How Much Tax Do I Pay On ABN?
The hot topic in the Australian offices this week, which several clients have asked us about is the question of what happens if you work on both an ABN and a TFN.
It’s very common for people to work on both types of tax numbers, but it can cause significant confusion when it comes to filing their annual tax return. We’ve decided to explain how this all works and end the confusion once and for all.
If you’re running your own business, you’re probably familiar with your Australian Business Number (ABN). As a business owner, you also have to comply with the rules set out by the Australian Tax Office (ATO). Your ABN doesn’t simply give you a reference point when sending invoices and other documents, and it also means that you’re accountable to the ATO if you don’t comply with your tax obligations.
In this guide, we’ll explain what your tax obligations are as a holder of an ABN. Fundamentally, the tax you have to pay on your ABN depends on your business and your combined income. This is all counted and assessed when the financial year comes to an end on 30 June.
An ABN is a number that identifies your business. It doesn’t replace your tax file number. Find out how to register an ABN. You’ll need it for tax and other business activities.
What is Australian Business Number?
So firstly, let’s explain what they are for anyone who doesn’t know. An ABN is an Australian Business Number, and every business operating in Australia needs to have one. Also, all self-employed people are required to have an ABN and quote it on invoices for work performed. Common examples of occupations where an ABN might be required are trades such as carpentry, fundraising, and personal training.
To operate your business in Australia, it is necessary to have an ABN (Australian Business Number). This unique 11-digit number is the key means of identifying business and is provided when you register your business. Sole traders, partnerships and companies are all required to have an ABN.
You can register your ABN using an online form in a matter of minutes. Registering your ABN is crucial for tax purposes, including GST and PAYG. If your business is making more than $75,000 annually, then you may face a penalty if the ATO finds out that you haven’t applied for an ABN. If you are doing business with other businesses, then that business can withhold payment to you if you do not list your ABN on invoices you issue.
An Australian Business Number, commonly known as an ABN, is the unique identifier of your business to the government and community.
As well as confirming your business identity when ordering and invoicing, having an ABN means you can access tax benefits, claim energy grants credits and get an Australian domain name. Getting an ABN is one of the first steps to set up your business correctly. This guide covers what you need to know about obtaining an ABN.
An Australian Business Number (ABN) is an 11 digit number that’s used to identify your business to your customers, suppliers and the government. It’s held in addition to a Tax File Number and is different from an Australian Company Number (ACN) and a business name.
Having an ABN allows you to:
- Confirm your business identity to others when ordering and invoicing
- Avoid having business clients withhold a percentage of any payments they make to you.
- Register a business name
- Register a .com.au, .net.au, or .org.au domain name
Find Out If You Need An ABN
Not everyone needs an ABN. To get one, you need to be running a business or other enterprise.
Visit the Australian Business Register (ABR) website to find out about your entitlement to an ABN.
If you apply for an ABN and you’re not entitled to one, your application may be refused. The reason for refusal will be explained to you by the Australian Taxation Office.
From large corporations to freelancers, many different kinds of businesses have an ABN.
If you’re starting or carrying on an enterprise in Australia, you need an ABN. Carrying on an enterprise means running a business or engaging in commercial activity, like selling goods and services. The Australian Business Register (ABR) ‘s definition of an enterprise also includes charities, superannuation and property renting and leasing.
You need to have an ABN if you register for Goods and Services Tax (GST).
Each business structure has different eligibility requirements:
- Sole traders
- Sole traders are the only owner and legally responsible for all aspects of the business. They are eligible for an ABN
- Partnerships are eligible for an ABN as two or more people or entities who run a business and distribute income and losses between themselves
- Companies that are registered with the Australian Securities & Investments Commission (ASIC) can apply for an ABN
- A trust holds property or assets for the benefit of others (beneficiaries) and is eligible for an ABN
You don’t need an ABN if you’re located in the Christmas or Cocos Islands, or if you have a joint venture where the partners have their own ABNs.
Register for an ABN
You can apply for an ABN and other key business registrations through the Business Registration Service. Before you register, make sure you have:
- identified your business structure
- proof of identity
- details of your business activities and associates ready
The Australian Business Number (ABN) is a unique 11 digit identifier issued to all entities registered in the Australian Business Register (ABR).
The 11 digit ABN is structured as a 9 digit identifier with two leading check digits. The leading check digits are derived using a modulus 89 (remainder after dividing by 89) calculation.
To verify an ABN:
- Subtract 1 from the first (left-most) digit of the ABN to give a new 11 digit number
- Multiply each of the digits in this new number by a “weighting factor” based on its position as shown in the table below
- Sum the resulting 11 products
- Divide the sum total by 89, noting the remainder
- If the remainder is zero the number is a valid ABN
Applying for an ABN is free. However, if you get a tax agent to do it on your behalf, you may incur fees that way.
