Businesses use activity statements to report and pay a number of tax obligations, including GST, pay as you go (PAYG) instalments, PAYG withholding and fringe benefits tax. Non-business individuals who need to pay quarterly PAYG instalments also use activity statements.
Activity statements are personalised to each business or individual to support reporting against identified obligations. Activity statements for businesses may be due either quarterly or monthly. Generally, businesses can lodge and pay quarterly if annual turnover is less than $20 million, and total annual PAYG withholding is $25,000 or less. Businesses that exceed one or both of those thresholds will have at least some monthly obligations. Non-business individuals are generally required to lodge and pay quarterly.
Businesses or individuals with small obligations may be able to lodge and pay annually. Some taxpayers may receive an instalment notice for GST and/or PAYG instalments, instead of an activity statement. The Australian Taxation Office (ATO) web site provides instructions on lodging and paying activity statements. Detailed instructions are provided for each of the different tax obligations:
The Australian business number (ABN) is a single business identifier that allows businesses to deal with the Australian Taxation Office (ATO) and other government departments and agencies with one identifier.
An ABN is not compulsory and not everyone is entitled to an ABN. The following entities will need an ABN to comply with other tax obligations:
- Businesses with GST turnover of $75,000 or more must register for GST and need an ABN to do this
- Non-profit organisations with GST turnover of $150,000 or more must register for GST and need an ABN to do this
- Entities seeking to be endorsed as a deductible gift recipient need an ABN to obtain that status
- Charities seeking exemption from income tax need an ABN.
- Companies registered under the Corporations Law
- Business entities carrying on an enterprise
- Trustees of self-managed superannuation funds should obtain an ABN for the fund.
If an entity makes supplies of goods or services to a business, the supplier entity generally needs to quote an ABN. If the supplier does not quote an ABN, the payer may need to withhold tax from the payment.
Deductions for the decline in value of depreciating assets are available under the Uniform capital allowance (UCA) system. In addition to the rules for depreciating assets, deductions are allowed for certain other capital expenditure. Small business entities have the option of choosing simplified depreciation rules.
Land, trading stock and most intangible assets (excluding exceptions such as intellectual property and in-house software) are not depreciating assets.
The decline in value is calculated by spreading the cost of the asset over its effective life, using one of two methods:
- Prime cost method – decline in value each year is calculated as a percentage of the initial cost of the asset
- Diminishing value method – decline in value each year is calculated as a percentage of the opening depreciated value of the asset.
For most depreciating assets, taxpayers can either self-assess the effective life, or use estimates published by the ATO. Taxpayers can recalculate, either up or down, the effective life of an asset if the circumstances of use change and the effective life initially chosen is no longer accurate. An improvement to an asset that increases its cost by 10% or more in a year may result in an obligation to recalculate the effective life of the asset.
Decline in value of cars is restricted to the car limit. Luxury car leases are treated as a notional sale and purchase, with decline in value restricted to the car limit.
The decline in value of certain depreciating assets with a cost or opening adjustable value of less than $1,000 can be calculated through a low-value pool. The decline in value for depreciating assets in the pool is calculated at an annual diminishing value rate of 37.5%.
Capital gains tax (CGT) generally applies to CGT events that happen to CGT assets acquired after 19 September 1985. CGT is not a separate tax, it forms part of income tax.
The most common CGT event is the disposal of an asset by selling it or giving it away. A full list of CGT events is available here.
A CGT asset is any kind of property, or a legal or equitable right that is not property. CGT assets include:
- Part of, or an interest in, a CGT asset
- Goodwill, or an interest In it
- An interest in a partnership asset
- An interest in a partnership, that is not an interest in a partnership asset
- Land and buildings
- Shares in a company
- Units in a unit trust
- Debts owed to a taxpayer
- A right to enforce a contractual obligation
- Foreign currency.
Where a taxpayer owns an interest in a CGT asset and then acquires a further interest, the interests remain separate CGT assets. Buildings, structures and other capital improvements to land may be treated as separate CGT assets to the land. A car is a CGT asset, but any capital gain made from it is exempt from CGT (the gain may be taxable under other provisions).
Special rules apply to some kinds of CGT assets, including collectables, personal use assets, certain investments, leases and options.
Working out a capital gain or loss
For most CGT events, a capital gain arises if the capital proceeds from the CGT event exceed the cost base of the CGT asset. Conversely, a capital loss arises if the reduced cost base of the CGT asset exceeds the capital proceeds from the CGT event.
