Tax obligations working for yourself/starting a business

So you decided to work for yourself – more flexibility, better hourly rate and all the perks that go with it.

How do I know if this applies to me?

If your work wants you to ‘invoice them’ (see what makes up a correct invoice here)
You are a contractor
You are thinking about doing something which you will make a profit

(note the following is applicable for any entity – sole trader/partnership/company/trust – which entity to choose will be another article)

To get set up (The first year)

ABN – Australian Business Number
You need one of these to be in business – can register at the Australian Business Register www.abr.gov.au (you can also search the register for details about ABN holders).

To GST or not to GST – that is the question

GST– Goods and Services Tax has been around since 1 July 2000. GST rate of 10% means that all business registered for GST must charge 10% on sales.

For example if you buy something for $110 you divide by 11 = $10 GST.

What?? How does that work? Work it out backwards – If they make something for $100 they have to charge 10% GST – $10 so the GST inclusive price is $110.

If you notice your train ticket for $5 – divide by 11 and you will get the GST amount.

You usually only have to register for GST if you earn more than $75,000 from your business* (*$150,000 if not for profit).

However you can voluntarily register. A lot of people register for the following reasons:
- The company they do work for told them to register
- The company they do work for expects GST on the invoice (OK not a great reason to register)
- Everybody else is doing it

If you register for GST you need to complete a form and pay/get a refund for GST collected (on sales) minus GST paid (on business purchases) = Net GST.

This is usually done quarterly on a Business Activity Statement (BAS). You might also meet the requirements to lodge an ‘Annual GST return’ – due when your tax return is due.

Most people prefer to lodge quarterly BASs as it forces them to do their paperwork and see what they have earned/spent each quarter.

The second year

GST
If you lodged an annual GST return (and wish to keep doing so) the ATO will usually estimate and send quarterly GST instalments for you to pay during the year. If you think these instalments are too high – in the September quarter (first quarter given tax year end in June) you can elect to prepare a quarterly BAS.

Hiring staff
If you hire employees* (not a sub-contactors) to work for you – you will be required to register for PAYG Withholding, take out PAYG Withholding from their pay and lodge a quarterly BAS with the ATO.

PAYG Instalments
When you lodge your first year business tax return (if you have made a profit) – the ATO will issue instalments to pay next years tax (Pay As You Go).
Very briefly -if you receive a high instalment (because you had a great 1st year, or finished business, etc.) then you can sometimes vary the instalment down.

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