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Managing your tax affairs is an important task for any new or existing business owner and especially as an E-Commerce operator, small mistakes can snowball and create problems in the future.
We have prepared an Australian taxes guide for E-Commerce operators that serves to discuss the tax basics for those looking to start an E-Commerce Business.
This guide will also serve as a refresher for those who have started but may have gaps in their knowledge.
1. Choosing your Business Structure
2. Income Tax Registration (TFN)
3. Business Registration (ABN)
4. Goods and Services Tax (GST) Registration
5. Preparing for Income Tax
6. Preparing for Goods and Services Tax (GST)
Which Business Structure should I use for my E-Commerce Business?
The best structure depends on your needs by considering the Cost, Risk, Tax and Ownership of your business, your product or service offering and the stage of your business.
However the best structure typically to commence business in E-Commerce will be Sole Trader.
Sole Trader offers the lowest cost which is a strong factor as many new businesses often fail. Should you have concerns over asset protection, you should consider incorporation or trading from a company.
Tax is rarely a consideration for startups as the trading performance is often a loss however you should consider prior to transfer of the business if you can still utilise these losses.
Where startups have multiple business partners, you may consider using either a partnership as a low cost structure or proceed directly to a trust or company structure.
Despite the above considerations, you should consider all these elements together:
• Costs – These include legal and consultation fees specific to your needs and costs for continuous compliance of your business such as accounting and tax lodgements.
• Risk – How risky is your product or service offering? Do you have insurance? Are you concern for your personal assets I.e asset protection?
• Tax – Are you paying more or less tax than is necessary? Am I entitled to all Tax Concessions and Government Grants?
• Ownership – Would the business be owned by one or multiple people? How can you manage your ownership and control?
We have summarised an overview of these elements with the most popular business structures.
Can I change my structure later when my business improves?
The simple answer is yes and we do often suggest this as a strategy to new E-Commerce Operators that are looking to ‘test the waters’ with the demand for their product or service.
Moving to an appropriate structure should be completed with caution, promptly and correctly in order to avoid adverse tax and risk consequences.
Once you have chosen your Business Structure, the next step would be to complete your tax registrations.
We recommend speaking to your Tax Accountant or Lawyer prior to setting up or re-structuring your business.
2. Income Tax Registrations (TFN)
You may already be registered for income tax purposes as your personal Tax File Number (TFN) will also serve as your Sole Trader Tax File Number.
If you don’t have a personal Tax File Number, registering is completed by an online application form and visiting a local Australia Post branch to verify your identify.
For more information on registering an Individual Tax File Number refer to the Australian Taxation Office’s Website at https://www.ato.gov.au/Forms/TFN—application-for-individuals/
What if you operate or plan to operate your E-Commerce business through another entity such as a Trust, Company or Partnership?
Assuming you already have a personal Tax File Number, the process is simple by completing one online application through the Australian Business Register website.
For more information and to register for a business Tax File Number refer to the Australian Business Register website below.
3. Business Registration (ABN)
Not everyone is entitled to an Australian Business Number or ABN.
The three entitlements for an ABN are those starting a business or who are already carrying on a business in Australia, and if you are a registered company.
Some examples of E-Commerce businesses entitled to an ABN Include:
1. Planning to start Business in Australia
A. Advertising, setting up a social media account or a website for the business.
B. Consulting with financial, business or tax advisers.
2. Already carrying on a Business in Australia
A. The business has intention to make a profit i.e use of business plan or determining profitable market to sell.
B. You carry on as if it were a business i.e record keeping, recurring activities.
C. Size of operations are consistent and reasonable of a commercial activity i.e purchasing bulk goods from wholesalers.
3. Registered a Company with ASIC
Care should be taken when applying for an ABN as your activity needs to meet the requirements for an ABN.
Often when your activities do not meet the criteria of a business, they are considered a Hobby.
Hobbies are not entitled to an ABN and do not meet many other requirements of running a business such as report their income or expenses to the Australian Taxation Office.
Caution should be noted as there are many risks with trading as a ‘hobby’ when in fact, you are a business.
Unregistered business can be liable for taxes and often lack protection such as insurance or appropriate business structure.
The application process is simply completed by an online application at the Australian Business Register website.
Prior to completing the application, you will require the following information:
A. Registration Numbers for the registering entity such as Tax File Number (TFN) and Australian Company Number (ACN), if a Company.
B. Business Contact Details including address, email (must not start with info@ or support@ etc) and telephone number.
C. Associates’ Details including full name, date of birth and tax file number or residential address. Note if the resident associate details do not match ATO records, the application will be refused.
D. Business Details including description of main activities I.e for Herb Retailing (41290 Other Specialised Food Retailing).
If you are unsure which category your business fits, use the Australian Taxation Office’s Business Industry code search:
4. Goods and Services Tax (GST) Registration
An entity can be registered if it is carrying on a business (has ABN).
Entities are required to be registered if carrying on a business and its’ GST turnover is $75,000 or more.
Failure to register when required will not prevent GST payable by the business and can result in additional penalties and even prosecution.
GST Turnover is the total taxable supplies which is typically the total sales (less export sales) in the current financial year and your projected sales for the remainder of the financial year.
Clients often ask why you would register for GST on a voluntarily basis for GST?
