Taxes can be a source of confusion for many business owners and individuals alike. Two taxes that are often confused are Income Tax and GST (Goods and Services Tax). While both are key components of Australia’s tax system, they operate in very different ways. Let’s dive in to understand how these taxes work.
What is Income Tax?
Income tax is a tax on the money you earn. This includes income from various sources like salaries, business profits, rental properties, or even interest from your bank account.
Australia uses a progressive tax system, which means the more you earn, the higher the percentage of tax you pay. Here’s an example:
- If you earn $50,000 per year, part of your income will be taxed at lower rates like 16% or 30%.
- If you earn $200,000 per year, part of your income will be taxed at the highest rate of 45%.
Income tax applies to both individuals and businesses:
- Individuals and sole traders: Tax is based on personal income after deducting allowable expenses.
- Companies:
- Small companies (turnover under $50 million): Tax rate is 25%.
- Larger companies or companies with passive income (e.g., rent or interest): Tax rate is 30%.
Summary: Income tax is calculated on your earnings after expenses.
What is GST?
GST, or Goods and Services Tax, is a 10% tax on goods and services traded in Australia. Unlike income tax, which is based on earnings, GST applies to transactions and is collected by businesses on behalf of the government.
Here’s how GST works:
- If you sell a product or service, 10% of the total price is GST.
- For example:
- A handmade candle sold for $55 includes $5 GST.
- A coffee sold for $5.50 includes 50 cents GST.
As a business owner, it’s your responsibility to collect GST from customers and pass it on to the government when you lodge your Business Activity Statement (BAS).
Important Note: The GST you collect doesn’t belong to your business—it’s the government’s money. You’re simply a collector for the Australian Taxation Office (ATO).
Common Misunderstandings About GST
Many business owners feel overwhelmed by their GST bills, thinking they’re paying too much tax. However, the GST doesn’t belong to you—it’s just passing through your business.
Key Points to Remember:
- If your business wasn’t registered for GST, you wouldn’t collect this money at all.
- Treating GST as your income can create confusion and financial stress when it’s time to lodge your BAS.
Avoiding GST Problems
Here are three steps to manage GST effectively:
- Separate It: Transfer GST collected into a dedicated tax account weekly. This ensures the money is ready for your BAS payment.
- Understand It’s Not Profit: GST is not part of your business income or profit—it’s the government’s money.
- Keep Good Records: Track both GST collected on sales and GST credits on purchases. Use accounting software like Xero to simplify this process.
Income Tax vs GST: Key Differences
| Income Tax | GST | |
| Basis | Tax on what you earn. | Tax on what you sell or buy. |
| Who Pays It | You pay directly based on your earnings. | Customers pay it to your business; you pass it on. |
| Who Registers | Automatic for anyone earning income. | Required only if your turnover exceeds $75,000. |
Final Thoughts
Understanding the difference between income tax and GST is essential for effectively managing your finances. By treating GST as government money and keeping it separate, you can avoid cash flow problems and focus on growing your business.
Need more help with income tax vs GST? Talk to us today for personalised advice and reliable tax solutions!
