Andrew Fernance from RSM has more than 25 years of experience in accounting, tax and business advisory services. Photo: Thomas Lucraft.
Few things strike fear into the heart more than the tax office ringing up and asking to see the paperwork.
And while the annual tax return might be a fairly simple affair for most individuals, as soon as you call yourself a business, it can get very complicated very quickly.
Small business owners are particularly vulnerable, because of an array of changes that come into play as you transition from one employee to many. And there’s no shortage of such owners in the ACT.
At the end of the last financial year, there were 33,918 actively trading businesses in the ACT, up 7.7 per cent on the previous year and the highest number ever recorded.
In a statement at the time, the Canberra Business Chamber attributed most of this to small businesses.
“Almost all of it occurs in the micro and small business sector – those with less than 20 and in many cases no staff,” CEO Graham Catt said.
“Small business is big business, as far as the local economy is concerned, and we want as many of them as possible to grow into bigger businesses.”
Andrew Fernance is a principal with the RSM team here in Canberra, with extensive experience advising local businesses on tax compliance and reporting requirements. He says there are a number of mistakes small business owners make, starting with not managing their cash flow.
“If you’re starting from a small base and growing your overheads and staff numbers, you have to manage all those extra costs, because there will always be a delay before you as the company is paid,” he says.
“Quite often, businesses get caught out and left short on cash.”
Local small businesses make up the bulk of the ACT’s economy according to the 2022 ABS statistics. Photo: Tim Mossholder.
The Australian Taxation Office (ATO) defines a small business as a sole trader, partnership, company or trust with a turnover of less than $10 million per year.
Andrew says that’s the technical definition – realistically, the threshold is lower.
“Practically, it’s businesses that turn over less than $5 million.”
Since 2019, all employers automatically report all the numbers to the ATO every time they make a payment to an employee through the Federal Government’s Single Touch Payroll (STP) initiative.
But once you’re paying out more than $1 million across your employees every year, the ATO requires employers to withhold a portion of income tax from their employees’ pay each cycle.
Called pay as you go (PAYG) withholding, the employer, rather than the employee, pays this directly to the ATO on behalf of the employee. And as your business grows, Andrew says it’s important to make sure you have this money available each fortnight.
“If you don’t pay your employee’s super and PAYG withholding on time, you lose your eligibility for tax deductions for expenses, which is a big loss.”
Then there is one of the most hated taxes of all.
“If a business is paying gross wages of $2 million or more per annum, you also have to pay a payroll tax to the state or territory government, on top of everything else,” Andrew says.
In the ACT, the payroll tax rate is higher than in other states at 6.85 per cent of all gross wages for a month, but the threshold is also higher at $2 million.
Inside Canberra’s RSM office. Photo: Holly Williams.
Andrew says the difference comes down to the fact the ACT’s economy is a mix of small businesses and large national companies looking for a presence in the capital. The higher threshold lets the small businesses off the hook while ensuring the ‘big boys’ are contributing.
It’s also a self-assessed tax. If you need to pay it, you must lodge a return with the ACT Revenue Office either monthly or annually.
“You need to have a significant business to have a payroll of more than $2 million,” Andrew says.
“But once you get there, it’s probably the most hated business tax, because it’s for nothing.”
At the end of the day, however, it all comes down to two words: “Be prepared”.
“Budgeting is extremely important,” Andrew says.
“The key thing for new businesses, and certainly growing businesses, is to stay on top of their tax liabilities and set some cash aside so they don’t get big surprises.”
This comes down to setting out a realistic “break-even point”.
“A lot of people get this term wrong because they think it’s when they’re making no money, but your break-even point should be after you’ve paid yourself and after you’ve made a profit.”
Most taxes are charged in instalments throughout the year, so it’s a matter of “keeping on top of those”.
“That way, you’ll only have the catch-up payments left at the end of the financial year.”
For anything more than simple, Andrew’s recommendation is to get an accountant involved. And the ATO recognises this too, which is why the cost of engaging an accountant to keep your affairs in order is tax deductible.
Provided you get your PAYG withholding payments through in time, of course.
Contact RSM for more advice on the requirements for small business owners.
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