profits. The key to understanding where tax minimisation can be made is in assessing whether your business is generating a similar amount of profit the previous year. The ATO looks at last year’s tax as an indication of what your PAYG income tax liability may be and slightly increases this to factor in inflation. If your business profits are suffering, then it’s a worthwhile to consider reporting the reduction in business profits to the ATO to save on what would have been, a much larger tax bill!
It’s important to note that these are all things that you can investigate as a business owner yourself to improve your tax minimisation strategy. These three key components of tax liability within your business need to be assessed to consider whether you think you may be paying too much tax. As the saying goes, there are two things you can’t escape in life – death or taxes! So, our only other option is to reduce the level of tax we pay. If all of this still confuses you or you still aren’t sure whether your business is paying too much tax, Box Advisory Services’ team of dedicated accountants can assist in making an accurate assessment on your business.
Please note that every effort has been made to ensure that information provided in this guide is accurate. You should note however, that the information is intended as a guide only, providing an overview of general information available to contractors and small businesses. This guide is not intended to be an exhaustive source of information and should not be seen to constitute legal or tax advice. You should, where necessary, seek your own advice for any legal or tax issues raised in your business affairs.