When starting out as a sole trader there are a lot of things you need to consider: how to promote your business, how to price your services, and how to track and manage your projects.
Then there’s also the issue of managing your own taxes.
One of the first decisions you’ll have to make is whether or not to register for GST - this decision will have a big impact on how you manage your financial admin. If you do register for GST, for example, then you will also need to lodge a quarterly BAS with the ATO.
This article will take you through all you need to know about what a BAS is, how to lodge it and why it is necessary.
Who needs to lodge a BAS?
BAS stands for Business Activity Statement. As a sole trader, you will only be required to lodge a BAS once you have registered for GST (Goods and Services Tax); after you register for GST you will need to lodge your BAS with the ATO quarterly.
When do I need to register for GST?
If your gross annual income looks like it will exceed $75,000, you will need to register for GST. This may be your projection when you start the year, start your business activity, or when your turnover goes over the threshold. If your income ticks over the $75,000 threshold, then you will have 21 days to then register for GST.
There are also other circumstances where you need to be registered for GST, regardless of your incomes. These include if your business is a taxi or limousine service, including ride-sourcing, or if you are wanting to claim fuel tax credits for your business.
What is a BAS?
Your BAS lodgments are the means through which you report and pay your GST and PAYG tax instalments, PAYG withholding tax, and other relevant taxes.
Lodging a BAS is not something to panic about, but if you are going to be lodging it every three months with the ATO, it’s best to get familiar with it as soon as possible. The ATO has some excellent guides to help small business get their heads around how and when to lodge. More on how to lodge your BAS below.
What is GST?
GST is charged on almost all goods and services sales, with some exemptions such as certain foods, some personal items, healthcare and some household essentials. If your business is registered for GST, you must charge your clients and customers an additional 10% on top of your sales, which is then paid to the ATO when it’s due. GST is an additional charge on top of your invoice and is not taken from the money you earn.
Effectively you are collecting the tax on behalf of the ATO and paying it to them. The tax collected by the ATO is then used by the states for public services, infrastructures, such as roads, public schools and hospitals.
Every three months at the end of March, June, September and December, the ATO will automatically send you a BAS form to complete - either through the post or if you have your MyGov account linked to the ATO, you can find this online. You have until the 28th of the following month to then make any payment owing to the ATO.
The GST portion of your BAS is the GST (10% on top of your invoices) you charged clients minus any GST you paid in the course of your business expenditure.
What is PAYG?
PAYG stands for “Pay As You Go”. The PAYG Instalment portion of your BAS estimates income tax payable quarterly based on your previous year’s tax return. However, if you’re doing better or worse than last year, there is an option to vary the PAYG portion payable based on your actual business performance.
While it may seem like a lot of work to do your income tax every three months, there is some sound logic to it. It means you are always on top of your tax and can avoid any serious cash flow issues that would result from dealing with an entire year’s income tax bill at the end of the financial year.
Varying the amount payable isn’t too complex. You need to tick a box and select one of four reasons as to why you are changing your quarterly payment amount. You can vary your instalments if you believe the current ATO assigned amount will result in you paying too much or too little tax for the year. You then need to pay the same amount each subsequent quarter unless you make another variation. The ATO provides an excellent calculator to help you work out the correct amount.
How to lodge your BAS?
If your business is a services business, calculating GST and PAYG for your BAS can be a fairly straightforward affair. But if you need to purchase stock, undertake stock control, or have several business overheads, it can become more complicated.
Lodging a BAS will require keeping records of your invoices and expenses; you will also need to be up to speed about what you can claim as a legitimate tax deduction and what expenses you have paid with GST on them to claim as a credit.
If you are registered as a sole trader with an ABN, you are only required to fill out a simple BAS form. However, being registered as a company can add an additional layer of complexity that is not always necessary for sole traders.
Be cautious - a lot of traditional accountants push their clients into unnecessarily registering a company, a move that adds a great deal of complexity and overhead to the process of lodging returns.
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