Determining Tax Rates For Your Small Business In 2021

Using the services of small business accountants has more benefits than meets the eye. Sure, they are great for doing a professional job of bookkeeping and saving you time, effort and money. However, a hidden treasure of their services is helping small businesses determine their current tax rates, filing timely and correctly, and realizing any tax benefits for which they may be eligible from time to time.

Small business tax rates in 2021

Each small business needs to correctly determine its currently applicable tax rates.

Why should we determine the tax rates? Are they not one and the same over time? The short answer is “No”. Tax rates vary. Tax exemptions vary. Tax filing procedures vary. And it is not just one tax, which needs to be determined and managed. Small businesses will have to consider income tax, sales tax, employee tax, super to mention but a few. These will also vary depending on the form of your small business (sole trader, partnership, or company) and the line of business of your company. The Australian Taxation Office (ATO) regularly publishes the full list of applicable company tax rates and applicable sole trader rates.

Finding your way around the tax regulations is important as one and the same taxes may be either with a different rate for different kinds of businesses or may apply in a different manner altogether. For example, should your small business be a sole proprietorship, your company income will be taxed with income tax just as if it were your personal income and individual income rates will apply. Should, however, your business be a partnership, it will not pay any income tax. Rather the partners will pay a pro-rata income tax on their respective share of the income at individual income tax rates. Furthermore, in both instances, you need to be aware of the tax-free threshold, above which the respective income tax rates apply. 

Then again if your small business is a registered company, it will not pay any income tax. The small business company tax rates will be eligible for you, without any tax-free threshold. Then again some exceptions apply. If your small business is in the life insurance industry or a non-profit organization the company rates above will not apply to your business.   

I do not know about you, but just enumerating the different variances makes me feel as if I am in a maze. This maze is ever-expanding and continuously changing. So even if you take the time to learn the current applicable tax regime to your small business, you will need to update your knowledge continuously. 

What is new in 2021

We all realize now that tax legislation is a vast and ever-changing field. Last year, this was enhanced by a virus.

The impact of the global COVID-19 restrictions on the global economy was harsh. Hence governments and tax authorities around the world are doing their best to overcome the negative effects of the pandemic and facilitate restoration and growth once again. The Australian Government and ATO are no exceptions. Various tax incentives and direct subsidies started to roll out as early as 2020 and continue in 2021 (some even reaching 2022). All of them are aimed at reducing the impact of the COVID-19 crisis and ensuring fast and strong recovery of businesses. However, each small business needs to find out the ones for which it is eligible, how to apply, and in what timeframe. Here are the highlights:

• Temporary (October 2020 to June 2022) full expensing and backing business investments incentive for depreciating assets. For these assets, an accelerated depreciation deduction applies. The measure should bolster investments in new assets by businesses;
•  Working from home increased expenses, which may be claimed as tax deductions. This measure is applicable until the end of June 2021, and is in support of employees and businesses with changed working arrangements due to the COVID restrictions;
• Increase of the upper limits of taxable income at lower rates of the resident tax rates for 2020 – 2021. The measure aims at reducing the tax burden during the pandemic and post-pandemic recovery;
• Changes in the company tax rates – while the company tax rate is still 30% if your company is a “base rate entity” (basically meaning small business), the company tax rate is reduced;
• Personal income tax cuts, currently extended for the tax period 2021-2022. The measure reduces the tax burden from income tax;
• The JobKeeper Payment Program directly supports businesses, which are affected by the COVID restrictions, to keep their employees. The Program ended on 28 March 2021. 

Utilising any of these will require correct and timely application in a predetermined form in a particular timeframe.

Financial advisers 

So, we have the relatively complex material of tax regulation, changing from year to year, different for different businesses, with specific measures and programs for supporting the COVID fall-out, specific requirements for filing, predetermined application forms, and specific time frames to be met. 

Seems complicated? In fact, it really is. Furthermore, it is also dynamic and ever-changing. The stake being whether our small business saves money or loses money.  

So what can we do about it? How can we find our way in this tax maze?

We exclude by default doing it yourself (as a small business owner, you have enough on your hands as it is, to dive into the taxation material). One way to navigate your way in this ever-changing sea of taxes is to hire a financial adviser or a financial planner. These companies are specialized in keeping track of all current tax regimes, regulations, and measures. They will interview you and advise on the current tax regulation most applicable to your small business. You will have information on the current tax environment, but you will still have to do the rest of the work. An easier way is to use the services of small business accountants. In this way, you get two for the price of one. Your bookkeeping will be done efficiently and you will have a partner to help you out in the difficult field of taxes. A word of caution here: do hire local business accountants. If your business is located in South Melbourne, Google “Accounting Firms in Melbourne”, when you are looking for your hired accounting hands. This is important, as some tax regulations are geography-specific and local experts will be privy to them, while national ones, let alone international ones, may not be as sharp (and will certainly be more expensive).