eCommerce tax: the beginners' guide
eCommerce is a great industry to be in. It’s a growing industry as we saw the unprecedented rush to online purchases through the pandemic.
And it continues to kick goals.
Even now that the pandemic has subsided, we continue to see 5 million Australians buying online every month, and in the year ending June 2022, we spent $62.3 billion online.
If this isn’t enough to spur you on, 90.4% of global Internet users visit online retail stores.
That’s a lot of business your eCommerce store could be tapping into!
As a new online store, you’ve probably got your products sorted, your website is on its way but what about the other side and maybe not so glamourous (sorry accountants!) side of the business – the accounting and tax?
It does pay to investigate how your eCommerce business will work in terms of accounting and taxes, so you can be tax-effective and just as importantly, prepare and plan for your responsibilities as an online business.
- Setting up your eCommerce online store
- Income Tax
- Goods and Services Tax (GST)
- Any other taxes or duties my eCommerce business may have to pay?
Setting up your eCommerce online store
Part of an effective tax strategy is to choose the correct business structure for your eCommerce store.
Factors to consider are the long-term goals for your business, the amount of risk you are prepared to take, as well as, if and who you are going into business with.
This is an important step for your business as the structure will impact on your tax, personal liabilities, asset protection, legal costs, clients, operational risk and reporting obligations.
If you’ve already chosen your business structure, jump straight to the heading Income Tax to continue our tax guide.
If you are still considering your business structure options, read on as we discuss the pros and cons of each of the types –
The two main considerations for business structure
There are rules which may limit your choice in business structure.
They are based on two main considerations that decide the business structure type –
- The number of owners in the business and
- If the business will hold and control any assets for the benefit of others. By assets we mean, estate, property, or business.
What are the business structure types?
Let’s jump in and help you to choose your business structure for your eCommerce store –
1. Sole trader ABN holder
What is a sole trader? This is the simplest structure as a self-employed person who owns and runs their eCommerce business as an individual. It gives you full control and responsibility for any issues.
Advantages of a sole trader
- Less expensive to run
- You can run your online business under a trading name. It doesn’t have to be under your name
- You have complete control over the management and future of the eCommerce business
- It has the least amount of paperwork of the business structures
- Profits are taxed at the owner’s personal income tax rate
- Closing or selling the business is easy, the owner keeps all the after-tax gains
- You have more privacy as you do not need to disclose your profits to the public
- Your eCommerce business can grow – it is relatively easy to transfer from a sole trader into a company down the track.
Disadvantages of a sole trader
- You are fully responsible for all your business debts. They will be paid from your personal assets such as your home, vehicles, or savings.
- Tax is paid at the owners’ marginal tax rate which may be higher than the company tax rate.
- There are few tax concessions available for a sole trader
- There are limits on business expansion.
2. Partnership Business Structure
What is a partnership? A partnership is where 2 or more people operate an eCommerce business as co-owners and share income. All co-owners act on behalf of each other in the business.
It is like a sole trader and follows a simple registration process.
However, we highly recommend when choosing a partnership for your eCommerce business to create an agreement between all parties that covers business details, roles of the partners, operational outline, and expectations so all partners are clear from the outset.
Advantages of a partnership
- It is simple and cost-effective to set up.
- A smart way to combine resources and the individual expertise of people.
- You can use a trading name for your online business
- It is easy to operate
- Profits and losses are shared between the partners, according to their share of the business
- You have more privacy as you do not need to disclose your profits to the public
- Your eCommerce business can grow – it is relatively easy to transfer from a partnership into a company down the track.
Disadvantages of a partnership
- All partners are personally responsible for business debts, including debts incurred by the other partners.
- All partners can participate in the running of the partnership unless you have agreed otherwise.
- All profits must be shared between the partners.
- The partnership itself does not pay tax. Tax is charged at the personal rate of each partner. As your eCommerce business earnings increase, so too does your tax rate.
- It can be difficult to add or remove partners from the partnership. Ownership to someone outside the partnership cannot be done without the other partners’ permission.
- Personal differences and disagreements between the partners may hinder the eCommerce business.
3. Company Structure
What is a company? A company is its own legal entity, separating the personal responsibility of its shareholders and directors.
