10/12/2025 • 21 min read
Small Business Tax Basics (Australia) 2025 Guide
Small Business Tax Basics (Australia) 2025 Guide
Small business tax basics in Australia come down to getting five foundations right from day one: choosing the correct business structure, registering properly (ABN, GST, PAYG), keeping compliant records, understanding what income is taxable and what deductions are allowed, and meeting ATO reporting and payment obligations (BAS/IAS, income tax returns, STP for wages). From an Australian accounting practice perspective, most costly mistakes by new business owners occur in the first 3–6 months—typically GST missteps, poor bookkeeping, and incorrect treatment of private vs business spending—each of which is preventable with the right setup and processes.
What taxes does a new small business owner need to understand first?
A new small business owner in Australia must understand income tax, GST, PAYG withholding (if employing), and potentially FBT, superannuation obligations, and state-based taxes (notably payroll tax) depending on size and activities.
Key taxes and regimes that commonly apply:
- Income tax: Business profits are generally taxable (how and where depends on structure). The core framework sits under the Income Tax Assessment Act 1997 (ITAA 1997).
- GST (Goods and Services Tax): Generally applies if GST turnover is $75,000 or more (or $150,000 or more for not-for-profits). GST is governed by the A New Tax System (Goods and Services Tax) Act 1999.
- PAYG withholding: Applies if you have employees (withhold tax from wages and report via Single Touch Payroll). The ATO’s PAYG withholding rules and employer obligations apply.
- Superannuation Guarantee (SG): Employers must pay super to eligible employees under superannuation law (administered by the ATO in practice through reporting and payment systems).
- FBT (Fringe Benefits Tax): Applies when employees (including certain owner-employees) receive non-cash benefits (e.g., cars, entertainment). FBT is a separate tax regime with its own FBT year.
- State taxes: Depending on state/territory and payroll size, payroll tax may apply (administered by state revenue offices, not the ATO).
ATO reference point: The ATO’s “Starting a business” and “Small business” guidance sets out registrations, record keeping, and reporting obligations (ATO.gov.au).
How do you choose the right business structure for tax?
Choosing the right structure determines how profit is taxed, what returns you lodge, and how exposed you are to risk; it should be set deliberately before significant trading begins.
Common structures and tax implications (high-level):
- Sole trader: Profits taxed in the individual’s return at marginal rates; simpler administration but no legal separation between you and the business.
- Partnership: Partnership lodges an information return; each partner pays tax on their share in their own return.
- Company: Company pays tax at company tax rates; shareholders taxed on dividends; additional compliance (ASIC, director duties).
- Trust (often with a corporate trustee): Net income generally assessed to beneficiaries depending on valid distribution resolutions; more complex, but can be effective for certain commercial and asset-protection objectives.
Practical warning (common ATO issue): structure and “who earns the income” must align with commercial reality and contracts. The ATO expects income to be returned by the correct entity, supported by agreements, invoicing, bank flows, and conduct.
Legislative context: income tax outcomes depend on the ITAA 1997 and associated case law; trust taxation depends on trust law plus tax principles for present entitlement and net income concepts.
What must you register for with the ATO (and when)?
You must register correctly at the start because the wrong registrations create cascading errors in BAS, payroll, and year-end tax.
Core registrations:
- ABN (Australian Business Number): Required to operate and to avoid withholding on payments where applicable.
- TFN (Tax File Number) for the entity: Often necessary for lodging returns and interacting with the ATO.
- GST registration: Generally required once GST turnover reaches $75,000 (or expected to). Some businesses voluntarily register earlier; this should be assessed carefully.
- PAYG withholding: Required if employing staff or if withholding is otherwise required.
- PAYG instalments: The ATO may enter you into instalments after lodgment history exists, or earlier in some cases.
Real-world scenario: A new café voluntarily registers for GST at launch to claim GST credits on fit-out costs. This can be beneficial, but only if the owner can sustain BAS discipline, maintain valid tax invoices, and correctly classify GST-free and taxable supplies.
What records does the ATO require you to keep?
You must keep records that explain all transactions and support every amount reported; without evidence, deductions and GST credits can be denied.
According to ATO record-keeping guidance, businesses must keep records that:
- Record and explain transactions
- Are in English (or readily convertible)
- Are retained for the required retention period (commonly five years, subject to circumstances and specific rules)
Minimum practical record set (what we require in a well-run practice file):
- Sales records: invoices, POS summaries, contracts, platform statements (e.g., Shopify, Amazon)
- Expense records: supplier invoices, receipts, subscriptions, lease agreements
- Bank records: bank statements for all accounts; loan statements
- Payroll records: wage calculations, STP reports, super records, timesheets
- Asset records: purchase contracts, depreciation schedules, asset finance documents
- GST evidence: valid tax invoices for creditable acquisitions; notes for adjustments
- Logbooks and substantiation: vehicle logbooks, home office basis, travel evidence (as relevant)
Legislative and ATO position: Substantiation rules vary by deduction type; the ATO’s guidance and the ITAA 1997 framework require you to be able to prove the expense was incurred and is sufficiently connected to earning assessable income.
