1. The Business Tax System
Chapter 1
The Business Tax System

2. 1.1 Creating a Business Registering a Business
To begin trading, a business requires the following:
A Tax File Number (TFN).
An Australian Business Number (ABN).
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3. ABN To be entitled to an ABN you must be:
A company registered under corporations law in Australia,
A government entity, or
An entity that is carrying on an enterprise in Australia.
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4. Registering for GST
GST registration is required if either the current or projected GST turnover is $75,000 or more, or $150,000 or more if the business is a non-profit organisation.
GST turnover is the gross business income excluding any GST.
Current GST turnover = turnover for the current month + previous 11 months.
Projected GST turnover = turnover for the current month + following 11 months.
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5. What is GST Turnover?
GST turnover is business gross business income (not profit), excluding any:
GST included in sales to customers
Input taxed sales
Sales that are not for payment
Sales not connected with the business
Sales not connected with Australia
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6. 1.2 Operating a Business
Once registered with the ABR the business is ready to start trading.
A business may then employ staff, issue invoices for sales/fees and receive invoices for expenses.
The balance of revenue less expenses results in the business’s net profit or loss.
If the end-of-year position is in profit this will normally give rise to an income tax liability.
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7. Employing Staff
There are three main obligations for an employer when a new employee is hired: 1. A Tax File Number (TFN) declaration form needs to be completed. 2. Pay As You Go (PAYG) tax needs to be withheld from the employees’ wages and remitted to the ATO using Activity Statements. 3. Superannuation must be paid to the employee’s superannuation fund account.
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8. Tax File Number Declaration Form
New employees are required to complete a TFN declaration form before they receive payments.
The declaration must be signed and sent to the ATO within 14 days of employment.
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9. The Purpose of the Tax File Number Declaration Form
Allows the ATO to match information supplied by the taxpayer with details it receives from other sources regarding employment and investment income.
Helps the ATO detect non-disclosure of income and, therefore, prevent income tax evasion.
Advises the employer how to correctly deduct PAYG Withholding tax from employee wages.
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10. Applying for a Tax File Number
For the ATO to issue a TFN to an individual or company they must apply to the ATO using the appropriate form.
The form can be obtained from the ATO through online ordering, by phoning the ATO, at an ATO shopfront or at selected newsagencies.
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11. PAYG Tax Withheld
Businesses are required to deduct a prescribed amount from wages and remit it to the ATO regularly though the Instalment Activity Statement (IAS) or Business Activity Statement (BAS).
This amount represents a contribution towards the employee’s annual income tax liability and is known as PAYG (Pay As You Go) withholding.
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12. PAYG Tax Withheld
Businesses are required to apply for registration for PAYG withholding before withholding any tax from wages.
This can be done on the initial business registration with the ABR or online through the ATO.
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13. PAYG Tax Withheld
To calculate the amount to deduct, the ATO publishes schedules for deducting tax for employees on a weekly, fortnightly and monthly payment cycle.
These schedules can be found on the ATO website and in the Student Resources section for this book at learnnowbiz.com.
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14. PAYG Tax Withheld
The Weekly tax table for 2014/15 is included in the Appendix of the book.
Where the resident payee does not give the payer a TFN, tax must be withheld at the highest marginal rate plus Medicare Levy and Temporary Budget Repair Levy (45% plus 2% plus 2% = 49%) in 2014/15.
PAYG withholding needs to be withheld from:
Payments to employees, company directors and office holders.
Payments under a labour hire agreement.
Payments under voluntary agreements.
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15. PAYG Tax Withheld
If an employee has a Higher Education Loan Program (HELP) debt, additional tax may need to be withheld. HELP is designed to assist students by offering four types of loans.
The Commonwealth Government pays the debt on behalf of the student and is repaid through the taxation system when the student begins earning a specified level of income.
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16. PAYG Tax Withheld
PAYG Payment Summaries must be completed each year and distributed to employees by the 14th of July following the year ended 30th of June. The PAYG Payment Summary Statement must be completed and be lodged with the ATO by the 14th of August. It contains details of how many employees were paid, the total wages paid and the total PAYG tax withheld.
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17. Superannuation
The Superannuation Guarantee is a levy placed on all businesses with employees.
Superannuation is levied to reduce the future dependence on welfare payments made by the Federal Government in the form of the old-age pension. This regime came into existence through the Superannuation Guarantee (Administration) Act 1992.
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18. Superannuation
For the year commencing 1 July 2014, employers must contribute 9.5% of ordinary time earnings (OTE) to a complying superannuation fund of the employee’s choice, at least quarterly, which is then invested on behalf of the employee until they reach retirement age.