A Proprietary Limited company or Pty Ltd can be started by a minimum of 1 director and 1 shareholder, but you can have more directors and shareholders. Each shareholder may own an equal portion of the shares (for example, one share each), or any other portion the shareholders agree on in the company through an initial share offering.
Most incorporated companies in Australia have shareholders, company directors and managers who are typically the same two or three people.
Advantages of a company structure
- All legal arrangements are in the eCommerce company’s name, not in the name of directors and managers.
- The income tax rate for a company is less than the highest rate for individuals.
- In most cases, shareholders are not liable to pay company debts, they can only lose the value of their shares.
- When the company’s profits are distributed to shareholders, the shareholders can receive a tax offset for any tax the company has paid. This can lead to a refund if your marginal rate is lower than the company rate.
- Continuity of management and ownership in death or disability is maintained as company shares can be transferred.
Disadvantages of a private company business structure
- A company is more regulated than other business structures.
- It is more costly to establish and run a company and the rules are more complex.
- If the directors fail to meet their legal obligations, they may be personally accountable for the company’s debts.
- The company’s profits distributed to shareholders are taxable. This can lead to a tax debt if the shareholders’ marginal rate is higher than the company tax rate, although the shareholder may receive a tax offset for any tax the company has paid.
- Suppliers and lenders are hesitant to lend money or enter into contracts with Pty Ltd companies unless directors or shareholders provide personal guarantees.
What is a trust? A trust is not a legal entity. It is a relationship where a trustee (an individual or a company) carries on business for the benefit of other people (these are the beneficiaries).
This business structure is potentially the most complex business structure, so stay with us here.
There are 2 main ways to utilise this structure:
- Trading trust – this is where the business is run through a trust and the trustee is responsible for the business operations.
- Family trust, otherwise known as a discretionary trust – this is where assets, such as shares in a family business or rental properties, are held in trust for the benefit of you and your family. The trust is not responsible for the operations of the company but will receive distributions of profits that can be distributed to your family as you see fit.
The trustee can either be a company or one or more individuals.
Advantages of a trust
- A trust provides protection of assets as well as limits the liability in relation to the business.
- A trust separates the control of an asset from the owner of the asset. This may be useful for protecting the income or assets of a young person or family unit
- Trusts offer flexible tax obligations as income and capital gains can be spread among the beneficiaries
- The beneficiaries of a trust are not responsible for the trust debts
- Beneficiaries pay tax on trust income at their own marginal rates
Disadvantages of a trust
- A trust is more costly to set-up
- Its complex legal structure requires the services of a solicitor or accountant to set-up and maintain
- The trustee has a strict obligation to hold and manage the property for the exclusive benefit of the beneficiaries
- The operation of the business is restricted to the terms outlined in the trust deed
- Trusts have broad regulations they must comply with, so may be difficult for a business owner to maintain
- Trusts cannot distribute losses, only profits
- Profits earned may increase tax rates
- A trust cannot retain profits to be used later to expand the business. It is subject to penalty rates of tax if it does
- Investors may not want to invest in a trust
We’ve had clients who have started their online business as a sole trader, so they could see how the business went, then changed to a company business structure when their business took off, much to their surprise.
Alternatively, if you have grand plans for your eCommerce business, start as a company so you can establish a solid foundation for growth and investing options.
Remember, there is no right or wrong way to start your eCommerce business but it makes good business sense to keep tax strategy in mind as each business structure type will be bound by certain laws and the specific taxes it will have to pay.
Now that you are clear on the business structures for your eCommerce business, let’s look at the taxes your business is likely to pay.
Starting from the top, your eCommerce business may need to pay income tax.
What is income tax? This is the tax that is imposed by the ATO on income generated by a business. Much like the tax you pay as an individual on your income.
How is income tax calculated?
If you are a sole trader, you will tally the income you have earned through your eCommerce business minus your expenses, such as the purchase of stock, website, marketing and delivery costs.
This difference (which is your profit) will be added as income to your personal tax return with other earnings you may have received in the financial year.
If you are a company, you calculate income tax by multiplying your taxable income (profitable income) by the entity’s tax rate for that financial year.