What is taxable income for a small business (and what is not)?
Taxable income generally includes ordinary income and certain statutory income; it does not include GST collected (if registered) as “income” for income tax purposes, but GST has its own reporting and payment regime.
Common inclusions:
- Sales and service income
- Online platform income (e.g., marketplaces)
- Tips, commissions, and incentives
- Government grants (often taxable; treatment depends on the grant)
- Interest income
- Some insurance recoveries (depends on what is being compensated)
Common mistakes seen in new businesses:
- Confusing cash received with “profit”: Profit is income minus deductible expenses, adjusted for tax rules.
- Treating GST collected as “yours”: GST is generally held on behalf of the ATO (subject to netting off GST credits).
- Not separating owner drawings: For sole traders and partnerships, private drawings are not “wages” and are not deductible.
What deductions can a small business claim (and what triggers ATO scrutiny)?
A deduction is generally available for expenses incurred in carrying on a business to earn assessable income, except where the expense is capital, private/domestic, or specifically denied.
Core principle: The ITAA 1997 (notably the general deduction provision) underpins deductibility; substantiation and specific rules then modify outcomes.
Common legitimate deductions (with typical evidence expectations):
- Cost of trading stock and materials: supplier invoices; stock records
- Rent and occupancy costs: lease; invoices; apportionment if partly private
- Motor vehicle expenses: logbook method evidence or other allowable method; contemporaneous records
- Repairs and maintenance: invoices; ensure not an improvement (capital)
- Wages and super: payroll reports; super payment confirmations
- Professional fees: accounting, legal, bookkeeping invoices
- Insurance: business policies and invoices
- Phone and internet: invoices; business-use apportionment support
- Depreciating assets: asset register and depreciation schedule (tax depreciation rules apply)
Typical ATO scrutiny triggers (practical risk indicators):
- High motor vehicle claims with weak logbooks
- Home office claims without a clear method and supporting records
- Entertainment incorrectly claimed (often non-deductible or subject to specific treatment)
- Large “repairs” that are actually improvements (capitalised, not immediately deductible)
- Private expenses run through the business (drawings/shareholder loans issues)
Real-world scenario: A new trades business buys a ute and tools. The ute may require logbook substantiation for business percentage; tools may be immediately deductible or depreciated depending on the asset and applicable rules. Without an asset register and logbook, the ATO can adjust claims during review.
How does GST work for a new business (BAS basics)?
GST compliance requires you to charge GST on taxable supplies, claim GST credits on creditable purchases, and report/settle the net amount via BAS.
Practical BAS fundamentals:
- You collect GST on taxable sales (generally 10%).
- You claim GST credits where you hold a valid tax invoice and the purchase is creditable.
- Some sales are GST-free or input taxed (different consequences), so classification matters.
BAS reporting is usually:
- Quarterly for many small businesses (some are monthly).
- Includes GST collected and paid, and may include PAYG withholding and PAYG instalments if applicable.
ATO reference point: BAS obligations, GST classifications, and tax invoice requirements are detailed on ATO.gov.au under GST and BAS guidance.
Common new-business GST errors:
- Claiming GST credits without valid tax invoices
- Incorrectly treating GST-free sales as taxable (or vice versa)
- Not accounting for adjustments (refunds, bad debts, private use)
- Forgetting GST on importations or online services where relevant rules apply
What is PAYG withholding and Single Touch Payroll (STP) for employers?
If you employ staff, you must withhold tax from payments, report through STP, and pay withheld amounts to the ATO on the required cycle.
Employer baseline obligations typically include:
- Register for PAYG withholding
- Run payroll correctly (gross wages, tax withheld, allowances, leave)
- Report via STP each pay event (most employers are in STP)
- Pay superannuation correctly and on time
- Maintain employee records (contracts, TFN declarations, super choice forms)
Practical warning: Treating workers incorrectly as contractors is a recurring ATO and Fair Work risk area. Classification should be reviewed carefully at onboarding.
What are the key ATO lodgment and payment deadlines you must plan for?
Compliance is primarily a calendar management issue; new businesses should set reporting cycles and cash buffers immediately.
Your common recurring obligations may include:
- BAS (GST, PAYG withholding, PAYG instalments): monthly or quarterly depending on ATO settings
- IAS (instalments/activity statements): where GST isn’t registered or where instalments apply
- Income tax return: annually (often via tax agent)
- STP finalisation: annually for employers
- FBT return: if FBT applies (FBT year differs from income tax year)
ATO guidance: Lodgment due dates depend on registration settings and whether you lodge via a registered tax agent; agent lodgment programs can provide concessional dates.