The Superannuation Guarantee rate will gradually increase from 9.5% to 12%.
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19. Ordinary Time Earnings
Ordinary time earnings are what employees earn for their ordinary hours of work, including award payments, bonuses, commissions and allowances.
An employee’s “ordinary hours of work” are the specified as ordinary hours of work under the relevant hours award or agreement.
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20. Employee Voluntary Contributions
Employees are allowed to make further voluntary contributions from their salary up to a prescribed limit (generally $30,000 in 2014/15) which is taxed at a concessional rate of 15% in the superannuation fund.
Any voluntary contributions over this limit will be taxed at 49% in 2014/15.
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21. Record Keeping and Pay Slip Requirements
Employers must record the amount and period of superannuation contributions for their staff, as well as the date contributions were made and the name of the fund they were paid into.
Employee pay slips must include the amount of superannuation contributions made during the period and the name of the fund receiving the contribution.
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22. Fringe Benefits Tax
Fringe Benefits Tax (FBT) is a tax on employers who provide benefits of a private nature to employees.
A fringe benefit is a benefit provided in respect of employment, for example, a non-cash benefit given to the employee in lieu of salary and wages.
Depending on the type of benefit it may be captured under the Fringe Benefits Tax Assessment Act (1986).
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23. Fringe Benefits Tax
If FBT is applicable to a business then registration for FBT is required.
Registration is also required when the business believes they have incurred FBT.
The form can be found at learnnowbiz.com or on the ATO website.
The FBT year runs from 1 April to 31 March of the following year with lodgement and payment of an annual return required by 21 May.
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24. Fringe Benefits Tax
A business pays instalments toward its annual FBT liability through Activity Statements.
An instalment amount is usually pre-printed on the BAS at field F1 and needs to be remitted to the ATO.
Any fringe benefits provided to employees that are greater than $2,000 for the year need to be recorded on the employee’s Payment Summary as Reportable Fringe Benefits.
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25. Sales Invoices
As part of conducting business, tax invoices will need to be issued for the provision of goods and services, to document the transaction for both the supplier and the purchaser.
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26. Types of Supplies
Under the GST there are three different types of supplies:
Taxable Supplies – GST of 10% must be included on all sales invoices.
GST-free supples – GST of 10% is not required.
Input-taxed supplies – GST of 10% is not required.
Most sales are taxable supplies and will be discussed further in Chapter 3.
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27. What is a Valid Tax Invoice?
For an invoice to be valid it must include the following:
The words “Tax Invoice” should be included and clearly visible.
The Business Name and ABN.
The date.
A brief description of the items sold, including the quantity (if applicable) and the price of what is sold.
The GST amount (if any) payable in relation to the sale
The extent that each sale to which the document relates is a taxable sale.
If the sale is for more than $1,000 then the purchaser’s name and address or ABN is also required.
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28. Purchase Invoices
Most businesses incur expenses of some kind in the course of doing business.
Most invoices received by a business will have a GST component. To claim the GST back from a purchase (input tax credit) there must be a valid tax invoice that meets the requirements listed in the previous Sales Invoices section.
The supplier must be registered for GST. This can be checked by visiting the Australian Business Register at abr.gov.au.
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29. Purchase Invoices
Purchases where the value is $82.50 including GST or less, businesses are not required to hold a tax invoice but must have one of the following:
A tax invoice.
A cash register docket.
A receipt.
An invoice.
Where a tax invoice has not been provided at the time of supply, the supplier will be required to provide a tax invoice within 28 days.
Tax invoices must be retained for a period of 5 years after the occurrence of the transaction.
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30. Purchase Invoices
If the business deals with a supplier who does not have an ABN the business is required to deduct 49% (2014/15) from the payment to the supplier.
The amount deducted is then remitted to the ATO through the “PAYG Withholding No ABN Quoted” label on the BAS/IAS.
A Payment Summary needs to be sent to the supplier and the total of the No ABN transactions needs to be reported by the business on the Annual PAYG Withholding No ABN Quoted form.
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31. Recipient Created Tax Invoices (RCTI)
In certain situations the purchaser (recipient) is able to issue a tax invoice called a recipient created tax invoice (RCTI) on behalf of the seller (supplier) once a price has been agreed.
This situation will typically arise where the purchaser holds the information required to calculate the exact amount payable, e.g. commission payments based on sales made.
An RCTI is issued by the purchaser of the goods and/or services rather than the seller.
The ATO website has a list of industries that have been approved to issue RCTIs.
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32. What is a Valid RCTI?
