Getting Ready for Tax Season: 2023 Guide for Entrepreneurs

Profile pic for Davide Di Prossimo
Davide Di Prossimo
Last updated:
May 2023
Entrepreneurship
Guides
you're here!

For small entrepreneurs, freelancers and sole traders, the end of the financial year is usually a source of stress.

You must continue working, but also prepare and collect information about business expenses, PAYG instalments, and banking activity statements.

In this guide, you’ll learn important information about the process of filing your tax return this year.

Tax season glossary and dates

Let’s cover some important terms you need to keep in mind to get your taxes done and dusted. 

Glossary of tax terms

EOFY (End of Financial Year) 

EOFY is June 30th. This is the last day of the financial year. That means that July 1st is the first day of the new financial year.

GST (Goods and Services Tax) 

GST is a 10% tax charged on goods and services sold in Australia.

As an entrepreneur, if you’re earning more than $75,000 a year from your business you will need to collect this fee in your invoices.

Furthermore, you’re likely to be charged GST on some products and services you use and you’ll be able to claim that GST when you do your tax return.

BAS (Business Activity Statement)

BAS is a form that you need to submit to the ATO (Australian Taxation Office) on a quarterly basis. The form summarises:

  • Your gross income for the quarter.
  • The GST you charged to your clients over the quarter.
  • The GST you paid on business expenses.

When you submit your BAS, you’ll also have to submit a payment covering your PAYG instalments (next glossary item) as well as your GST balance; which is the GST you charged to your clients minus the GST you paid for your business expenses.

PAYG (Pay As You Go)

The PAYG system is used by the ATO to spread out your tax payments throughout the financial year. 

The majority of entrepreneurs, freelancers and sole traders will be required to make PAYG instalments on a quarterly basis.

The ATO will use your tax return from the previous year to estimate how much you owe for Q1 of the coming financial year.

You will be required to either pay a flat rate dollar amount, like $1,000 for the quarter, or give you a percentage as an instalment rate, like 19% of your earnings.

Also, the ATO gives you the ability to adjust your instalments to more closely reflect your income for the quarter so that you can avoid over- or under-paying.

Lastly, keep in mind that these PAYG payments can be called PAYG-I, which stands for “Individuals” or PAYG-w stands for “withholding”; this last one represents withhold instalments on behalf of your employees.

Dates: When do you need to submit your BAS forms?

The ATO will send you a notification through the myGov portal when you need to make payments. 

As of 2022-2023, these are the important BAS due dates to keep in mind:

  1. Quarter 1: July, August and September - Due date: October 28th
  2. Quarter 2:  October, November and December - Due date: February 28th
  3. Quarter 3: January, February and March - Due date: April 28th
  4. Quarter 4: April, May and June - Due date: July 28th

It’s important to note that your fourth quarterly payment for the financial year may happen very close to tax season; but they’re NOT the same thing.

You always need to file your annual tax return and all four quarterly payments each year.

Recommended reading: Register for GST, Make PAYG Payments and BAS Filing

How to calculate your taxable income

The money that you earned this past financial year is eligible to be taxed by the ATO. And in order to file your taxes, you need to have a good understanding of your taxable income.

For the first year after you register for an ABN (Australian Business Number), it’ll be up to you to estimate your own taxes and set aside money to pay them after the EOFY.

After the first year of operation, the ATO may automatically register you for PAYG instalment payments; depending on the amount of income reported the previous year. 

With the new financial year, they will start sending you estimates of how much they expect you’ll earn.

It’d be wise for you to make the habit of doing your own estimates of your income every quarter.

How do you make your own estimates? Do some numbers with a spreadsheet and use your invoices (gross income), expense receipts and bank statements. You can use these figures to estimate how much you’ll likely owe in the coming quarter.

By doing that, regularly, paying down your tax bill at the EOFY will come with no big surprises.

How do you figure out how much money you need to put aside every month to pay your taxes after the EOFY?

Start from the official tax bracket chart by the ATO. In this guide we are assuming that you operate as a sole trader.

These are the income tax rates for individuals:

You can also use the simple tax calculator by the ATO and run different scenarios.

After you do your numbers, you want to add the amount you need for taxes on top of the annual amount you want to make as a salary and divide that by 12.

From now on, that is your north star. That’s the average monthly amount you need to make for the next 12 months to pay yourself and pay taxes.

‍Recommended reading: How to Set Your Financial Goals [1 Template]

How to calculate your business expenses

Running a business costs money. You have to cover everything: The internet connection, transportation, utility bills and more. 

Fortunately, the ATO allows you to cut down on your tax bill by claiming these business expenses. And it’s important to claim everything you can to reduce your tax bill as much as possible. 

Read the guide How to Set Your Financial Goals [1 Template] to see examples of expenses that CAN and CANNOT be claimed.

