This is the second in a 3 part series designed to assist the Australian hobbyist crafter determine if they need to set up as a business. It aims to provide relevant information to help you set about taking this next step; which can be confusing and a bit daunting! It is also a great time to consider this topic, with the start of the new financial year only a few weeks away.
Taxation and Small Business
What tax will I have to pay when I get an ABN?
When you get an ABN, you need to start disclosing any income and expenses in relation to your business in your income tax return each year. You should start keeping all your receipts to substantiate your business spending, and start thinking about whether you are using your car/phone/computer etc for business purposes. If you are you may be able to claim a portion of these expenses in your tax return.
When you complete your tax return, you will disclose any income and then deduct off this amount any expenses relating to your business. If you end up with a positive amount then this is your business profit and you will need to pay income tax on this amount. It should be noted that if you have no other income then the first $10,000 of profit will be effectively tax free because of the way the marginal tax rates and rebates work. As your level of profit increases, so will the tax rate applicable to that income. Here is a calculator that helps you figure out the tax on different levels of income.
What if I end up with a loss?
If you end up with a loss (that is, your expenses exceed your income) and you have no other income in that year, then you just disclose your loss in your tax return and carry it forward to offset against income in future years.
If you do have other income in that year, then you need to figure out whether you can “offset” the loss against your other income. There are some rules that need to be considered (non commercial loss rules) and you should check with your accountant to ensure you pass the necessary tests. The benefit of offsetting your loss against other income is that it will reduce the total amount of tax that you pay on your income.
Do I have to register for GST?
You do not have to register for GST just because you have an ABN. Registering for GST is optional until your income from business reaches $75,000.
The benefit of registering for GST is that you are able to claim back the GST that you pay when you acquire things for your business. For example, if you are registered for GST and you buy a computer then you can claim back the GST portion of the cost of the computer. You can only claim GST on expenses if you have a tax invoice.
The disadvantage of registering for GST is that you will be obliged to pay 1/11th of your gross sales to the ATO. This may mean you have to increase your prices to ensure that registering for GST does not end up eating into your profit. And when you register for GST you are also required to lodge Business Activity Statements (BASs). You can choose to lodge your BAS annually if your turnover is less than $75,000. If your turnover exceeds $75,000 then you have to lodge monthly.
Please note that the information contained in this post is provided as general information only; none of the information provided takes into account your personal circumstances. It is important that you seek advice from your accountant in order to address your specific circumstances.
Written by Sharon Parker of The Robin Street Market especially for the CHA.
Look out for the last part in this series; Record Keeping and Business Management.
Was this article useful? Have more to add? Please leave a comment.... we really want to hear from you! Yes you!