Chapter 05 – Financial, accounting and taxation

Cash management issues

Cash is the lifeblood of any business. Poorly planned cash flow is a major reason for small businesses failing. Ironically many small business run out of cash because they are too successful and cannot fund their growth. Cash flow is normally lagged, i.e. it comes some time after the critical event, such as a sale or the provision of a service. In the case of a new business cash can sometimes not come until three or four months after the business starts.

Small business cash flow comes from three main sources, which are:

  • equity, i.e. capital contributed by the owners;
  • debt, i.e. loans from institutions such as banks; and
  • sales, i.e. payment for the supply of goods and services.

Cash budgets

Cash budgets are a simple and effective management tool if used carefully.

Many start-up small businesses fail in the first few years because they do not budget properly. They typically over-estimate revenue and under estimate costs. Owners frequently spend too much on private lifestyle. New businesses need cash and growing businesses need even more cash: there is a huge investment in debtors, stock, marketing and overheads to get a business up and running efficiently and optimally.

When establishing a budget for a new enterprise, one difficulty is of course the fact that it is, in fact, a new enterprise. Ideally, the person completing the budget has experience with a comparable business from which they can base the new business’s expected revenue and expected cost. This gives the budget a lot more rigour and objectivity.

If in doubt, be conservative. It‘s better to be safe than sorry. Make your surprises happy ones by under-estimating sales and over-estimating costs. 

Identified expected cash deficits need remedial action. There four potential remedies here, which may be enacted in combination:

  • reduce costs;
  • increase receipts;
  • borrow; or
  • contribute more equity.

Budgets should be compared to actual experiences as the year unfolds, and up-dated as necessary: the concept of a ‘rolling budget’ is strongly recommended for all businesses regardless of size or age.

You can read more about debt management in Part 09 – Managing debt.

Accounting records

The tax law and various other laws require business owners to keep appropriate records of their business transactions.

The income tax law generally requires accounting records to be kept in English or in form that can be easily converted to English and understood by the Australian Taxation Office. The records must be kept for at least five years after they are prepared, obtained and the relevant transaction occurs. Accounting records for taxable Australian assets must be in effect kept indefinitely (the relevant transaction is the eventual disposal of the asset). The ATO website www.ato.gov.au contains a large amount of information for small business and the record keeping rules are explained here: ATO record keeping rules.

Accounting for decision making

Records are also needed for accounting reports for management decision making.

Management accounting, as defined by the Chartered Institute of Management Accountants, is “the process of identification, measurement, accumulation, analysis, preparation, interpretation and communication of information used by management to plan, evaluate and control within an entity and to assure appropriate use of and accountability for its resources. Management accounting also comprises the preparation of financial reports for non-management groups such as shareholders, creditors, regulatory agencies and tax authorities”.

Small to medium sized businesses need, as a minimum, monthly management accounts. These can be built on, or adapted, as needed to better suit specific management information needs, such as year to date results, actual results compared to budgeted results, or, in the case of a professional practice, revenue according to operator, or other source.

Accounting systems

An accounting system should be as simple as possible having regard to the circumstances of the business and the information needs of the various stakeholders.

This means an accounting system designed for a listed public company will look completely different to an accounting system designed for a small practice, where the owner works in the business and has personal control of the cash flows in and out of the business.

Excessive complexity reduces comprehension and hence the effectiveness of the accounting reports. Many small business owners are talked into excessively complicated accounting systems that cost the earth and produce no additional effective information.

Accounting software

In Australia, there are currently three players in the small business accounting software market: Xero, MYOB and Reckon.

All three provide excellent accounting software solutions, but you need to think carefully in order to make the right choice. Work through the features. You can trial each of these products for 30 days. The demos will allow you to test the features to see which one will work best for your business needs. This is particularly important if your business has special reporting needs, complicated inventory or a way of working that is a bit unusual.

Compare costs. You should compare the costs of each product, factoring in the current cost of annual support and annual upgrades. Support is vital, especially at the beginning, and help that’s only ever a phone call away can be a lifesaver. But this help can have a cost. In some instances, annual support is almost equal to the purchase price of the software, and so it’s important that you factor it in. Even if the purchase prices includes a year’s annual support, find out what the regular annual fee is.

