Establishing a legal trading structure
We recommend a company as the best trading structure for tax minimisation purposes for small to medium size businesses. Further we recommend a company as a trading structure to protect your personal assets from the risks of being in business. We can attend to the establishment of the company and the cost is $1,320.
TFN and ABN application
The business will need to obtain a TFN in order to complete a yearly tax return and report its taxable income to the Australian Tax Office (ATO).
The business will also need an ABN and to report on tax invoices when they sell products or services. The purpose of the ABN system is that if a business doesn’t have an ABN it must be operating outside the tax system (the cash economy). Further as a business owner you are required to withhold 47% from the payment from a sale made to you by a business that doesn’t have an ABN.
We will apply for the TFN and ABN as part of the company establishment.
The business must register for GST where it’s turnover exceeds $75,000. Being registered for GST requires the business to charge an additional 10% on sales (with some exclusions) and to pay those amounts to the ATO on a business activity statement (BAS). The business can claim credits for GST its paid on outgoings where you were charged GST on the BAS too.
GST obligations on a BAS can be reported and paid on a cash or accrual (invoice) basis. Most small business owners opt to report and pay GST liabilities on a cash basis. Small businesses generally report on and pay BAS’s quarterly but can do so monthly.
Owners’ remuneration (dividends)
There are two ways owner’s take an income (remuneration) from a company. One option is via dividends . Dividends involve withdrawals (sometimes incorrectly referred to as drawings) of money from the company bank account. The withdrawals may be a return of money loaned to the company (sometimes referred to as a credit loan) but once the withdrawals exceed the loan to the company they results in a loan from the company (sometimes referred to as a debit loan). In most circumstances a loan from the company will be deemed to be a dividend due to the Income Tax Act 1936 (Division 7A). Dividends may be franked or unfranked. Franked dividends have tax credits attached to them due to the company having paid tax of its profits. Unfranked dividends have no tax credits attached to them. Unfranked dividends are pre-tax receipts of income and effectively place an obligation on the owner to save for the tax liability on those receipts. Franked dividends are a hybrid of pre-tax receipts of income where 25% of the income has a tax credit. Depending on the business owners’ personal taxable income the franked dividends may not have sufficient tax credits to meet their individual tax liability and therefore also place an obligation for the owner to save for the tax liability.
Owners’ remuneration (salary and wages) and PAYG W registration
The second option is to take owner’s remuneration as salary/wages from the company. My experience in over 20 years of being involved with businesses is this is the superior option. Taking remuneration this way addresses the tax liability on remuneration upfront. The payroll feature in Xero calculates the withholding (the PAYG W system) on the remuneration for you so there isn’t a tax shortfall at the end of the year or need to set aside estimated of tax obligation in separate personal bank accounts. Further this option creates a superannuation obligation on the remuneration that otherwise would not be saved for your retirement. We will help set you up on Xero’s payroll features and help you process your payroll.
You can take an income from the business as a dividend or salary/wages. We strongly recommend you take your income as salary/wages. If you take your income as salary/wages the business will need to register for PAYG withholding. PAYG Withholding requires the business to withhold tax from your wages and report and pay those amounts on BAS’s. If the business isn’t required to register for GST it will remit the PAYG W via an Instalment Activity Statement (IAS).
BAS obligations (GST and PAYG W) can seem overwhelming but are easily addressed as you’ll see below.
Once the company is established we have the company binder couriered to you and then you sign the relevant documents. You keep the documents as you may need certified copies of them in future so you need the original documents on hand.
Open a bank account
As soon as practical we recommend you take the company binder to your bank and open two business bank accounts. The first bank account will be your general transactional account which should have a debit card attached to this bank account. The second bank account will be your BAS account used to save the net GST you’ve collected and the PAYG Withholding you’ve withheld from your wages. We highly recommend these obligations are saved for weekly and can show you how using the software detailed below.
Subscribe to Xero
Once you have the company bank account details and debit card details we recommend you subscribe to Xero, an online accounting software, to help you meet the business’s accounting obligations. Then invite us as a user and we will start a bank feed whereby transactions that run through the business bank accounts are directly imported into Xero. Further we’ll set up a standardised chart of account used to account for the income and expenses of your business.
Invoicing and bills
We will also will establish your invoicing template so you can start raising invoices immediately.