Let’s put some numbers to this –
Sasha started her eCommerce business, Sasha’s Dresses, selling, of course, dresses. In her first year of business, she had the following transactions:
- Total Shopify Sales of $119,550
- Purchases of Inventory (dresses) of $36,600
- Marketing/Website Costs of $6,500
- Packaging/Postage of $1,230
By the end of the financial year, Sasha counted her inventory and had less than $5,000 of inventory on hand.
From these transactions, Sasha’s Dresses income (profit) totals $75,200 by deducting her expenses from the total sales.
The formula: Sales – Expenses = Profit
If Sasha’s business was set up as a sole trader, she would add the profitable income of $75,200 to her personal tax return along with any other income she earned during the financial year. Other earnings could include the job she held to supplement her income while she built up her new eCommerce business or interest and dividends on her investments.
So, the income tax she would pay would be her personal tax rate when all income is totalled.
If Sasha’s Dresses was a Pty Ltd company, the amount of income tax Sasha would pay on $75,200, would be the company tax rate applicable for that financial year.
As of 2022-23, the income tax rate for small businesses (under $50 million in revenue) is 25%. Sasha would pay $18,805 in income tax (25% of $75,200).
Of course, this is a simplified explanation, but it gives you a good idea of how income tax is calculated.
- Not all sales are assessable and not all expenses are allowable.
- There are two methods you can use when calculating income tax:
- Cash – where income is assessable when received
- Accrual – where income is assessable when it is earned.
The correct method for your business to use is the one that truly reflects the profit of your business.
Usually, in eCommerce businesses, the accrual method is the most appropriate because of the delay between the purchase of inventory and receipt of inventory and when the actual sales are made from this inventory. The size of the business should also be taken into consideration.
Your accountant will be able to help you choose the best method applicable to your online business.
When is income tax due?
If your eCommerce business is in its first year of trading, your income tax will be due and payable after you have lodged your annual tax return with the ATO.
As a sole trader, your personal income tax return with your business income is due on 15 October after the end of the financial year.
If you have engaged a tax agent (like Sleek!) to complete your tax return you have until the following 15 May to lodge and pay.
If you have set up your online business as a company (Pty Ltd) or a trust, you will use a business tax return to report your business income.
You have until 15 May of the following year of the financial year end to submit and pay (if you’ve made a profit) your annual business tax return.
That’s a lot to take in, isn’t it? Let’s look at an example to make this clearer.
Your annual company tax return for the financial year from 1 July 2022 through to 30 June 2023 (FY23) is due on 15 May 2024.
Income tax registration
To lodge and pay your income tax, you are going to need a tax file number (TFN) for this.
If you are a sole trader, you will use your individual tax file number to declare your eCommerce business earnings. It will be declared along with other income you may have earned throughout the financial year, such as wages or salaries, interest or dividends.
If you do not already have an individual TFN, you apply online to the ATO.
As a company, when you set up for company registration, as part of the process, you will apply for a company tax file number with the Australian Taxation Office.
In both cases, when you file your end-of-year accounts, you will use your TFN of which the income tax is recorded and paid.
Goods and Services Tax (GST)
Another tax that your eCommerce business may need to account for is GST.
What is GST? Goods and Services Tax is a 10% added value on most goods and services in Australia.
There are a few exceptions, such as basic food stuff, but you can check the list here.
If the type of goods and/or services that your online store is selling are not on that list, keep reading, as your eCommerce business will need to pay GST.
How is GST calculated?
To calculate how much your eCommerce business owes to the ATO for GST, you will need to look at both sides of the equation – the GST your business has received from its sales and the total GST your business has paid when it has purchased expenses such as stock, postage, packaging and website.
Let’s use Sasha and her online dress business to put some numbers to this –
As we discussed in our income tax example, Sasha is registered for GST and dresses incur GST.
In Sasha’s first year of business, she had the following transactions –
- Total Shopify Sales of $119,550
- Purchases of Inventory (dresses) of $36,600
- Marketing/Website Costs of $6,500
- Packaging/Postage of $1,230
Remember, GST is 10% of the payable value. To find out the amount of GST on her sales and expenses we divide each total by 11.
- Shopify Sales $119,550 = GST collected $10868 (119550 / 11)
- Purchases of Inventory (dresses) $36,600 = GST paid $3327 (36600 / 11)
- Marketing/Website Costs $6,500 = GST paid $590 (6500 / 11)
- Packaging/Postage $1,230 = GST paid $111 (1230 / 11)
Sasha’s BAS would look like this –
GST collected (from sales) $10868
Less GST paid on expenses $4028
Sasha would need to pay $6840 ($10868 minus $4028) in GST for the year.