Evaluate whether you need any add-ons – you need to make sure that your accounting software can talk to the other computer programs in your office. For MYOB, you can find a list of add-ons at the MYOB Add-Ons page. For Xero, you can find a list of add-ons at the Add-on Marketplace. For Reckon, you can find their add-ons at the Reckon Development Catalogue.

Talk to your accountant – if your accountant has a software preference with one of these products, then you will most likely minimize accounting fees by following their recommendation.

You can find out more about each of these software provider through the following links:

Common registration requirements

The www.business.gov.au website provides new business owners guidance on what registrations and licenses are required when setting up a new business.

The following tables outline the common registrations required for a new business:

Taxation registrations
Tax file number application A TFN is mandatory for all ATO dealings You can register on-line using one document at www.ato.gov.au or at www.business.gov.au
Australian Business Number application An ABN is needed to avoid 47% withholding tax
GST registration GST registration is needed to claim GST credits or if annual turnover is greater than $75,000
Pay As You Go Withholdings PAYG registration is needed if you pay salary or wages

 

Payroll tax registration
Consider whether payroll tax is payable once total annual payroll including certain contractor payments exceeds $550,000 pa You register via the relevant state revenue office website
Workers’ compensation insurance
All employers are required to have worker‘s compensation insurance for injured workers Refer to the relevant state authority‘s website eg www.worksafe.vic.gov.au www.workcover.nsw.gov.au
Superannuation Guarantee Scheme
Quarterly contributions are required by the 28th day of the end of the quarter
Compulsory contributions of 9.5% of each employee‘s earnings base.
Standard Choice form to be supplied to all new employees within 28 days of employment starting

 

Business name registration
A business name must be registered in each state in which business is carried on.
Other business registrations: more information
You can access more information on other business registrations at www.business.gov.au

Further information can be accessed here: Australian Government – Business: Registrations and licenses.

Common lodgement obligations

Type of return Date for lodgement Lodgement party
Income tax return To be lodged by 31 August each year or as required under a tax agent lodgement program Australian Taxation Office
Business Activity Statement (including GST, PAYGwithholdings, PAYG Instalments, FBT and certain other minor taxes Quarterly if turnover is less than $20,000,000.Yearly if turnover is less than$75,000 Australian Taxation Office
Employee PAYG summary 14 days of end of the financial year, i.e. normally 14 July each year Australian Taxation Office
Payroll tax (if applicable) Various Relevant state revenue office
Worker’s compensation insurance Various Relevant state office
Superannuation Guarantee shortfall (if applicable) 14th day of the second month of the relevant quarter Australian Taxation Office
Annual ASIC company statement Annual. No lodgement as such: the return is prepared by ASIC ASIC: no return required if ASIC return is correct

Special tax concessions for small businesses

Small businesses have a number of special tax concessions available to them. All types of business entities can access these concessions, including sole traders, companies, partnerships or trusts, provided that they satisfy the eligibility criteria.

To qualify for the concessions your business must meet the small business entity requirements for the year in question:

  • Your aggregated turnover is less than $2,000,000. Aggregated turnover is the sum of your gross income proceeds (rather than your net profit) for an income year. It includes the annual turnover of any entity you are connected or affiliated with at any time during that income year. It does not include the GST amounts you have charged on your sales.

If you are not a small business in an income year, you may still be eligible for the CGT concessions (if you have net assets of $6 million or less), and the FBT car parking exemption (if your total ordinary income plus statutory income is less than $10 million).

Depreciation

Once you have determined that your business is a small business entity, the concessions that apply include depreciation concessions. From 12 May 2015 to 30 June 2017, small business entities can claim an immediate deduction for the assets they start to use, or have already installed to use, for all assets costing less than $20,000.

This threshold of $20,000 will temporary replace the previous instant asset write off threshold of $1,000. After 30 June 2017, the threshold will revert back to $1,000.

Assets that exceed the threshold for the relevant year are placed in the general small business pool and depreciated at the diminishing value rate of 15% in the year of allocation and 30% in all subsequent years.

For more information regarding this concession, refer to ATO Simplified depreciation rules and the Tax Laws Amendment (Small Business Measures No. 2) Act 2015.

Exclusions to the depreciation rules

Some types of assets have been excluded from the simplified depreciation rules (however may still be deductible under other parts of income tax law). These include assets you rent or lease to others, horticulture plants, software, capital works and options. For further details and a full listing refer to ATO – Simplified depreciation rules: Exclusions.

