How income tax works

The amount of income tax your business has to pay, depends on your taxable income. It’s calculated from your assessable income less any deductions.

  • Assessable income is generally income your business earns. It includes all gross income (before tax) from your everyday business activities (sales etc.) as well as other income that is not part of your everyday business activities, for example capital gains. It does not include GST payable on sales you make, or GST credits
  • Deductions are amounts you can claim for expenses involved in running your business.

You must lodge an income tax return for any year you run your business. You need to lodge even when you don’t expect you’ll owe tax.

Pay as you go (PAYG) instalments

When your business and investment income reaches a certain amount, you’ll pay your income tax in instalments. These payments are usually quarterly. This helps you to avoid a large tax bill after you lodge your tax return.

Tax concessions for small business

If you’re a small business with an annual turnover of less than $10 million, you may be able to get small business tax concessions from the ATO.

The ATO website has information on the tax concessions, offsets and rebates available for small business.

Lower company tax rate

The full company tax rate is 30% and the lower company tax rate is 27.5%. From the 2017–2018 income year, your business is eligible for the lower rate if it’s a base rate entity.

A base rate entity is a company that both:

  • has an aggregated turnover less than $50 million from 2018–2019 ($25 million for 2017 –2018
  • 80% or less of your assessable income is base rate entity passive income (for example interest, dividends or rent

The lower company tax rate and eligibility requirements have changed in recent years. Check out the ATO website to learn more about the changes to company tax rates.

Pay as you go (PAYG) withholding

As an employer, you need to collect pay as you go (PAYG) withholding amounts from payments you make to:

  • your employees
  • other workers, such as contractors, that you have voluntary agreements
  • businesses that don’t quote their Australian business number (ABN)

Tools to work out how much tax to withhold from pay

It's important to calculate the right amount of tax to withhold from your employees' pay. There are handy tables to help you pay:

  • casual employees
  • regular weekly, fortnightly or monthly payments to employees

There are also tables to work out the correct amount to withhold for:

  • the Medicare levy
  • Study and training support loans
  • superannuation payments

Enter an earnings amount into the relevant ATO tax table. It’ll then tell you the amount of tax to withhold.

Alternatively, use the tax withheld calculator to work out how much tax to withhold from payments to your employees or other payees.

Extra pay period in a financial year

A year usually consists of 26 fortnightly pay periods or 52 weekly payments. However, in some years there is an extra pay period. Due to the extra pay, you may find that not enough money has been withheld at the end of the financial year.

In these years, it's a good idea to give your employees the option of withholding additional pay as you go (PAYG) withholding amounts from their pay to avoid a possible debt.

Check the ATO website to find out more about withholding for 27 fortnightly or 53 weekly pays in a year.

Get tax help after hours

As a small business owner, you're often dealing with administrative work like taxation outside of business hours. Get help with a range of tax issues from the ATO at a time that suits you.

Small Business Assist provides online guidance and tax information. For a more personalised and secure experience, use the call-back service.

Small Business Assist

Small Business Assist is available:

  • Monday to Friday: 3pm to 9pm Australian Eastern Standard time (AEST) – except public holidays
  • Saturday: 10am to 4pm AEST

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