Now if Sasha had paid more GST on expenses than she received through her sales, she would have a GST refund, which the ATO would pay her.
When is GST due?
Businesses use an activity statement to report their GST.
If you’re registered for GST, the ATO will send you a BAS or you can get your accountant to lodge it on your behalf. You must lodge this statement even if you have nothing to report or you’re having difficulty paying.
There are different payment timeframes.
- Monthly, if your turnover is $20 million or more p.a.
- Quarterly, if your turnover is less than $20 million
- Annually, if you are voluntarily registered for GST. Only for businesses with a turnover of <$75,000 p.a. ($150,000 for not-for-profit organisations).
Most companies will need to submit their BAS at the end of each quarter.
Let’s table the quarterly BAS due dates –
Quarterly BAS due dates
Quarter 1 July to September BAS is due 28 November (or 21 October if you are not using an accountant or tax agent)
Quarter 2 October to December BAS is due 28 February (or 21st February if you are not using an accountant or tax agent)
(yes, good spotting, the ATO gives you an extra months grace to complete and pay your BAS over the Christmas period)
Quarter 3 January to March BAS is due 28 May (or 21st April if you are not using an accountant or tax agent)
Quarter 4 April to June BAS is due 28 August (or 21 July if you are not using an accountant or tax agent)
How to register for GST
Regardless of whether you are a sole trader or an incorporated eCommerce business, you will need to register for GST if you meet any of these criteria –
- Your business has an annual turnover of $75,000 or more
- Your business is a not-for-profit organisation, and the annual turnover is >$150,000
- You want to claim fuel tax credits (this is a % rebate of your fuel expenses, check here for the rates)
- You provide any riding services – taxi, Uber, GoCatch, Didi, Ola, limousine travel (OK this isn’t really an eCommerce business!)
If you have worked out you need to register for GST, let’s get cracking to register –
First, you will need your ABN, which will also become your GST registration number.
You can apply for an ABN through ABR yourself or Sleek [https://sleek.com/au/incorporation/ ] can make it even easier.
You will need this information for ABN registration –
- Your business structure – sole trader, partnership, company or trust?
- Proof of identity – here’s where you’ll need your personal tax file number (TFN) to prove who you are, and the TFN of any other shareholders or directors of your business.
- Legal business name
- Business contact details
- Authorised contacts – such as your tax accountant or BAS agent
- Details about your business and associates – what products or services your business will be selling and who else will be involved in the business as shareholders or directors (if any).
Should I voluntarily register my eCommerce business for GST?
So, you’ve looked at the criteria and seen that your online business does not need to register for GST.
But should you?
eCommerce businesses are unique in that if you operate through aggregator platforms such as Amazon, The Iconic, eBay, Catch and others, they automatically add GST to your sales price, regardless of your GST status and turnover.
If you are charging GST on sales, then it makes sense to claim the GST on your purchases.
If your business is selling directly to your customers through your website or social media, (ie, not selling through an aggregator), it makes sense if you have the option to not charge GST.
In this situation, you could charge 10% less on sales, making your products less expensive than your competitors. #winning
Why wouldn’t you, especially when your eCommerce business is starting out?
If your eCommerce business will be hiring employees, then you will need to know about PAYG.
If you won’t be employing any staff, you can skip this bit (but it is always good to know for when your business grows and you need to hire staff to help)
What is PAYG?
PAYG tax is the prepayment of your employees’ end-of-year tax obligations to the ATO.
Essentially, you are taking out an employees’ tax from their wages or salary and forwarding it to the ATO.
You may also, need to withhold PAYG for some contractor payments or for businesses who do not quote their ABN number.
Theoretically, it’s not a tax on your eCommerce business – you are passing on your employees’ tax obligations but your business has to pay it.
This is why we have included it here in our tax guide for eCommerce businesses!
How is PAYG calculated?
To calculate your PAYG withholding and pass this on to the ATO, you will need to set up a payroll process to help you get it right.
Payroll is the means of paying employees. This is where all your staff’s work hours, salary and wages, taxes, superannuation and sick, carers and annual leave is recorded and reported to the ATO.
