It is never too early to start thinking about taxes. Understanding your tax obligations are a critical aspect of running a successful eCommerce business. It can help you save money and avoid potential penalties and fines.
In this post, we’re walking through the no-frills beginner’s guide to Australian personal and business taxes, as well as how to avoid the most common tax mistakes.
Note: Before we dive in, this post is designed to be educational. We strongly recommend all eCommerce entrepreneurs talk to an accountant or accounting firm, like Bean Ninjas, to get the best advice for their specific financial situation.
What you need to know before setting up an Australian company
Starting your eCommerce business is exciting, but you can end up creating some gnarly business and personal headaches related to asset protection and tax planning down the road if you don’t have the right corporate setup.
Australia personal income tax
In Australia, personal income tax is a tax that is imposed on individuals based on their income. The tax year in Australia runs from 1 July to 30 June. Taxpayers must lodge their tax return with the Australian Taxation Office (ATO) by 31 October, or by 15 May if they are using a registered tax agent. The ATO will then calculate the tax payable and issue an assessment notice.
The personal income tax rates are a progressive tax and range from 0% to 47%, and include both business and other income.
Note: Other income may include salary, wages, allowances, fees, ETPs, Government payments and allowances, Superannuation income streams, interest, dividends and other investment income, Rental property income, Capital gains or losses, including cryptocurrency gains and losses, and foreign income.
This means that people with higher incomes, including salary, investments, capital gains, etc., are taxed at higher rates. The amount of tax payable depends on the amount of income earned, the deductions and offsets claimed, and the taxpayer’s residency status.
Note: The marginal tax rate in Australia is currently 47% for those earning over $180,000 per year.
Determining your founder salary
As a founder, it is in your best interest to pay yourself a market rate to understand the true profitability of your business.
However, there are three different ways that you can pay yourself:
- Salary and wages (PAYG and superannuation )- You issue a paycheck to yourself each pay period, just like your employees. This is the standard way most pay themselves but it comes with two potential pitfalls: not setting aside enough money to pay personal taxes or not saving enough for retirement.
- Dividends – This is where you take out a share of profit from the company and pay tax at the rate of 45% + 2% (Medicare). This can be expensive since you are taxed at nearly double the company tax rate of 25% (assuming you are doing less than $50 million in annual revenue)
- Directors’ fees – Directors’ fees are payments made to a director of a company in exchange for their services. These fees are usually paid in addition to any salary that the director receives. They are typically paid on a project-by-project basis and are not part of their annual salary. The fees are often used to cover the costs of services provided by the director, such as advice or assistance, or to cover expenses incurred while carrying out their duties. Directors’ fees may also be used to reward the director for their efforts or achievements.
Australia corporate income tax
Operating your business through your company or a discretionary trust gives you more asset protection and opportunities to save on taxes. However, it can also come with stricter compliance requirements.
The three main ways to legally extract money from a private company as a director or shareholder are as follows:
- Directors’ salary, wages, allowances, and fees: This is subject to superannuation guarantee, PAYG withholding, and ATO reporting
- Dividends: The declaration and payment of dividends must be recorded appropriately
- Loans: May be deemed to be unfranked dividends unless subject to commercial terms
The base company tax rate is 25% for businesses doing under $50 million in annual revenue.
Discretionary trusts are an excellent vehicle for tax planning due to the flexibility afforded in respect of the who, what and how much to distribute each year.
If the trust deed allows, the trustee can:
- Distribute income in any proportion to the nominated beneficiaries, e.g., 25% to taxpayer X, 35% to taxpayer Y, and 40% to taxpayer Z.
- Can stream income by segregating the different income classes and distributing in the most tax efficient manner, e.g., Distributing capital gains to a taxpayer with carrying forward capital losses.
It is important to work with an eCommerce accounting firm, like Bean Ninjas, to make sure you have a compliant trust distribution resolution filed each year before 30 June. If not, you are subject to the ATO’s highest marginal tax rate of 47%.
Related reading: How to choose the right business structure for success
If you sell any assets, like real estate, cryptocurrencies, shares, or sell the business, you are subject to capital gains tax rules.
We recommend speaking with your accountant before you sell any assets.
GST stands for Goods and Services Tax. It is a type of tax that is applied to the price of most goods and services sold in Australia.
As an Australian eCommerce business, you are required to register and pay GST once you hit the $75,000 revenue threshold.
It can sometimes (but not always) be beneficial to register for GST at the same time you create your company and apply for your Australian Business Number (ABN) to avoid forgetting about it or an unpleasant tax bill. You can register online here or by phone.
Then, once you have registered for GST, you need to comply with annual reporting requirements, like tracking and filing annual Business Activity Statements (BAS).
Once you have employees, you need to make sure you are following all applicable payroll taxes, like PAYG withholding and superannuation. Payroll tax rates and thresholds vary based on the states and territories where your employees are located.
Pro Tip: Here are the current payroll tax thresholds by territory and state.
5 of the most common business setup and tax mistakes that Australian eCommerce businesses make
When it comes to tax planning, here are some of the most common mistakes that Australian eCommerce entrepreneurs make, along with how to avoid them.
Double counting revenue
If you are selling on multiple platforms, one of the most common mistakes is double-counting reviewing. For instance, you can double count a payment in Stripe and then again when it hits your bank accountant. This means you can end up paying a lot more in taxes than you normally would.
A simple way to fix this is to have your accountant or bookkeeper reconcile your bank account each month.
Not saving enough to pay your taxes
Your taxes should never be a surprise at the end of the fiscal year if you are withholding the correct amount each pay period and have accurate financial records.
A simple way to ensure that you have enough money to pay taxes is to create a separate bank account just for tax money each month. You may also want to use a cash flow management strategy, like Profit First, too.
Inaccurate inventory accounting
You need to know how much inventory you bought, what’s been sold (recognized revenue), and any inventory write-offs (tax deductions). It is impossible to do this without switching to accrual accounting and detailed inventory reporting, ideally weekly or monthly.
Not registering for GST
Any Australian business that did more than $75,000 in annual revenue must register and pay GST.
Some companies think they can avoid doing this if most or all of their revenue is overseas. However, that’s not the case, and you could wind up with tax penalties.
Paying the wrong amount in GST
Another way that eCommerce entrepreneurs can get into trouble is by not configuring the correct GST settings in Shopify.
For instance, you need to collect GST for all customers in Australia but not for international customers.
In addition, you should make sure you are collecting GST on the product as well as shipping.
By proactively managing your taxes, and staying up-to-date on relevant laws and regulations, you can avoid costly mistakes, maintain financial stability, and ensure that your business stays on track.
If you are looking for help with tax planning or accounting for your eCommerce business, learn about our tax accounting services and schedule a call with our team here.