The decision would depend on many factors but the answer is clear for E-Commerce operators that retail through or use aggregator platforms such as Amazon.
Aggregator platforms effectively add GST to your sales price therefore you are effectively registered for GST purpose regardless of turnover.
If you are effectively charging your customers GST on your sales, you should then register to claim the GST on your purchases.
The above exception does not apply to retailers under the GST threshold and not using an aggregator platform.
E-Commerce retailers selling directly to customers I.e through their website have a competitive advantage by not registering for GST as they can be offering the same product 10% cheaper than GST registered competitors.
The easiest method to register for GST would be immediately following completion of the business registration (ABN) – see above.
As discussed above, care should be taken to ensure you firstly meet the requirement of a business as you will not be entitled to be registered for GST.
How much Income Tax do I have to pay?
The amount of Income Tax Payable is simply the entity’s Taxable Income multiplied by the entity’s Tax Rate for that financial year.
Taxable Income is the profit earned during the financial year for Income Tax purpose.
This can likened to the accounting or actual profit of the business i.e Sales less Expenses = Profit.
Caution should be taken when calculating the Tax Income as not all Sales are Assessable and not all expenses are allowable.
Tax Rate is determined by the business structure summarised below:
The two most common methods to account for Income Tax are as follows:
1. Receipts or Cash method where income is assessable when received.
2. Earnings or Accrual method where income is assessable when derived or in other words when it has been earned.
The basis for determining the correct method is one that appropriate reflects the true profit of the business.
The correct method is on a case by case basis and should use professional judgement.
Factors that weigh heavily for E-Commerce operators are income from Trading (sale of inventory) which typically results in the Earnings Method.
Size of business should also be considered when determining the correct method.
Example: First Year Trading, E-Commerce Company
John setup a company and started his first-year trading from his Shopify store. John’s business resulted in the following transactions during the financial year:
• Purchases of inventory $18,960
John had less than $5,000 of inventory on hand as at the end of the financial year.
Given the above transactions, the company would have an income tax payable upon lodgement of the Income Tax Return totalling $3,777 (see below).
GST and Types
Goods and Services Tax (GST) is a sales tax (10%) on consumption of goods within Australia.
GST Registered Businesses will collect GST by adding 10% onto their sale’s price.
These same businesses will then claim back the 10% GST charged by other businesses on their purchases.
Care should be taken as not all Sales have GST to be collected and not all Purchases have claimable GST.
The most common GST-Free sale for E-Commerce providers are exports as they are supplies outside the GST system.
Note however that special rules apply if the good are not exported from Australia within 90 days.
The Business Activity Statement
It would be uneconomical for the Australian Taxation Office to wait until the end of financial year to collect your GST.
As a result, the GST is collected and paid usually on a quarterly tax return called the Business Activity Statement (BAS).
Businesses voluntarily registered for GST can elect for an Annual Business Activity Statement which helps to reduce compliance costs.
These businesses should consider if a quarterly lodgement is better for cashflow, especially if trading through Aggregator platforms.
Which Method to Account for GST?
There are only two methods to account for GST which are similar to Income Tax:
1. Cash Method where GST is claimable when paid and payable when received.
2. Accrual Method where GST is claimable and payable when the tax invoices have been received.
Businesses can choose the method that is favourable to them which is typically the Cash Method.
This is due to cash flow advantages as the business will only have to pay once the cash has been received. Note that businesses with turnover above $10m (not a small business entity) must be on Accrual Method.
How much Goods and Services Tax do I have to pay?
The amount of GST payable depends on the GST Collected on Sales, less the GST Paid on your Purchases, during the period – see example below.
Transaction 1 – Sale of $5,500
During the previous financial quarter, the client made sales of $5,500 through their Shopify which means they would have collected $500 of GST ($5,500 / 11).
This amount would be reported on the Business Activity Statement for the quarter ended and paid to the ATO.
Transaction 2 – Purchase of $1,100 Inventory
Client had purchased $1,100 worth of inventory from a GST registered wholesaler during the period, they would have paid $100 of GST ($1,100 / 11).
This amount would be reported on the same Business Activity Statement for the quarter ended and refunded by the ATO.
Lodgement of Quarterly Business Activity Statement The client would pay $400 to the ATO on the Business Activity Statement being $500 GST collected, less $100 GST paid.
Disclaimer: This page contains general information only and has been prepared without taking into account your circumstances, objectives, or financial situation. We recommend that you consider whether this information is appropriate and always seek professional advice in relation to your circumstances.
Moschners, Chartered Accountants is a modern accounting firm located within the city fringe servicing a range of industries and sizes. We are experienced E-Commerce Accountants providing a full range of business, accounting and taxation solutions for E-Commerce operators. We have strong values on Professionalism, Education and Technology with a young and dynamic team culture.
Craig Moschner is the principal at Moschners, Chartered Accountants and an experienced public practice accountant with over 10 years experience in a range of industries and taxpayers.
Mr. Moschner holds a Bachelor of Commerce (Accounting) and Graduate Diploma of Chartered Accounting. He is a member of the Chartered Accountants Australia & New Zealand and a Registered Tax Agent with the Tax Practitioner’s Board.
He is also an active member of Industry Technical Discussion groups allow maintenance of current knowledge and providing the best solutions to his clients.
In his free time, he enjoys cooking, speculating investments, and catching up with friends and family.