Trading stock concessions

Trading stock is anything that is produced, manufactured, acquired or purchased for the manufacture, sale or exchange. Generally, businesses must undertake a stock take to work out the value of trading stock at the end of an income year. This means that you must work out the quantity of stock on hand and assign a value to each stock item and account for the difference between the value of trading stock on hand at the start and end of the year.

Small business entities can choose whether or not to conduct a stock take and account for changes in the value of trading stock if there is a difference of $5,000 or less between:

  • the value of your stock on hand at the start of the income year; and
  • a reasonable estimate of the value of your stock on the hand at the end of that year.

For more information regarding this concession refer to: ATO – Trading stock rules for small businesses and Subdivision 328E – Trading stock for small business entities of the Income Tax Assessment Act 1997.

Pre-paid deduction concessions

If a small business entity pre-pays an expense (i.e. they incur the expense and pay for it) for a good or service, they can choose to deduct the expense in the year of payment, rather than the period in which the good or service is provided, provided that the service period in not longer than 12 months.

For more information regarding this concession refer to: ATO – Immediate deduction for prepaid expenses.

Capital Gains Tax concessions

There are four capital gains concessions available for small business entities. Small businesses that exceed the $2 million turnover limit can also access these concessions if they have a net asset value of less than $6 million.

In order to be eligible for the concessions the asset that is the subject of capital gains must first meet the active asset test. For an asset to be considered an active asset, it must be a tangible or intangible asset that is used or held ready for use in the course of carrying on a business by:

  • you (i.e. the business owner);
  • your spouse;
  • your affiliate;
  • an entity you are connected with; or
  • a share in a company or interest in a trust where the value of the asset is at least 80% of the market value of all of the assets of the company or trust.

Generally business premises will be considered active asset provided that all the conditions are met. This is even the case even when the premises is owned by a separate legal person, such as a family trust or a spouse. However, rental properties held solely as investments and rented to unrelated persons do not satisfy the condition and therefore the CGT concessions do not apply to investment properties.

Once the asset meets the active asset test, the small business entity can access the following concessions:
[expand title=”15 year exemption” tag=”h4″]
A small business entity that has held an active asset for 15 years is exempt from paying any capital gains on that asset. In order to meet this concession, the asset must meet the active asset test for at least 71/2 years of the 15 year period.
[/expand]
[expand title=”50% active asset reduction” tag=”h4″]
A small business entity is eligible for a 50% reduction on a capital gain, in addition to the general 50% discount that is available to individuals (and trusts).
[/expand]
[expand title=”Small business retirement exemption” tag=”h4″]
This concession exempts a capital gain on a business asset, up to a lifetime retirement exemption limit of $500,000. This concession generally applies after the 50% reduction concession has been applied. You do not need to actually retire in order to meet this concession. However, if you are under the age of 55, in order to qualify for this concession, you must contribute the amount of the assets CGT exempt amount into your super fund.
[/expand]
[expand title=”Small business rollover concession” tag=”h4″]
This allows the taxpayer to rollover a capital gain into the cost base of a replacement asset acquired within a two year period. This also include improvements to an existing asset.

A small business entity may apply as many of these concessions which they are eligible for until the capital gain is reduced to nil.

For more information regarding the capital gains concessions available for small business entities refer to the following summary on the ATO website: Small business entity concessions.[/expand]

Two year amendment period

Small business entities are also eligible for a shorter statutory amendment period which only allows the ATO to go back two years to amend assessments.

FBT concessions (car parking)

Small business entities can be exempt from Fringe Benefits Tax (FBT) for car parking benefits provided that the parking is not provided by a commercial car park.

This concession is also available if gross total income for the last income year before the relevant FBT year was less than $10 million, regardless of whether you meet the small business entity criteria ( i.e. turnover less than $2 million).

BAS Basics

This section helps explain the BAS process and the basic tax compliance tasks connected to running a business.

BAS stands for Business Activity Statement. A BAS is a two-page form summarizing the information needed to pay a number of tax obligations. These include GST, Pay as You Go instalment (PAYGI), Pay as you Go Withholding tax (PAYGW) and fringe benefit tax (FBT) instalments. However, the BAS does not replace the business owner’s annual income tax return.

Every business adviser needs a working knowledge of the BAS process because the BAS is a necessary part of every business. 

