Debunking the Myths

If you’re a business owner or high-income earner, the thought “Am I paying too much tax?” has likely crossed your mind. But this question often reveals common misunderstandings about tax obligations, including the differences between various tax types. Let’s dive into what “too much tax” actually means and clarify the key taxes every business owner should understand: GST, income tax, and PAYG withholding (PAYGW).

Myth 1: “I’m Paying Too Much GST”

Goods and Services Tax (GST) is a consumption tax applied to most goods and services sold in Australia. It’s set at 10% and added on top of the sale price, meaning that when customers buy from you, they’re paying the GST—not you, technically. As a registered business, you collect this GST from your customers and later pass it to the Australian Taxation Office (ATO) through your BAS (Business Activity Statement).

If you’re a business claiming “I’m paying too much GST,” remember that you’re simply passing along the GST from your customers to the ATO. Any genuine overpayment would likely be a result of incorrect BAS reporting, not the actual GST itself. Proper GST tracking and input tax credits on eligible purchases can keep things balanced and potentially reduce your GST liability.

Myth 2: “Income Tax Is Eating Up My Profits”

Unlike GST, income tax is calculated on the net profit of your business or individual income. In Australia, the tax rate depends on your income level, with progressive tax rates for individuals and a flat rate for companies. A high tax bill here can feel painful, but it’s generally a sign that your business is profitable!

Many business owners confuse higher tax payments with overpayment, but this usually reflects strong earnings. One way to manage income tax is through strategic tax planning and expense deductions. Speak with one of our Advisors here @HKSRussell who can guide you on legitimate deductions and strategies to optimise your tax bill.

Myth 3: “PAYG Withholding Is Too Much”

PAYG withholding (PAYGW) is a tax withheld by employers on behalf of their employees and paid directly to the ATO. As a business owner, this means you’re responsible for deducting a portion of your employees’ wages for their individual income taxes. PAYGW doesn’t increase your tax bill but ensures compliance with ATO regulations by collecting tax upfront from employees.

Misconceptions around PAYGW often stem from confusion about what portion is the employer’s responsibility. Remember, you’re only withholding the employee’s tax—not covering it personally. Ensuring accurate payroll processes and understanding how PAYGW functions can save a lot of hassle in your bookkeeping.

Bottom Line: Understand, Don’t Fear, Your Tax Obligations

When clients feel they’re paying “too much tax,” the root issue is often a misunderstanding of tax categories and functions rather than an actual overpayment. By understanding how GST, income tax, and PAYGW work, you can assess where your money is going and ensure compliance without overpaying.

Investing in a solid financial strategy with expert guidance can clarify your tax obligations and even reveal tax savings that align with your business goals. So, instead of fearing “too much tax,” focus on maximising the profits that lead to tax and optimising your business’s financial health.

e: advisors@hksrussell.com
t: +61 7 3177 4120

Posted on October 28, 2024 by Charisse Russell - Articles