Depending on your circumstances, you’ll need the following to apply for your ABN:
- Any ABNs you’ve previously held
- Your tax file number (TFN)
- You’ll also need the TFNs of any associates like partners, directors and trustees
- Your Australian Company Number (ACN) or Australian Registered Body Number (ARBN)
- If you already have these, remember your ACN can be applied for at the same time as the ABN
- Your legal entity name
- This name appears on all official documents or legal papers and can be applied for at the same time at the ABN as well
- The date your ABN is required
- This should be the date that you expect to start any business activities and can’t be more than six months ahead of when you apply
- The licence number of your professional advisor
- If you’ve engaged one, for example, an Australian Financial Services (AFS) licence
- Your tax agent registration number
- Any other authorised contacts
- They must be authorised to make changes or update information on behalf of the entity
- Any associates’ details like shareholders or directors
- Associate requirements are different for each entity type
- Your business activity
- This is usually the main source of income for your enterprise, for example, agriculture, construction, investment and manufacturing
- Your business locations
- Provide business locations for all premises operated by your enterprise, unless there’s a risk to the safety of individuals, for example, a women’s refuge.
You will receive your ABN as soon as you complete your application. If you omit important details or they cannot be verified, it can take up to 28 days to complete your application.
ABN’s And The Tax-free Threshold
Most people who have an ABN are required to lodge an annual income tax return. If you carry on a business, then you need to lodge an annual income tax return. The requirement to lodge is irrespective of whether the business is reporting a profit or loss and is not subject to the tax-free threshold.
The Australian Tax Office (ATO) collects income tax from working Australians each financial year. In Australia, financial years run from 1 July to 30 June of the following year, so we are currently near at the beginning of the 2020/21 financial year (1 July 2020 to 30 June 2021).
ABN & Tax
In the case of an ABN, tax is not taken at source, the person raising the invoice and receiving the payment is receiving full payment for products or services so a portion of that income should be retained to meet the tax liability at the end of the financial year.
People are generally fine with understanding what their obligation is when they work solely on either the TFN or ABN model. The confusion usually only arises in situations when people have two jobs in the tax year where one is ABN, and the other is TFN or indeed if they have a full-time role that is TFN but operate a small business that generates ABN income on the side, perhaps as a personal interest.
An ABN is necessary for operating a business, while a TFN (Tax File Number) is required for any person working in Australia. Most people apply for their own TFN when they start working at their first job. Your TFN will stay with you for life. However, if you start a partnership business, then you and your partner will have to apply for a separate TFN.
When you start working, you give your TFN to your employer, who can then deduct tax from your income. This is normally done through PAYG (Pay as You Go). With a TFN, tax is taken at the source, i.e., at the time you are paid. This means you normally don’t have to worry about your tax obligations at the end of the financial year.
If you run your business as a sole trader, you will be able to use your current TFN for tax purposes. However, if you are in a partnership or have started a company, your business will have its own TFN.
With an ABN, tax is not taken directly from the source. For example, a carpenter raising an invoice will receive full payment for his or her work; tax is not deducted at this stage.
This means that as a sole trader with an ABN, you need to set aside a portion of your income so that you can meet your tax obligations when the financial year ends. When June rolls around, you must include your ABN earnings with any other income received; after you lodge your tax return, tax is assessed based on that combined income. The tax-free threshold sits at $18,200. If your income is higher than this, then progressive tax rates will apply.
What and how you need to report depends on your business structure. You can also use the ATO tax calculator to estimate the amount you are obliged to pay.
How To Lodge And Pay For Tax
Your business must lodge a tax return each year, and you may need to lodge business activity statements more regularly. How you lodge your tax will depend on your business structure. Find out how to lodge returns and your options for paying tax.
Check The Requirements For Your Business Type.
Your business needs to lodge a tax return each year, even if you record a loss or don’t meet the tax threshold. When lodging your return, make sure you know the rules that apply to your business structure:
- Sole trader – Lodge an individual tax return. Include all your business income on your tax return using a separate business schedule. You don’t need to lodge a separate tax return for your business.
- Partnership – Your partnership has its own tax file number (TFN) but doesn’t pay income tax on the profit it earns. Each partner reports their share of the partnership income in their own tax return. Your partnership must also lodge a separate partnership return under its own TFN.
- Company – A company is a separate legal entity. You must lodge a company tax return and pay tax on the company’s income. If you’re a director, you’ll still need to lodge your own personal return as well.
- Trust – A trust has its own TFN and must lodge a trust income tax return.
If you run a not-for-profit (NFP) organisation, you may be eligible for tax concessions. Read a summary of tax concessions for NFP organisations on the Australian Taxation Office (ATO) website.
Understand Business Activity Statements Requirements
When you register for an Australian business number (ABN) and GST, the ATO will automatically send you a business activity statement (BAS) when it is time to lodge. Your BAS allows you to report and pay for certain taxes, including:
- goods and services tax (GST)
- luxury car tax
- wine equalisation tax
- pay as you go (PAYG) withholding
- Pay as you go (PAYG) instalments
- fringe benefits tax (FBT) instalments
You have several options for lodging your BAS; however, most businesses that lodge their own BAS choose an online option.
Lodge Your Tax Return Or Bas
Depending on how complex your business and taxes are, you may lodge your own return or get a professional to lodge it for you.
You can lodge your tax return:
- with a registered tax agent
- online with myTax if you’re a sole trader
- with standard business reporting enabled software if you’re a company, trust or partnership
- by paper
You can lodge your BAS:
- through a registered tax or BAS agent
- online (online services in myGov, the business portal or SBR-enabled software)
- by phone (for nil BAS statements only)
- by mail
If you use a tax or BAS agent, make sure they’re registered with the Tax Practitioners Board (TPB). To check if they’re registered, search for them in the TPB register.