Each business that is subject to GST, the PAYGW system, the PAYGI system, or FBT, is required to lodge a BAS at the end of each tax period. Typically, this will be quarterly, but sometimes can be on a monthly basis. Businesses with annual turnover more than $20 million must lodge a BAS each month. GST registration is compulsory if a business turns over more than $75,000 per annum. Businesses with lower turnovers have the option to register if they wish to. 

BASs can be lodged using paper or electronically. If the business lodges its BAS on a quarterly basis, it is generally due to be lodged within 28 days of the end of each quarter. Alternatively, if the business lodges its BAS on a monthly basis it is generally be due to be lodged within 21 days of the end of each month. 

The business may elect to lodge a full monthly BAS showing all details (i.e. GST, FBT, PAYGI and PAYGW details) rather than a quarterly BAS. However, this should not be done without first discussing the details with your accountant.

The remainder of this chapter refers to a BAS as a quarterly BAS unless otherwise indicated.

Instalment Activity Statement

A taxpayer who is not registered for GST and not required to complete BAS statement must complete a monthly Instalment Activity Statement where withholdings from salaries and similar amounts are more than $25,000 but less than $1,000,000 in the previous financial year. This monthly activity statement only shows the PAYGW details and does not show the other details included in the quarterly BAS.

An Instalment Activity Statement (‘IAS’) is similar to a BAS, and must be used when a business is not registered for GST, but is subject to the PAYGW system, or the PAYGI system rules described in this module. IAS is required where withholdings from salaries and similar amounts are more than $25,000 but less than $1,000,000 in the previous financial year.

For example, if a person is an employee, but receives investment income or trust distributions, an IAS may be required to be lodged on a monthly or quarterly basis, to comply with the PAYGI system rules. The IAS looks similar to a BAS. However, it only shows information relating to the PAYGW or PAYGI obligations. It does not show information relating to GST.

Lodging BAS

The BAS can be lodged either manually or electronically. The choice depends on what is most convenient for the business situation. (That said, the ATO is migrating more businesses on to electronic lodgement).

Manual lodgement requires mailing the completed form to the ATO address shown on the pre-printed envelope, and also shown on the pre-printed BAS form. It is a good idea to record this address for future correspondence with the ATO. 

If lodging the BAS electronically, the ATO‘s internet based electronic commerce system will need to be accessed. Business‘ who have informed the ATO of their preference to lodge the BAS electronically will have received an information pack explaining how to do this. This information is also available at the ATO website at lodge your activity statement online, or by contacting the ATO on 13 28 66. If assistance is required using the ATO‘s electronic commerce system, the ATO can be contacted on 1300 139 373.

Electronic payments can be made using direct credit, direct debit, or BPAY. Manual payments can be made via mail or at Australia Post.

Payments are normally required at the same time that the activity statement is due to be lodged. The dates for payment and lodgement are pre-printed on each activity statement. Voluntary payments can be made at any time. This will be deducted from the net liability. Full details of the ATO‘s electronic payment options and manual payment options are set out at appendix 1 at the end of this module.

When a refund is due from the ATO, a payment will be made into a nominated bank account within 14 days of the BAS being lodged electronically. This will take a little longer if the BAS is lodged manually. Interest will be paid if the refund is delayed by the ATO. If money is owed to the ATO from other activities the amount of the refund will be offset against this debt.

The refund will only be paid by direct credit to a nominated account with an Australian financial institution. Banking details will have been provided to the ATO at the time of registration for ABN/BAS. If a business has queries regarding refunds, or wishes to change the nominated bank account for payment, the ATO should be contacted on 13 28 66. The ATO requires proof of identity before any details can be altered.

Example of a quarterly activity statement

An example BAS form can be found here:

A summary of the BAS GST labels on the calculation worksheet

A brief explanation of the labels and comments on their practical significance is a useful tool for getting to know the BAS. The 20 GST labels are located on the GST calculation worksheet for BAS. They are marked G1 to G20. Some require fresh data to be inserted, and some are simply totals of other sets of labels, or similar internal calculations. Labels G1 to G9 deal with the amount of GST due on taxable supplies. Labels G10 to G20 deal with the amount of GST credits available.

A brief tour of the GST part of the BAS is a useful way to get a handle on the issues. All labels other than Label G9 and Label G20 are inclusive of GST. Labels G9 and G20 are amounts of GST payable or creditable to be transferred to 1A and 1B.