For a valid RCTI, both the seller and the purchaser must meet the following conditions:
The seller and the purchaser must be registered for GST.
The purchaser must include the ABN of the seller on the RCTI.
The purchaser must issue the RCTI (or a copy) to the seller within 28 days of the sale or within 28 days of establishing the price.
The purchaser must keep the RCTI (or a copy).
The purchaser must issue an adjustment note (or a copy) to the seller within 28 days of any adjustment occurring.
The purchaser must reasonably comply with their general tax obligations, such as being up to date with lodgement of activity statements and payments.
The purchaser must not issue an RCTI on or after the date on which either the purchaser or seller has ceased to comply with any of the requirements above.
The sales for which the purchaser can issue an RCTI are agreed to in writing by the purchaser and the seller either in a separate written agreement specifying the supplies to which each agreement relates or embedding this information or specific terms in the tax invoices they issue.
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33. The Written Agreement
The written agreement between the seller and purchaser must meet all of the following requirements:
Be current and effective whenever an RCTI is issued.
List the type of goods or services that it relates to.
State that the purchaser can issue tax invoices for the supplies.
State that the seller will not issue tax invoices for the supplies.
State that both the seller and the purchaser are registered for GST at the time they enter into the agreement and, if either ceases to be registered for GST, they will notify each other.
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34. Information Required on the RCTI
In addition to the requirement for a written agreement, to be valid an RCTI must contain enough information to enable the following to be clearly identified:
That the document is intended to be an RCTI.
The identity and ABN of the supplier (seller).
The identity or ABN of the recipient (purchaser).
What is supplied, including the quantity (if applicable) and the price.
The extent to which each sale is a taxable sale
The date of issue of the document.
The amount of GST (if any) payable for each sale.
If GST is payable for any sale — that the GST is payable by the supplier.
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35. 1.3 Introduction to Activity Statements
Businesses are required to comply with tax legislation.
The New Tax System came into effect in 1999 and introduced the Goods and Services Tax (GST). GST replaced indirect taxation with a 10% charge on most sales made by businesses.
This effectively shifted the job of tax collection onto businesses.
Businesses are required to pay amounts collected to the Australian Taxation Office (ATO) through the use of Activity Statements. Businesses are required to lodge Activity Statements on either a monthly, quarterly or annual basis to the ATO.
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36. Types of Activity Statements
There are two types of activity statement:
The Business Activity Statement (BAS), which must be completed by those taxpayers who are required to report GST in that activity statement period.
The Instalment Activity Statement (IAS), which applies to those not registered for GST, taxpayers with investment income and GST-registered businesses who are required to report GST on a quarterly basis but have other monthly reporting obligations.
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37. Business Activity Statements
All taxpayers who are registered for GST must report their tax obligations on a BAS. A BAS can be used for:
GST.
PAYG instalments.
PAYG withholding.
Luxury Car Tax (LCT).
Wine Equalisation Tax (WET).
Fringe Benefit Tax (FBT) instalments.
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38. Business Activity Statements
A business that is registered for GST purposes must also apply for an Australian Business Number (ABN).
It will then be required to:
Complete a BAS.
Lodge the BAS.
Report and pay tax as required.
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39. Cash or Accrual Accounting
There are two methods used to account for GST — cash and non-cash (commonly known as accrual) accounting.
Under cash accounting a GST liability arises when payment is received for a sales invoice (GST Collected) and credit entitlements (GST Paid) arise when purchase invoices are paid to suppliers.
Under accrual accounting a GST liability arises when a sales invoice is issued for a sale (GST Collected) and credit entitlements (GST Paid) arise when a purchase invoice is issued by a supplier, regardless of when payment is either received or paid.
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40. Instalment Activity Statements
The IAS mainly applies to individual taxpayers with investment income (e.g. rental, interest or dividend income) or who have businesses with an annual turnover below the minimum GST registration threshold of $75,000. In addition, some GST-registered businesses must complete a quarterly BAS and a monthly IAS for the months in between.
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41. Instalment Activity Statements
An IAS can be used for the following reporting obligations:
PAYG instalments.
PAYG withholding.
FBT instalments.
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42. 1.4 Providing BAS Services
Registered BAS agents can charge a fee for providing BAS services to a taxpayer.
A BAS service is defined as:
Preparing or lodging an approved form about a taxpayer’s liabilities, obligations or entitlements under a BAS provision.
Giving advice about the taxpayer’s obligations under a BAS provision.
Transacting any business with the Commissioner on behalf of a taxpayer in relation to their obligations under a BAS provision.