The ATO has rules regarding what does and doesn’t count as a business expense. 

I’d advise you to speak to an accountant, but in general, follow these rules when claiming expenses:

  • The expense must be directly related to running the business; not for personal use.
  • If the expense is for both business and personal use, you can only claim the portion of the cost that is used for running your business.
  • You must keep records to prove these costs are associated with your business. Keep receipts, invoices etc. However, there are exceptions to this rule for vehicles, home office costs, uniform expenses and more.

How do you claim business expenses?

You can claim business expenses as tax deductions on your annual tax return filed after June 30th, which is the date that marks EOFY.

If you operate as a sole trader, you can claim deductions in the “Business and professional items” section of your individual tax return.

Lodge your tax return online with myTax, or you can hire a professional accountant or tax agent to do that for you.

Keep receipts and expense invoices at hand

The ATO requires sole traders, freelancers and entrepreneurs to keep records of the many expenses they have for their operations. 

When you lodge your tax return, you are allowed to submit photos, files, PDFs and electronic copies of your receipts and business expenses. 

Find here a list of what expenses do NOT require receipts.

What you need to know about GST (Goods and Services Tax)

GST is a very important part of taxes, because many sole traders, freelancers and entrepreneurs will be required to charge GST to their clients and customers, and then submit GST payments to the ATO every quarter. 

You must register for GST if you expect your gross income from your business to be $75,000 or more in a single tax year and from a single business.

I highly recommend you read the following guide: Register for GST, Make PAYG Payments and BAS Filing

How to collect GST from your clients

When you register for GST, it’s up to you to charge and collect GST from your clients. 

You also have to:

  • Include the GST on its own line as a specific item on the invoice.
  • Label the invoice “Tax Invoice” if you are charging GST.

Make sure you set aside GST through the quarter as you’ll need to submit it as a payment when you file your BAS. 

How to claim GST credits

When you pay GST on goods and services you purchase as a business expense, you can claim GST credits when you submit your quarterly tax payments to the ATO.

Hence, if you spend money on GST, you can subtract what you paid from the GST you owe when you submit your BAS.

Here’s a list of items that are NOT eligible for GST credits.

BAS vs. PAYG: What’s the difference?

These two terms are very much related, but they're not the same thing. It’s important that you understand how they differ.

BAS: Business Activity Statement

Bas is a form you submit to the ATO each quarter if you are registered for GST, summarising:

  • The total earnings for your business over the quarter.
  • The GST charged to clients over the quarter.
  • The GST you paid on business expenses over the quarter.
  • Your quarterly PAYG instalment.
  • If you have employees, your PAYG-w instalment.

The ATO will send you a form automatically in your myGov account inbox when your BAS is due each quarter, when you have registered your business for GST and received an ABN.

Think of BAS as an umbrella term that includes GST and PAYG.

PAYG: Pay As You Go

PAYG instalments are the method that the ATO uses to collect quarterly income tax payments. 

The ATO does that so that you don’t have to make large payments at EOFY in your annual tax return.

You will pay PAYG instalments quarterly. Also, if you registered for GST, your PAYG instalments will be included in your BAS. 

The ATO will provide an estimate for how much you owe, and will either send you an instalment notice, or include the PAYG instalment amount within your quarterly BAS. 

It’s also important to mention that if you have employees, you are required to withhold a certain amount of tax from their pay - these are called PAYG withholdings, which you will then send to the ATO.

How to pay your PAYG instalments

Paying your PAYG instalments is simple:

  • Visit your myGov dashboard and link your myGov with your ATO account.
  • Wait to receive your first PAYG Instalment Notice or Instalment Activity Statement from the ATO in your myGov inbox.
  • With these forms, fill out the basic information in regards to your income, expenses and investments.
  • You will then have the option to make a payment through a bank account or use a credit card.

Recommended reading: Register for GST, Make PAYG Payments and BAS Filing

Who has to submit PAYG instalments

Follow this rule of thumb. 

If you expect to earn more than $4,000 in business income over the course of the year, and you had business income tax payable from the year before, then you’ll likely be required to make PAYG instalments.

Alternatively, you can register to make voluntary PAYG-I instalments.

Tax checklist for entrepreneurs

If you’re ready to file your tax return, here’s what you need:

  • Your [20xx-20xx] taxable income figure.
  • Record of PAYG instalments made over the last financial year.
  • Records of business expense claims from the last financial year.
  • Records of GST collected on invoices over the last financial year.
  • Records of GST paid on business expenses over the last financial year.

And that’s it. You’re now ready to file your taxes. 

And lastly, I highly recommend you have an accountant or tax agent review your tax return before you submit it to the ATO.

‍PREVIOUS GUIDE: Beginners Guide on How to Find Your First Clients