For your reference a sample BAS calculation worksheet can be found here: GST calculation worksheet

G1    Total sales (including any GST)

This is the total income from all sources during the tax period including GST charged on them, if any. It includes other incomes and blended payments (although we generally prefer these to be banked by service trusts where possible). The amount will usually be determined on a cash basis. That is, only the amounts received in the period will be shown, and opening and closing debtors should be ignored.

G2    Export sales

Financial planners usually do not have exports and can ignore label G2.

G3    Other GST free sales

The amount of GST free services rendered during the tax period should be shown here.

G4    Input taxed sales

Interest income and residential rent income should be shown here, if these amounts have been included in the total income figure shown at item G1.

G5    Add G2 + G3+ G4

Add the totals of these three sections.

G6    G1 minus G5

This represents total taxable supplies – i.e. total sales, less GST free sales and input taxed sales.

G7    Adjustments

This section allows adjustments for mistakes or omissions from prior periods.

G8    Add G6 + G7

This amount represents the total of taxable supplies, less adjustments.

G9    Divide G8 by eleven

This is the amount of GST payable, before the credits shown at item G20 are considered. This amount should be transferred to label 1A on the BAS.

G10   Capital purchases (including any GST)

This is the sum of capital costs paid by the business that have attracted GST.

G11   Non-capital purchases (including any GST)

This this includes items like rent (assuming the landlord has turnover above $75,000 per annum, and is required to charge GST), contractors (but not salary and wages), utilities, consumables and similar costs.

G12 Add G10 + G11

This is the total of all costs paid that have attracted GST.

G13   Purchases for making input taxed sales

This label is usually nil. If residential rent has been included at label G4 input taxed sales, then any costs that relate to this income should be shown at item G13.

G14   Purchases without GST in the price

This amount includes supplies that are GST free or input taxed. Examples are interest paid, or rent on commercial premises, where the landlord has not registered for GST.

G15   Total of estimated private use of acquisitions + non-income tax deductible acquisitions

This is self-explanatory.

G16   Add G13+G14+G15

This is also self-explanatory.

G17   G12 minus G16

This is the total of creditable acquisitions.

G18   Adjustments

This relates to mistakes or omissions from prior periods. It should be nil in your first BAS.

G19   Add G17+G18

This is the total of creditable acquisitions, after adjustments.

G20   Divide G19 by 11

This is the amount of credit due for GST paid. This amount should be transferred to label 1B on the BAS.

The PAYG system

There are two parts to the PAYG system. These are:

  1. The instalment system, or PAYG Instalments. This controls the payment of tax on income (and any companies or super funds).
  2. The withholding system, or PAYG Withholding. This controls the payment of income tax due in respect of tax withheld on salary payments (and payments made to a business that did not quote an ABN).

The GST cash-collection system is another separate system. Each of these three systems use the same ATO forms – known as activity statements. These forms are sent out by the ATO.

Activity statements are used to advise the ATO of the amounts due to it under the GST, the PAYG Instalments and the PAYG Withholding systems. There are two types of activity statements. The first type of statement is the Business Activity Statement (BAS) and the second is the Instalment Activity Statement (IAS). The BAS is used if for entities registered for GST and the IAS is used for entities not registered.

Quarterly BASs and IASs are generally required to be lodged no later than 28 days after the end of the relevant period. Monthly BASs and IASs are generally required to be lodged no later than 21 days after the end of the relevant period.

One area generating questions is PAYG Withholding. Entities with withholdings of more than $25,000 but less than $1,000,000 are required to lodge monthly activity statements to remit tax deducted from employees’ salaries and wages (and payments to businesses that have not provided an ABN). This is so even though the entity has to only provide GST and PAYG Instalment information on a quarterly basis.

If annual withholdings are less than $25,000 the entity is required to remit withholdings on a quarterly basis. If annual withholdings are more than $1,000,000 the entity is required to remit withholdings within 7 days of making the payment.

The PAYG instalment system

PAYG instalment system requires clients who have income other than salary income and capital gains, i.e., investment income or business income, to pay tax on a quarterly basis during the tax year. The PAYG instalments are notified to the ATO in the Business Activity Statement.

Anyone who has registered for the GST, has investment income, or has business income is involved in the PAYGI system. This includes most companies, super funds and individuals. It does not normally include trusts and partnerships.