If you are using the payroll function through your accounting software, the PAYG amounts will be calculated automatically with each employee’s pay.
You can then run a report for the period of your PAYG withholding to calculate the total amount of PAYG you need to pay to the ATO.
If you are making PAYG calculations outside of payroll – such as PAYG withholding for contractor payments or for businesses who do not quote their ABN number – you may need to use the ATO calculator.
Find the ATO calculators here.
Sleek scoop – Make sure you select the right calculator for each circumstance!
When is PAYG due?
The ATO will advise you whether your eCommerce business needs to pay monthly or quarterly.
You can check this on your ATO Business Portal or with your accountant.
If you are required to pay your PAYG quarterly it will be lodged through your BAS, at the same time as your GST.
If you are required to pay your PAYG monthly, it will be through the Instalment Activity Statement.
You can register at the same time as when you setup up your business, using your ABN.
If you have already set up your business, you can register for PAYG through your BAS agent, accountant, or your online services with ATO.
To explore more about employing staff and PAYG, click here to read our blog ‘Employing staff? You’ll need to know about PAYG.
Well done for sticking around. This is a lot to absorb and understand but knowing more about these taxes will make you a smarter entrepreneur and help your business plan for its success.
We’re almost there, there are just a few more taxes and duties we need to make you aware of that are important for an eCommerce business.
Any other taxes or duties my eCommerce business may have to pay?
Will your eCommerce business be importing products from overseas?
If so, there will be GST and other taxes that may be applicable, unless they are covered by an exemption.
Exemptions for GST and duties on imported goods include basic food, certain medical aids and appliances and cars used for disabled people.
These taxes and duties are determined by the Australian Border Force according to the type of class of the goods you are importing. So, it’s important you check this out so you know exactly how much you need to pay for each shipment.
These taxes and duties are important to note because if they are not accounted for when pricing your products to sell, can have a serious effect on your profits.
So, let’s have a look at them.
GST on imported goods
If the goods you are importing are eligible for GST, you will need to pay the GST at the border before the goods can be released to you, regardless of the value of the goods.
The GST is like the GST discussed above – 10% on the value of the goods.
Sleek scoop: GST on imported goods is payable by all online businesses regardless of your GST status. If you are registered for GST, you can claim the GST paid back – another good reason to register for GST?
You can defer the payment of GST on taxable importations until the first BAS after the goods are imported but you must have an ABN, registered for GST and lodge and pay BAS online and monthly.
Customs Duty on imported goods
The Australian Border Force (ABF) is responsible for clearing imported goods through customs when they first arrive.
Imported goods with a value over AUD1000 and some imported goods like tobacco, tobacco products and alcohol, are subject to the payment of:
- customs duty, and
- taxes and other charges, including an import processing charge.
Customs duty is generally 5% of the value of the goods imported in Australian dollars.
For certain imported goods, dumping and countervailing duties may also be collected.
There are other specific duties which may be payable for certain goods imported. This includes luxury car tax or the wine equalisation tax. We highly recommend you research these taxes.
How to calculate GST, customs duty for imported goods to Australia
The taxes and duties use the Australian dollar value of the goods to calculate the amount you need to pay.
The Australian Border Force will receive your declaration when importing the goods. Using this declaration, they will issue a payment advice to you.
It can get complicated, but let’s look at a general way on how to calculate these taxes and duties:
Back to Sasha’s Dresses. Say, Sasha purchased dresses from the USA at a cost of AUD$2300
Customs duty on this importation is 5% – 5% x $2300 equals $115.
Next, add all the freight, insurance and customs duty to the cost of the goods ($2300 + $115 + $150 for freight/insurance = $2565
GST is calculated at 10% of this final figure = $2565 + 10% = $256.50.
Again, this is a simplified example of taxes and duties for importations.
We highly recommend you use a customs broker, freight forwarder or contact the Australian Border Force directly to accurately calculate the GST and duties applicable for your importations.
How did you go about understanding your eCommerce business tax obligations?
We know this is a lot to take in, but we hope we’ve done a good job to explain them to you.
If you still need any help going through your taxes for an eCommerce store – or anything accounting-wise – Sleek is here for you. Our team is waiting now so contact us here or click on the chat button in the lower right-hand corner.