Angelique has started a new business and is unsure about how she pays tax as a sole trader and wants to know how much money is needed to budget correctly. She sought help from chartered accountant GAIL FREEMAN. 

I REASSURED Angelique that, despite the system being a little complex, once she was in the swing of managing the tax affairs of her new business, she’d find it quite easy. 

“Remember when you were an employee and tax was deducted every pay so that you had paid the approximately correct amount of tax at the end of the year? Well, the system for sole traders, investors and other business owners is designed to replicate that,” I told her.

“The starting point is when you lodge your first business tax return. The amount of tax owing will be calculated and that is due after the end of that financial year. The amount of tax you paid on your business income is increased slightly to allow for inflation and that is divided by four. This amount becomes your quarterly instalments for the current year.”

Angelique commented that it seemed she was paying double the tax on her first year’s income.

“Angelique, you are correct. However, at the end of year two, the amount of tax you owe is calculated and then a credit is raised for the instalments you’ve paid,” I said.

“This means that, going forward, you will be paying tax as you go with either a shortfall or extra payment at the end of the year. 

“So if your income goes up, the amount you owe will be greater and if it goes down then you will get a refund.”

Angelique asked what happened if her income was going down and the instalments were too high.

“That’s a good question,” I replied, “and obviously there’s a mechanism to deal with that by reducing your instalments to a more accurate amount. 

“However, if you reduce your instalment by too much, penalties can be charged. So any downward variation needs to be accurate. 

“If you know your income has gone up and the instalments are too low, while you can vary your instalment upwards, it is preferable to save the money and earn some interest on it until you have to pay it rather than have it paid to the Australian Tax Office (ATO) and not earning interest.

“When you are registered for GST these quarterly payments are made with your business activity statements (BAS). If you are not registered for GST you just pay the instalments quarterly. 

“The quarters end on September 30, December 31, March 31 and June 30. The instalments are due at the end of the next month if you lodge them yourself or at the end of the following month if we lodge them for you with your BAS. 

“The important thing is that you have to lodge and pay your instalments on time. If at any time you are unable to pay or you are concerned that the instalment is too high please contact me promptly and I will advise you of your options. While it’s possible to make a payment arrangement, the ATO charges very high interest rates.”

If you need guidance on your quarterly instalments or any other tax matter, contact the friendly team at Gail Freeman & Co Pty Ltd call 6295 2844, email info@gailfreeman.com.au or visit gailfreeman.com.au

Disclaimer

This column contains general advice, please do not rely on it. If you require specific advice on this topic please contact Gail Freeman or your professional adviser.

Authorised Representative of Lifespan Financial Planning Pty Ltd AFS Lic No. 229892.