If the only income is salary and wages, PAYG instalments are not required.

The due date for quarterly PAYG instalments for a taxpayer who is required to pay GST monthly is generally 21 days after the end of each quarter.

Where a taxpayer has a BAS or IAS quarterly obligation and is not required to pay GST monthly, the due date is generally 28 days after the end of each quarter.

If a taxpayer is eligible, and has chosen to make an annual instalment, it must be paid by 21 October, and before the income tax return is lodged. The instalment will be credited against the tax liability for the relevant income tax year.

The final tax liability will not be known until of the end of the income year, when the annual income tax return is lodged. PAYG instalments for the year are credited against the assessment to determine whether tax is owed, or whether a refund is due.

Calculation of the instalment will depend on which reporting option is chosen.

Option 1: Pay a PAYG instalment amount quarterly.

The ATO will calculate the amount needed to be paid, based on the business and investment income shown on the most recent income tax return (adjusted by a gross domestic product amount). The instalment amount will be pre-printed at label T7. If this option is chosen, it is not necessary to know how much income has been earned, to work out the instalment amount.

Option 1 is only available to:

  • All individuals;
  • Companies and super funds with business or investment income of $2 million or less, in their last income tax return, and
  • Companies and super funds eligible to pay an annual PAYG instalment.

Option 2: Calculate PAYG instalment using income times rate

The instalment is equal to the instalment income times the instalment rate. This option is available to all taxpayers.

Instalment income is the assessable income for the quarter. Assessable income is gross income, i.e. income before deductions, not taxable income, i.e. income after deductions. Instalment income includes sales, professional fees, interest income, rental income, dividends, and other types of business income or investment income.

Instalment income includes any share of partnership net income, and trust net income. GST charged to clients is not included in instalment income. Salary and other income taxed at the source are not included in instalment income.

The instalment rate is the rate of tax paid on assessable income for the previous year. The effective tax rate reflects deductions, so the higher the deductions, the lower the instalment rate. The instalment rate appears on the pre-printed BAS forms at label T2.

The instalment amount will be added to any withholdings due on employee salaries and any GST paid on non-GST free supplies. This total will be reduced by the amount of any GST credit on the inputs (i.e. accountant‘s fees, etc.) to determine whether the owner has to pay tax to the ATO, or is due a refund of tax from the ATO. A person who has not been notified by the ATO of their instalment rate is not required to complete the PAYG labels of the BAS.

Some Examples
1. A financial planner who practices in his own name had assessable income of $500,000 and costs of $200,000 in 2014. Tax on the profit of $300,000 at 2014 rates is about $101,000. The planner bills $125,000 in the quarter ending 30 September 2014. The planner’s instalment income is $125,000.
The planner‘s instalment rate is 20.20%, being $101,000 as a percentage of $500,000. The amount of the September 2014 instalment is therefore $25,250, being $125,000 times 20.20%. The planner will show his instalment income of $125,000 at label T1 on his BAS, and the instalment rate at label T2 on his BAS. The planner will show the amount of the instalment, i.e. $25,250, at label 5A on his BAS.
2. A super fund had contributions income of $60,000 and investment income of $50,000 in 2014. Costs were $5,000. Tax on the profit of $105,000 is $15,750. Investment income of $20,000 is received in the quarter ending 30 September 2014. The fund‘s instalment income is $20,000.
The fund‘s instalment rate is 14.30%, being $15,750 as a percentage of $110,000. The amount of the September 2014 instalment is therefore $2,860, being $20,000 times 14.3%. The fund will show its instalment income of $20,000 at label T1 on its BAS, and the instalment rate at label T2 on its BAS. The fund will show the amount of the instalment, i.e. $2,860, at label 5A on its BAS.

Expecting less tax

If there is an expectation that less tax will be paid in the year ending 30 June 2015, the instalment rate at (label T2) may be reduced, or the instalment amount at (label T7). Care is needed as there are penalties for submitting incorrect information.

Expecting more tax

If there is an expectation that more tax will have to be paid in the year ending 30 June 2015, the instalment rate at (label T2) may be increased, or the instalment amount at (T7). Care is needed as there are penalties for submitting incorrect information.

