How Business Tax in Australia Is Computed: A Guide for SMEs
If you run a small or medium business, you have probably asked how to work out business tax in Australia without nasty surprises at year end. Between sales, expenses, GST and BAS lodgements, it can feel like a moving target. The good news is that the core calculation is straightforward once you understand the steps and the rules that apply to SMEs. Recent reporting on rising tax debt for small businesses is a reminder to get on the front foot and plan your numbers early.
First Principles: Structure and Rates
How your tax is calculated starts with structure. Sole traders and partnerships are taxed at personal rates, while companies usually pay a company tax rate. For many incorporated SMEs, the base rate entity rules apply, which means a 25 percent company tax rate if you meet the turnover and passive income tests. You can confirm the current rate and definitions on the ATO page for company tax rates.
If you operate through a trust, profits are usually distributed to beneficiaries who are then taxed at their own rates. The point is simple. Know your structure, then use the correct rate when you compute taxable income.
The Three-step Computation for Business Tax in Australia
For most SMEs operating through a company, the computation follows three clear steps:
- Calculate assessable income
Include all ordinary income from business activities for the year, such as sales and fees, plus other assessable amounts like interest.
- Subtract allowable deductions
You can claim most costs you incur in running the business, provided they are directly connected to earning assessable income. Typical claims include operating expenses, some capital allowances for depreciating assets and the business portion of mixed-use costs. The ATO outlines what you can and cannot claim in its guide to business deductions. Keep evidence to back every claim.
- Apply the correct tax rate
Once you have taxable income, apply the relevant rate for your structure. Base rate entity companies apply 25 percent. If your numbers change during the year, revisit the status and rate before lodging. Reference the ATO company tax rates page when in doubt.
A quick worked example
Imagine your company turns over 620,000 dollars, with allowable deductions of 395,000 dollars.
- Assessable income: 620,000
- Deductions: 395,000
- Taxable income: 225,000
- Company tax at 25 percent: 56,250
That figure can then be adjusted by any carry-forward tax losses, timing differences or small business concessions you qualify for. The simple engine remains the same.
GST And BAS: The Moving Parts That Affect Cash Flow
Income tax is only one piece of business tax in Australia. If your GST turnover meets or is projected to meet the 75,000 dollar threshold, you must register for GST, charge GST on taxable sales, claim credits for eligible business purchases and report through a BAS. The ATO explains who must register on its Registering for GST page.
Once registered, you will generally lodge a Business Activity Statement quarterly, although some businesses move to monthly reporting. For a clear overview of what a BAS is and how to lodge, see Business activity statement on business.gov.au. Plan for GST, PAYG withholding and PAYG instalments so your cash flow can comfortably cover each lodgement.
What You Can Claim and What to Avoid
Getting deductions right can materially reduce taxable income. Common claims include wages, rent, utilities, professional fees, marketing, software and the decline in value of eligible assets. Only the business portion of mixed expenses is deductible. Private or lifestyle costs should not appear in your profit and loss. The ATO’s business deductions guidance is the best place to confirm eligibility before you lodge.
Record Keeping That Protects Your Position
Good records are the backbone of accurate computation and a strong defence during reviews. Store invoices, receipts, payroll reports, bank statements and asset registers in a tidy, searchable system. Accurate records make it easier to claim legitimate deductions and to respond quickly if the ATO asks questions. With small business tax debts in the spotlight, strong habits reduce stress and interest costs if anything is queried.
A Simple Computation Checklist For SMEs
Use this quick checklist each quarter and at year end to stay on top of business tax in Australia:
- Confirm structure and tax rate for the year. If you are a base rate entity, use 25 percent.
- Reconcile revenue to your POS, invoices and bankings.
- Capture all deductions you can substantiate, including asset purchases and genuine business-use costs.
- Meet BAS obligations on time and budget for GST and PAYG.
- Keep digital copies of source documents in one place.
- Forecast your year-end tax so payment does not become an emergency.
Why Getting Expert Advice Pays For Itself
The rules that govern business tax in Australia change, and there are many edge cases, from passive income thresholds to asset write-off settings and GST quirks. A proactive accountant can model your tax, set realistic instalments, improve cash flow planning and keep your records audit ready. If you want a clear, no-jargon computation of your estimated tax before year end, we can help.
Need a hand with business tax in Australia?
Acctivate Business Accountants works with Australian SMEs every day. We translate the rules into practical steps tailored to your business so you can focus on growth, not red tape.