How is Company Tax Calculated?

Written by

Parissa Tosif

Figuring out how company tax is calculated can be confusing. The amount you ultimately pay depends on various factors like deductibles, company type, and business income. However, understanding your specific tax situation is really important. It can ensure you meet your tax obligations. Additionally, tax can affect how you operate your business and do budgeting. This article provides a simple summary of how company tax is calculated.

What is a Company?

A company is a type of business structure.

One of the main characteristics of a company is that is a separate legal entity. It operates independently of the people who create it. That is, It can be sued, sued by others, or incur debt. A company has to comply with the Corporations Act 2001 (Cth) and has other requirements.

How Is Company Tax Calculated?

In a nutshell, company tax is calculated by applying the set ‘tax rate’ to your ‘taxable business income’. Your taxable income is your assessable income, minus deductibles.

In simple form, the calculations for company tax are:

 

Taxable Income = (Business Income – Deductibles)

Tax Payable = (Tax Rate) % of Taxable Income

1. The Tax Rate

The tax rate can differ depending on the type of company you have. Your tax rate is the percentage of your ‘taxable income’ that you need to pay to the Australian Taxation Office (ATO).

For Companies

Companies are taxed at 30% (2022 – 202 financial year). That means 30% of taxable income needs to be paid to the ATO. Company types that fall under this category of tax include:

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Lower Tax Rate

Additionally, certain types of companies are eligible for a lower tax rate of 25% (2022 – 2023 financial year).

  • Base rate entities – Base rate entities are companies that have an annual turnover of less than $50 million (2022 – 2023 financial year). Additionally, they make 80% or less of their income through passive means (for example, rent).
  • Small business – Small business entities are those that have a total turnover of less than $10 million. They also have to have to conduct business for all of the year, or part of it. Small businesses also have access to certain tax concessions.

2. Assessable Income

Your assessable income is usually made of two parts:

Gross Income

  • All money from sales (online and in person, cash or electronic)
  • Foreign Income

Other Business Income

  • Income from trading stocks
  • One-off transactions for profit
  • Capital gains
  • Cash prizes

3. Deductions

Deductions are expenses you can minus from your assessable income. The result is your taxable income. Generally, for an expense to be a deduction, it needs to fulfill certain criteria:

  • The expense was made for business use and not personal use; or
  • The expense was made partially for business and partially for personal use. In this situation, you can only deduct the portion that was for your business; and
  • You can prove these expenses.

Examples of deductions are:

  • Business travel expenses
  • Maintenance and repairs
  • Salaries and wages

Additionally, there are expenses that you cannot claim. These include:

  • Personal or household expenses (For example, childcare and home repair fees)
  • Fines and tickets
  • Money you earn on the side through a hobby
  • If you’ve claimed the GST part of a purchase in your business activity statement, you can’t claim it as a deductible 

In effect, the amount you spend on deductible expenses is then taken out of your assessable income. The result is taxable income.

For instance, say your online business makes $20,000. You spent $1000 on deductible expenses like business travel. In that case, your taxable income is $19,000. If you have a regular company and no other factors apply, the tax rate is 30%. Therefore, your tax for that year would be $5700. The time of year you can claim your deductibles depends on various factors including the type of deduction you’re making.

Summary

Overall, the amount your company will be taxed depends on a variety of factors. These include whether you’re a small business or not, and what deductibles you have. Further, if you have a not-for-profit company other tax rates apply.

Finally, keep in mind that tax rates can change. This can depend on the financial year in question, and your company type. If you have any questions or concerns about your company’s tax situation, you can get the assistance of an accountant or taxation lawyer.

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