The amount of a capital gain is reduced by the CGT discount if the taxpayer is an individual, trust or complying superannuation entity, and the taxpayer acquired the CGT asset at least 12 months before the CGT event. The discount percentage is as follows:
- 50% for Australian resident individuals
- 33 1/3% for complying superannuation entities and eligible life insurance companies
- Special rules apply to foreign resident individuals.
Taxpayers can choose the indexation method, rather than the CGT discount, if that results in a lower capital gain. Companies are generally not eligible for the CGT discount, but can use the indexation method. Discount capital gains made by trusts can generally be passed through to presently entitled beneficiaries, who can claim the discount percentage as above. Where the trustee is taxed on a capital gain, the availability of the discount depends on the particular circumstances of the trust.
Capital losses can only be offset against capital gains, they cannot be offset against other income. Care should be taken when applying capital losses to ensure the optimum reduction of capital gains for the CGT discount and small business CGT concessions. A net capital loss in an income year is carried forward to be offset against capital gains in later income years.
Exemptions, rollovers and concessions
Foreign residents and temporary residents are subject to CGT only on taxable Australian property such as real estate in Australia or a CGT asset used in a business in Australia. Temporary residents are subject to the same CGT rules as foreign residents, however some specific rules apply. Special rules apply on becoming a resident or ceasing to be an Australian resident.
For property sold after 30 June 2020, foreign residents will no longer be able to claim the CGT main residence exemption when they sell property in Australia unless certain circumstances apply.
Excise duty is a tax on certain types of goods that are made in Australia including alcohol, tobacco, fuel and petroleum products.
Customs duty is imposed at an equal rate on imported alcohol, tobacco, fuel and petroleum products to ensure imported and local goods are treated consistently. These goods are referred to as Excise Equivalent Goods (EEGs).
From 1 July 2019, for imported tobacco products, customs duty must be paid to the Department of Home Affairs when the products arrive at the Australian border.
Entities who manufacture or store excisable goods must hold an appropriate licence.
Fringe Benefits Tax (FBT) is paid on particular benefits employers provide to their employees or their employees' associates instead of salary or wages. Benefits can be provided by an employer, an associate of an employer, or a third party by arrangement with an employer. An employee can be a former, current, or future employee.
FBT is separate from income tax and based on the taxable value of the various fringe benefits provided. The rate corresponds to the top marginal income tax rate for individuals, including the Medicare Levy (currently 47%). A complicated gross-up factor is applied in calculating the tax - the general principle is that the FBT payable should equal the income tax otherwise payable by an employee on the top marginal tax rate, on the cash salary needed to purchase the benefit (including GST) from after-tax income.
Reporting, lodging and paying FBT
The FBT year runs from 1 April - 31 March. Annual FBT returns must be lodged and tax paid by 21 May each year. Returns lodged through tax agents may qualify for extended due dates. Annual FBT liabilities of $3,000 or more are paid by quarterly instalments as part of the employer's business activity statement.
If the taxable value of certain fringe benefits provided to an employee exceeds $2,000 in an FBT year, the 'grossed-up' taxable value must be reported on the employee's payment summary for the corresponding income tax year. The following categories of fringe benefits apply, with specific valuation methods applicable to each category:
- Board - meals provided to an employee and family members, where the employer provides accommodation and at least two meals a day
- Car - a car made available for the private use of an employee or associate (car benefits can be valued using either the statutory formula or operating cost methods)
- Car parking - a car parking space provided for use by an employee or associate, on either the employer's premises or in a commercial car parking station
- Debt waiver - releasing an employee or associate from an obligation to repay a debt
- Income tax exempt body entertainment - FBT is payable by income tax exempt employers on entertainment provided to an employee or associate by way of food, drink or recreation
- Expense payment - paying or reimbursing a private expense incurred by an employee or associate
- Housing - accommodation provided that is an employee's or associate's usual place of residence
- Living-away-from-home allowance - a cash allowance paid to compensate an employee for increased costs, because the employee's duties require them to live away from their usual place of residence
- Loan - a loan provided to an employee or associate either interest-free or at a discounted interest rate
- Meal entertainment - entertainment provided by taxable employers by way of meals to an employee or associate
- Property - goods provided to employees either free or at a discounted price
- Residual - any fringe benefit (as defined) that does not fall into one of the specific categories
Exemptions, concessions and special rulesMORE: See the ATO web site for more on FBT categories.