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43. Providing BAS Services
A ‘BAS provision’ includes:
Goods and services tax (GST) law.
Wine equalisation tax (WET) law.
Luxury car tax (LCT) law.
Fuel tax law.
Fringe benefits tax (FBT) law — relating to collection and recovery only.
Pay as you go (PAYG) withholding.
PAYG instalments.
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44. Legislation Relating to BAS Services
To ensure appropriate standards of professional and ethical conduct by tax agents and those providing BAS services, the Tax Agent Services Act 2009 was passed in Parliament. The Act became operational in February 2010 after allowing time for the appointment of a national Tax Practitioners Board and the establishment of administrative resources to administer the Act.
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45. Tax Agent Services Act 2009 The key features of the Act:
The establishment of a national Tax Practitioners Board (TPB), replacing the existing State-based boards.
A legislated code of professional conduct that governs the provision of tax agent services.
A wider range of disciplinary sanctions available to the new board, including a civil penalty for certain types of serious misconduct by tax practitioners.
Registration and regulation of BAS service providers as BAS agents.
Protection for taxpayers from tax shortfall penalties for making false or misleading statements, where a taxpayer demonstrates that they have taken reasonable care.
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46. BAS Agents BAS agents must be registered with the TPB.
A BAS agent may be an individual, partnership or company.
If the BAS agent is a partnership or company, a sufficient number of individuals (being registered BAS agents) are required to provide BAS services to a competent standard, and to supervise other employees.
A BAS Service Provider (BSP) is either:
A registered tax agent.
A registered BAS agent.
An employee who conducts BAS services for a company or partnership that is a registered BAS agent.
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48. BAS Agents
The requirements and recommendations apply to bookkeepers providing BAS services for a fee and the registered tax agents under whose direction they are working. BAS agents who charge for BAS services are required to be registered with the TPB. To be registered they must hold certain academic qualifications and meet experience requirements.
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49. Recognised Professional Associations (RPAs)
Voting members of the following recognised professional associations are eligible to register as BAS agents:
Association of Accounting Technicians.
Association of Chartered Certified Accountants.
CPA Australia (“CPAs”).
Institute of Certified Bookkeepers.
Institute of Chartered Accountants in Australia (“CAs”).
Institute of Public Accountants.
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50. How to Register as a BAS Agent
A standard application:
The applicant must meet the standard registration requirements. They must be a fit and proper person and meet qualification and experience requirements.
The applicant will be registered for three years from the day the TPB decides on the application. The applicant cannot legally provide a BAS service prior to approval of registration.
The application fees for BAS agent standard application are:
$500 - for registration as a BAS agent who carries on a business.
$250 - for registration as a BAS agent who does not carry on a business.
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51. Fit and Proper Person Requirement
To be eligible for registration, the applicant must satisfy the TPB that they are a fit and proper person.
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52. Qualifications
An individual who wishes to register as a BAS agent must satisfy the TPB they have sufficient qualifications.
The individual must hold at least a Certificate IV in Financial Services (Accounting) or Certificate IV Financial Services (Bookkeeping) from an Australian Registered Training Organisation (RTO) such as TAFE.
The qualification must include a course in GST/BAS taxation principles.
The type of GST/BAS course you need will depend on when the application for registration or renewal is made.
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53. Relevant Experience
To register as a BAS agent there are two options relating to relevant experience requirements for individuals.
Option 1: Experience Based on Accounting Qualifications
The individual must have had at least 1,400 hours of relevant experience in the past three years.
Option 2: Experience Based on Membership of a Professional Organisation
If the individual is a voting member of a recognised professional association the relevant experience requirement for the past three years is 1,000 hours.
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54. Other Responsibilities
Not knowingly obstruct the proper administration of the taxation laws.
Advise the client of the client’s rights and obligations under the taxation laws that are materially related to the BAS agent services provided by the agent.
Maintain the professional indemnity insurance that the TPB requires the agent to maintain.
Respond to requests and directions from the TPB in a timely, responsible and reasonable manner.
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55. Failure to Comply with the Code
BAS agents are required to comply with all the obligations set out in the Code
of Professional Conduct.
If, following an investigation, the TPB is satisfied that a BAS agent failed to comply with the Code; it may impose one or more of the following administrative sanctions:
A written caution.
An order requiring the agent to take one or more actions including:
completing a course of education or training specified by the TPB,
providing services (for which the BAS agent is registered) only under the supervision of another BAS agent that has been specified in the order, or
providing only those services that are specified in the order.
Suspending the agent’s registration.
Terminating the agent’s registration.