Annual instalments can be elected to be paid if the PAYG instalment for the year ending 30 June 2015 is expected to be less than $8,000. The ATO should be advised of this election by telephone on or before the date the first instalment would be due. Again, the decision to pay annual instalments should not be undertaken without discussing the matter with an accountant first.

Trusts

Trusts do not pay tax on the trust‘s net income. Instead, the trust‘s net income is allocated to its beneficiaries (unitholders in the case of a unit trust), who do pay tax on the trust‘s net income. This means trusts per se are not subject to the PAYGI system. But individual and corporate beneficiaries will pay tax under the PAYGI system.

Partnerships

Partnerships also do not pay tax on the partnership’s net income. Instead the partnership‘s net income is allocated to the partners, who do pay tax on the partnership‘s net income. This means partnerships per se are not subject to the PAYGI system. However, individual and corporate partners will pay tax under the PAYGI system.

The PAYG Withholding system

Businesses have to withhold tax from certain payments they make to others. These payments include:

  • salaries, wages, bonuses and commissions paid to employees;
  • payments to company directors;
  • eligible termination payments;
  • payments for unused leave;
  • compensation, leave or accident payments; and
  • payments where an ABN has not been quoted in relation to a supply.

Tax must be withheld from both cash and non-cash payments. The withheld amounts must be reported on the activity statement and remitted to the ATO.

The ATO publishes the withholding rates in various schedules and regulations. They are based on the individual tax rates at the time of the payment. If the payee has not provided a properly completed tax file number declaration, tax must be withheld at the highest marginal tax rate, plus Medicare (currently 47%).

If an employee has been issued with a variation by the ATO, tax may be withheld instead at the lower rate specified by the ATO.

Withholders are classified as small, medium or large. An entity is classed as a large withholder if the amounts withheld, during a financial year, ending at least two months before the current month, exceed $1 million. If the total amount withheld during a financial year, ending before the current month is between $25,000 and $1 million, it will be classified as a medium withholder. Where an entity is neither a large or medium withholder, it will be a small withholder.

Small withholders must complete the PAYGW section of the BAS (labels W1 to W5), and forward the appropriate amount of tax to the ATO each quarter. Medium withholders must do this each month. Large withholders must remit the amount withheld to the ATO within seven days of making the payment.

There are certain other obligations that arise where the employer is required to withhold tax from PAYG payments. These include:

  • registering for the PAYGW system;
  • making payments to the ATO of the amounts withheld;
  • providing an end of year summary to all recipients;
  • sending tax file number declarations to the ATO; and
  • providing an annual reconciliation to the ATO on all withholdings.

When making payments to the ATO under the PAYG withholding system, the employer must register with the ATO. The application must be made by the first day it is required to withhold an amount.

When sending withheld amounts to the ATO, this can be done on the quarterly BAS if the withholdings are less than $25,000 per year. However, if withholdings are more than $25,000 a year but less than $1,000,000, in a monthly BAS is required (but PAYGIS payments, GST and other payments continue to be paid quarterly).

The timing of tax payments

The following table summarises the payments dates for small, medium and large withholders:

Size of withholder Amount of threshold Due date for payment Method of payment
Large Total amounts withheld during a financial year ending at least 2 months before the current month exceed $1m If a withholder withholds on: Withholder must pay by: Electronic payment
Saturday or Sunday The 2nd Monday after that day
Monday or Tuesday The 1st Monday after that day
Wednesday The 2nd Thursday after that day
Thursday or Friday The 1st Thrusday after that day
Medium Total amounts withheld during a financil year ending before the current month of between$25,000 to $1 m The 21st day after the end of the month in which the amount was withheld*   Electronic payment or other means approved by the Commissioner
Small Total amounts withheld during a financial year ending before the current month are less than $25,000 The 21st day after the end of the month in which the amount was withheld*   Electronic payment or other means approved by the Commissioner
*Where a small or medium withholder has a BAS or IAS quarterly obligation, the payment date is extended to the 28th day (apart from an entity that pays GST monthly).

The due dates for quarterly PAYG instalments for a taxpayer who is required to pay GST monthly are summarized in Table below:

End of quarter Due date
30 September 21 October
31 December 21 January
31 March 21 April
30 June 21 July

The due dates for taxpayers that have a BAS or IAS quarterly obligation, and are not required to pay GST monthly are summarised in the table below:

End of quarter Due date
30 September 28 October
31 December 28 February
31 March 28 April
30 June 28 July
The Dover Group