Concessional valuation rules apply to 'in-house' fringe benefits The taxable value of certain fringe benefits can be reduced by employee contributions towards the cost of the benefit. Making such contributions can result in a lower overall tax liability, depending on the particular employee's tax situation and the valuation method that applies to each benefit received.
Fuel schemes provide credits and grants to reduce the costs of some fuels or provide a benefit to encourage recycling of waste oils. There are various types of schemes:
- Fuel tax credits for business - provides a credit for the excise or customs duty included in the price of fuel used for business activities, in machinery, plant, equipment and heavy vehicles.
- Fuel tax credits - domestic electricity generation and non-profit emergency vessels or vehicles
- Cleaner fuels grants scheme - encourages making or importing fuels that have a lesser impact on the environment. Eligible cleaner fuels include biodiesel and renewable diesel, as well as low or ultra-low sulphur conventional fuels like low sulphur premium unleaded petrol (PULP) and ultra low sulphur diesel (ULSD). The cleaner fuels grants scheme closed on 1 July 2015.
- Product stewardship for oil (PSO) program - supports recycling oil for environmental sustainability. This includes recycling used oil and using recycled oil.
The former Energy grants credits scheme that applied to alternative fuels and diesel no longer operates for new purchases of fuel.
The General Value Shifting Regime (GVSR) applies to arrangements that shift value between assets, causing discrepancies between the market values and tax values of the assets. Most value shifts happen when parties don't deal at the market value, causing one asset to decrease while the other increases.
Three scenarios are targeted under the GVSR. Exclusions apply to small values in each of the scenarios, as follows:
- Indirect value shifting (exclusion applies if total value shifts under a scheme are less than $150,000)
- Direct value shifts on interests (exclusion applies if total value shifted is equal to or less than $50,000)
- Direct value shifts by creating rights (exclusion applies if the market value of the right granted exceeds the proceeds for the grant by $50,000 or less).
Generally, the GVSR does not apply to normal commercial dealings conducted at market value, or dealings within consolidated groups. There are several other exclusions and safe harbours in the rules.
Goods and services tax (GST) is a tax of 10% on most goods, services, and other items sold or consumed in Australia. The general principle is that only the end consumer bears the economic cost of GST. Registered entities bear the liability of collecting GST in the price of sales to their customers, but can offset credits for GST included in the price of business purchases.Registration
An entity (including an individual) must register for GST if the entity's annual turnover is $75,000 or more ($150,000 for non-profit organisations). An entity may choose to register if the entity's turnover is below the threshold. Related entities may form a GST group and be treated as a single entity for GST. A single entity may register separate branches for GST.Charging GST
A registered entity is generally required to charge GST on all sales of goods and services in Australia, unless a supply is GST-free or input taxed. The entity must provide its customers with a tax invoice for all taxable sales above a threshold of $82.50 ($75 + GST).Claiming GST credits
A registered entity can claim an input tax credit for GST included in the price of goods or services purchased for the entity's business. A credit cannot be claimed for:
- Purchases where GST was not included in the price (GST-free acquisitions)
- Purchases used to make input taxed supplies
- Purchases for the entity's private use.
A range of special rules apply to sales and purchases by entities operating in specific industries, or certain types of transaction entered into by any entity. Details are available here.
Reporting and paying GST
The reporting periods for GST are called tax periods and can be quarterly or monthly. GST is reported and paid on the entity's activity statement for its tax period. Entities with an annual turnover of less than $20 million generally have quarterly tax periods, but can choose to have monthly tax periods. Entities with an annual turnover greater than $20 million are required to have monthly tax periods and lodge their activity statements electronically.
In limited circumstances, entities can choose to report and/or pay GST annually. This may involve quarterly instalments plus an annual GST return to reconcile actual transactions for the year. The rules for attributing GST payable and input tax credits to tax periods differ according to whether GST is accounted for on a cash or accrual basis. An entity can account for GST on a cash basis if any of the following applies:
- the entity is a small business (or non-business enterprise) with an annual turnover of less than $2 million - this includes the turnover of related entities
- the entity accounts for income tax on a cash basis
- the entity runs a type of enterprise that is permitted to account on a cash basis regardless of turnover - generally a government school, a charity, or a gift deductible entity.