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56. Professional Indemnity Insurance (PII) Requirements
It is possible that clients may suffer financial loss due to the conduct of a BAS agent in the provision of BAS services.
Since 1 July 2011, registered BAS agents are typically required to have adequate Professional Indemnity Insurance (PII) cover that meets the TPB’s minimum requirements.
Adequate Professional Indemnity Insurance will satisfactorily indemnify an agent against civil liability that may arise in the agent’s provision of BAS services.
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57. Penalties
Under the Tax Agent Services Act, if a fee for BAS services is charged by a person who is not a registered BAS agent, or a person eligible to do so, they may be prosecuted and fined up to $42,500 for a breach of this law.
Conduct Prohibited without Registration:
Providing BAS agent services.
Advertising BAS agent services.
Representing that you are a BAS agent or BAS service provider.
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58. 1.5 Income Tax
For Individual taxpayers the taxation process in a year of income is as follows:

59. Assessable Income A receipt is likely to be assessable income if:
It resulted from your personal exertion (i.e. you worked for it).
There is an element of regularity about it.
It results from an investment (i.e. you put your money to work for you).
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60. Assessable Income Examples
Salary or wages.
Allowances, earnings, tips, director’s fees etc.
Lump sum payments.
Employment termination payments.
Commonwealth government pensions, allowances and payments
Superannuation pensions and annuities.
Attributed personal services income.
Gross interest / dividends.
Partnership and trust income distributions.
Net income or loss from business.
Capital gains.
Foreign source income.
Rent.
Bonuses from life insurance companies and friendly societies.
Other income such as royalties, and foreign exchange gains.
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61. Exempt Income
Not all income is assessable (subject to taxation). The taxation law specifies categories of income that are exempt.
Examples of exempt Income are:
Family Tax Benefit
Exempt Commonwealth of Australia government pensions, allowances and payments.
Exempt Defence Force and United Nations payments.
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62. Deductions
The legislation permits us to claim any expense if it is paid/incurred in the production of assessable income, unless it is of a capital or private nature.
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63. General Deductions — Examples
Work-related car expenses.
Work-related travel expenses.
Work-related uniform and protective clothing laundry and dry cleaning expenses.
Work-related self-education expenses.
Other work-related expenses.
Interest and dividend deductions.
Office rent, telephone, electricity.
Other deductions including election expenses, foreign exchange losses, sickness and accident insurance premiums.
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64. Deductions — Specific
Expenses which might be deductible under the general provisions are not deductible under specific exclusions in the legislation, e.g. entertainment expenses, club fees and fines.
Expenses which appear to be non-deductible under the general provisions may be allowable under specific provisions. Examples include:
Gifts to approved charities.
Some legal expenses.
Decline in Value (depreciation) on depreciable assets.
Personal superannuation.
Cost of managing tax affairs.
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65. Substantiation of Work-Related Expenses
Income tax law requires a taxpayer to have receipts or other documentary evidence to support work- related expenses where the total claim is above $300.
A taxpayer who does not have the relevant documentary evidence such as dockets or receipts and claims in excess of $300 could expect to have their deduction reduced to the amount which can be substantiated, and penalty tax imposed.
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66. Current Personal Rates of Tax
For the tax year 1 July 2014 to 30 June 2015, the following tax rates apply to resident individual taxpayers.
Tax Rate
Taxable Income
Tax on Taxable Income
$0 - $18,200
Nil
$18,201 - $37,000
19c for each $1 over $18,200
$37,001 - $80,000
3, c for each $1 over $37,000
$80,001 - $180,000
17, c for each $1 over $80,000
$180,000 and over
54, c for each $1 over $180,000
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67. HELP repayment income (HRI*)
HELP repayment thresholds and rates 2014/15
HELP repayment income (HRI*)
Repayment rate
Below $53,345
Nil
$53,345 - $59,421
4.0%
$59,422 - $65,497
4.5%
$65,498 – $68,939
5.0%
$68,940 - $74,105
5.5%
$74,106 - $80,257
6.0%
$80,258 - $84,481
6.5%
$84,482 - $92,970
7.0%
$92,971 - $99,069
7.5%
$99,070 and above
8.0%
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68. ATO Audits
If the ATO suspects that a taxpayer has not filled out their tax return legitimately it can perform an audit.
The ATO has access to bank data and Centrelink to detect any omitted income, interest or social security payments.
Taxpayers are required to keep all records for a five-year period or for two years if they:
Receive income only from salary and wages, pensions, government benefits or allowances, interest and dividends.
Are entitled only to deductions for the cost of managing tax affairs, account keeping fees and gifts or donations.
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