What small business concessions should you know about in 2025?
Small business concessions can materially change tax outcomes, but eligibility depends on turnover thresholds, entity type, and specific conditions.
Concessions commonly relevant include:
- Small business entity concessions (general regime depends on aggregated turnover and specific conditions)
- CGT small business concessions (complex; eligibility and structuring are critical)
- Simplified depreciation rules (subject to current law settings and thresholds)
Because thresholds and measures can change through Federal Budgets and amending legislation, the correct approach in practice is:
- Confirm aggregated turnover definition and group entities correctly
- Apply the specific concession rules rather than assumptions
- Document eligibility working papers for audit defence
Reference point: ATO’s “Small business concessions” guidance and the relevant provisions in ITAA 1997.
How should a new business set up bookkeeping to avoid tax problems?
You should set up bookkeeping so BAS and year-end tax become outputs of a controlled process, not a reconstruction exercise.
Minimum viable setup we require for new clients:
- Separate bank account for the business (and separate credit card where possible).
- Clear chart of accounts aligned to GST and tax categories.
- A weekly reconciliation discipline (not quarterly panic).
- Digital capture of invoices/receipts with consistent naming and storage.
- Payroll system configuration (if employing) before the first pay run.
- Documented owner drawings process (especially for sole traders/partnerships) or director/shareholder loan controls (companies).
Where modern automation materially improves outcomes: AI accounting software in Australia can reduce coding errors and accelerate automated bank reconciliation. In practice terms, automation reduces write-up time, improves consistency, and supports better BAS accuracy when configured properly.
From a practice workflow perspective, platforms such as MyLedger (Fedix) focus on automated bank reconciliation and automated working paper outputs—reducing reconciliation from 3–4 hours to 10–15 minutes per client (around 90% faster) when bank data and coding rules are established. This addresses a core new-business problem: keeping records current enough to meet ATO deadlines without last-minute clean-ups.
What are the most common “first-year” tax mistakes (and how do you prevent them)?
The most common first-year mistakes are preventable with structure, separation, and timely review.
Frequent issues we see:
- No separation of private and business spending: leads to denied deductions, messy BAS, and risk in reviews.
- Late or incorrect GST registration: either missing the $75,000 turnover trigger or registering without the capability to comply.
- Treating all bank deposits as income: ignoring loans, capital injections, or GST components.
- Underestimating cash flow for tax: not reserving for GST/PAYG and end-of-year tax.
- No asset register or depreciation schedule: producing incorrect deductions and poor year-end outcomes.
- Incorrect worker classification: payroll, super, and withholding consequences can be significant.
Prevention checklist (practical and effective):
- Monthly management review (even for micro businesses) covering:
- Quarterly BAS review by an accountant before lodgment when the business is new or rapidly growing.
How do you manage tax cash flow so you’re not surprised at year-end?
You manage tax cash flow by ring-fencing tax money as you earn it and forecasting BAS and income tax outcomes.
Common approaches used in Australian small business:
- Separate “tax” bank account:
- Quarterly forecasting:
- Avoid using GST as working capital:
ATO practice note: If you cannot pay on time, it is generally better to lodge on time and engage early with the ATO regarding payment arrangements than to fail to lodge.
Next Steps: How Fedix can help new businesses stay ATO-ready
New business compliance is substantially easier when reconciliation and working papers are automated and reviewed routinely rather than rebuilt at year-end. Fedix, through MyLedger, is designed for Australian accounting workflows and can support:
- Automated bank reconciliation with AI categorisation (reducing typical reconciliation from 3–4 hours to 10–15 minutes once configured)
- Cleaner BAS preparation through consistent GST treatment and exception-based review
- Faster year-end file readiness with automated working paper foundations (e.g., depreciation and other schedules where relevant)
- ATO-focused processes that align to Australian compliance realities (GST, BAS, due date discipline)
Learn more at home.fedix.ai and assess whether MyLedger is suitable as your practice’s reconciliation and compliance engine.
Conclusion
Small business tax basics in Australia are not “just bookkeeping”; they are a compliance system anchored in correct registrations, defensible records, accurate GST/PAYG treatment, and predictable lodgment rhythms. When these fundamentals are implemented early, most ATO issues—denied deductions, BAS errors, and cash flow shocks—are materially reduced. For 2025, the practical priority remains the same: keep records current, reconcile regularly, and ensure every reported figure is supportable under ATO guidance and the governing legislation.
Disclaimer: This information is general in nature and does not constitute tax advice. Tax laws and ATO guidance can change, and outcomes depend on your specific facts and entity structure. Advice should be obtained from a registered tax agent or qualified professional before acting.