Keeping up with tax obligations doesn't need to be a bugbear for small businesses but you need to take the right approach from the outset, say the experts. Ensure you choose the best structure, as it is not always easy to change once you're up and running.
What can be done at start-up stage?
Tax is levied on transactions so it is imperative that the tax consequences are addressed before concrete steps are taken. In the case of a new business, choosing your structure is key. If limited liability is required, the usual choice is a company. A small business (five or fewer owners) may want to use a look-through company (LTC) as it has essentially the same tax characteristics of a partnership but with limited liability.
Unlike a standard company, an LTC allows non-taxable gains to be passed out tax-free to the shareholders, who also can use the company's losses against their own income, and the income is taxed directly to the shareholders. But a standard company may be better if the business is profitable as its income is taxed at 28 per cent, whereas LTC income may be taxed at 33 per cent to the shareholders.
Major changes can have unusual tax consequences. For example, bringing on a new shareholder will alter shareholding percentages, which can result in imputation credits and/or tax losses being forfeited. Addressing those issues before the change takes place can avoid unnecessary grief down the track.
What tax system options are available to me?
There are various tax elections. For example, you can choose to account for GST on a cash basis or on an invoice basis. If you provide services, your input credits are likely to be modest compared to your output tax. Cash basis will be preferable if you're not being paid up-front for the services as it results in tax being payable later than under the invoice basis. The opposite is true where suppliers allow you credit and you have cash customers. Other options for small businesses include electing to pay Fringe Benefit Tax annually instead of quarterly - deferring payment and enabling provision of up to $1200 a year of "unclassified benefits" per employee rather than the $300 a quarter limitation.
For small businesses with cyclical cash-flows, the GST turnover method can calculate provisional tax. This links your provisional tax payments to your two-monthly GST returns, so you pay more when sales are good and less during dry periods.
Why are systems so important?
Taxes are payable on set dates. If you don't file the return and/or pay on time you will have penalties and interest to pay in addition to the core tax.
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