Your business will receive tax invoices (bills and receipts) which you can choose to meet electronically or with a paper-based approach. A paper-based approach involves putting all the tax invoices you receive in a folder generally on a monthly or quarterly basis often separated alphabetically. This method can be tedious and time-consuming especially with tax invoices that are handed to you in person (e.g. fuel receipts).
A Xero subscription comes with a free version of Hubdocs which allows you to save the tax invoices directly in the software by either forwarding tax invoices received by email or by scanning and then emailing bills handed in person or by using the Hubdocs app on your smart phone. We will walk you through the process if needed but it’s quite straight forward.
Bookkeeping in Xero
You can choose to look after your business’s bookkeeping obligations or engage us to undertake it for you. We strongly recommend you engage us to undertake the bookkeeping so you can focus on the operational and marketing functions in your business.
Single Touch Payroll (STP)
The payment of wages to anyone is required to be reported to the ATO on each payroll cycle via the single payroll touch system. After initially registering with the ATO this obligation is met through the features in Xero’s payroll module.
Business Activity Statements (BAS’s)
BAS’s are remitted quarterly with a September, December, March and June reporting cycle to reported 28 days after the end of the quarter. It’s a business’s first large tax reporting obligation where the net GST collected and PAYG Withholding on wages are reported and paid to the ATO. Whether you’ve been undertaking the bookkeeping yourself or engaged us to do it we recommend we prepare your BAS’s to ensure accuracy and that you meet you reporting deadlines. Further if you’ve been following our advice on saving for the BAS obligations in the second business bank account the funds will already be there to make payment. The BAS obligation often create cash flow issues business owners as they’ve not put aside the funds to meet the obligation and find the large reduction in the business bank account an emotional rollercoaster-ride (especially when there’s insufficient funds to comfortably meet it).
Employers are required to remit superannuation with same quarterly cycles above and again often creates cash flow angst for business owners that have not separately saved for it. We recommend paying super in the same cycle as the payroll cycle to eliminate the large quarterly cash outlay and risk of late payment of superannuation (and the resulting superannuation guarantee charge). Failure to pay on time creates a further reporting obligation and the resulting payment is non-deductible. Another option is to open a third bank account to save in accordance with the business’s payroll cycle so the funds are already saved for when the due date arrives.
Superannuation payment obligations are reported to the ATO via the Superstream system. Xero has a highly automated function whereby with a few clicks and entering a code a business can have the superannuation obligation automatically deducted from the business bank account. Josie can help set up Xero’s superannuation feature and walk you through the steps for payment.
Superannuation is an expense that is only deductible when paid so if the business is to obtain a deduction for the June quarter it needs to pay the superannuation before 30 June (often a week before).
It’s a good idea to see us ahead of tax time to address ways your business can legitimately minimise its tax liabilities and also start saving towards after all tax planning measures have been address. Further Company directors that wish to declare dividends to shareholders must do so before 30 June each year if they want the dividend taxed in that tax year. Finally consideration should be given to decide how the dividend declaration is undertaken in the most tax effective manner.
Tax return lodgement
Businesses operating through companies are required yearly to lodge a tax return and pay the relevant tax liability with a 30 June reporting cycle. The due date for lodgement as you’re with a tax agent extends to 15 May the following year.
ASIC annual review
Two months before the one-year anniversary of the creation of the company the Australian Securities and Investment Commission (ASIC) will issue an invoice for around $280 for having a company. Further small companies must maintain a registered office open from 10am to 3pm on business days and we often act in that role given it’s hard for small business to meet this obligation for which we charge $220 annual as well as maintaining the company binder (electronically) and meeting your other annual return obligations (ensuring the all company details are correct and a solvency declaration is prepared).
Obtaining insurance isn’t in the realm of accounting and tax obligations but warrant mentioning here as they should be attended to prior to trading a business. Common insurances obtained are public liability, product liability, professional indemnity, asset insurance, worker’s compensation insurance (which is not available for the director/s), income protection insurance (because worker’s compensation isn’t available for the director) and cyber insurance. These would be in addition to life and total and permanent disability (TPD) insurance that should already be in place.
Other obligations and information
The above is not a complete guide to all your accounting and tax obligations but an introduction to the more immediate ones. For more information on other compliance obligations please contact us with your specific questions.
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