Did you know that there are over 2.3 million small businesses in Australia?
Yes, that’s right. A considerable number, isn’t it? This is great news for you because there’s truly nothing more exciting than someone wanting to start their own business.
Getting a business off the ground involves many moving parts, some more exciting than others. Brainstorming business names? Fun! Choosing the next social media post? Also, very fun. Considering whether you need an Australian Business Number (ABN)? Not so fun.
We thought you might think that, but it doesn’t have to be this way.
The trick to successfully getting your business up and running is understanding what an Australian Business Number actually is, its benefits and the legal obligations you might have as a business owner.
To help you better understand what an Australian Business Number is, the benefits of working under an ABN and how it will help your business start on the right foot, this post will set out everything you need to know.
What is an Australian Business Number?
One of the first things you will do when starting a business is apply for an Australian Business Number or ABN as it is popularly known. Registering for one means that your business is legitimate, and you can conduct operations within Australia. But what is it?
An ABN is a unique 11-digit number, is the key means of identifying your business and is provided when you register your business. An ABN is issued by the Australian Business Register (ABR) and operated by the Australian Tax Office (ATO), which enables them to track your business activities.
How do I register for an ABN?
Is registering an Australian Business Number difficult? The short answer is no. All you need to provide when registering for an ABN is:
- A superannuation entity (for example APRA regulated funds, ATO regulated self-managed super funds) must be set up correctly;
- Proof of identity;
- The reason you are applying
- The date you require the ABN to be effective from;
- Your Tax File Number (TFN);
- Where your business is located;
- Details of any officeholders in your business;
- The industry your business will operate in; and
- The activities your business will engage in.
At Lawpath, we can make registering an ABN process for you very easy.
What are my responsibilities under an ABN?
Have you ever wondered what your responsibilities are under an Australian Business Number? You don’t need to wonder any longer as we have set it out for you.
- Annual income tax return – If you have an ABN, you must lodge an annual income tax return. It will apply to your business regardless of whether it reports a profit or loss and whether it is above or below the tax-free threshold.
- Update your ABN – It will be your responsibility as a business owner to maintain and update your ABN details. This needs to happen within 28 days of you becoming aware of any changes.
- An Australian Business Number is for life – What this means is that once you register for an ABN, you have the entitlement to that ABN while running your business.
- Cancelling your ABN – If your business is no longer running, you can cancel your ABN, but you need to lodge any outstanding income returns beforehand.
- GST – You still need an ABN even if you earn below the GST threshold of $75,000.
Do I need an ABN as a sole trader?
If your business is still at the hobby stage, an ABN may seem like an unnecessary formality. But this doesn’t mean that you can’t apply for an ABN as a sole trader from the very beginning.
You are entitled to an ABN if you carry on a business in Australia or make supplies connected with Australia as a sole trader.
Yes, it’s clear that you don’t need it as a sole trader, but there are many benefits that prove more valuable as your business’s income and complexity increase. So if you want to save a lot of accounting headaches or reduce the costs of hiring an accountant down the track, why not get an ABN number.
How Much Tax Should I Pay on My ABN As a Sole Trader?
If you decide to have an ABN as a sole trader, you will have to pay tax on your individual income.
Before we get into the details, it’s good to know the difference between an ABN and a TFN (Tax File Number), as some business owners can get confused between the two.
An ABN is necessary for operating a business, while a TFN (Tax File Number) is required for any person working in Australia. Most people apply for their own TFN when they start working at their first job. Your TFN will stay with you for life. This will only change if you decide to start a partnership business. In this case, you and your partner will have to apply for a separate TFN.
Okay, so we now have a good understanding of the difference between ABN and TFN, but what does this all mean for a sole trader? Good question.
If you run your business as a sole trader, you will be able to use your current TFN for tax purposes, but with an ABN, tax is not taken directly from the source. For example, a carpenter raising an invoice will receive full payment for their work; tax is not deducted at this stage.
This means that if you start a business as a sole trader with an ABN, you need to set aside a portion of your income so that you can meet your tax obligations when the financial year ends.
When June rolls around, you must include your ABN earnings with any other income received; after you lodge your tax return, tax is assessed based on that combined income.
The tax-free threshold sits at $18,200. If your income is higher than this, then progressive tax rates will apply. What and how you need to report depends on what business structure you decide to go with. You can also use the ATO tax calculator to estimate the amount you are obliged to pay.
How do I remain compliant?
Staying organised if you decide to become a sole trader is key to ensuring you can meet your tax obligations at the end of the financial year.
So some things you can do to ensure that this happens include:
- Keeping all invoices issued as part of your business
- Retaining receipts for products purchased as part of running your business
- Understanding your tax obligations according to the ATO
- Being transparent and accountable in all your operations
Further, having a tax lawyer advise you on your situation will help you ensure you’re complying with your obligations. Tax can be tricky when it comes to running your own business. However, if you understand the requirements and are organised, it doesn’t have to be difficult at all.
Benefits of working under an ABN
As a sole trader, it is not a legal requirement to have an ABN, but there are many benefits of working under an ABN.
1. Avoiding mistaken identity
A case of mistaken identity can occur in many situations when you operate as a sole trader. For instance, despite your business having a very cool and unique name, there could be a lot of other businesses out there with similar names. This could cause issues when other businesses or customers are trying to identify you and may get confused.
So the benefits of having a unique identification number are very beneficial in this instance as other businesses and customers can be sure that they’re contacting the right business. I’m sure you don’t want to miss out on potential customers.
Your potential consumers, business clients or suppliers can verify the identity of your business through the ABN Lookup service. As a sole trader having an ABN can give your business the legitimacy it needs in the market from the outset.
You can also validate your suppliers’ and clients’ ABNs online using resources like the Australian Business Register (ABR). You’ll know who you’re dealing with and check the status of any business entity before engaging in any transactions.
2. Your business will be easily identifiable
If your business registers for an ABN, its identity and information will be saved in the Australian Business Register. Why is this important?
- Government assistance – Your ABN number will be handy for government agencies when offering support and providing other services;
- Validation – Did you know you can use your ABN number to validate suppliers and see if there are any conflicts of interest before going into business;
- Development – Government agencies can track you down and provide any information on changes in business growth and offer you support for the ever-changing business environment; and
- Disaster management – In case of any emergencies, for example, floods or fire, having an ABN can help your business be identified and receive support and assistance.
3. You’re able to get an Australian domain name
Once you have your ABN, you can register your business name nationally and purchase a domain like ‘.org.au’ or ‘.com.au’.
By doing this, you will further help customers and potential suppliers identify your business, make your website look more trustworthy, and make your business name unavailable to other businesses.
Just imagine having your business website? Pretty cool, isn’t it? But this isn’t possible without an ABN.
4. Protecting yourself from a pay cut (Temporary)
If you have an ABN, the government is confident that you are paying the right amount of tax.
When you do not supply an ABN, businesses that pay you may have to withhold up to 47% of the payment and pay that 47% to the Australian Taxation Office.
Even if this amount is only temporarily withheld, it may still be money to keep your business going that you cannot afford to lose.
So if you want to avoid this temporary pay cut, get an ABN for your business, so when you deal with other businesses, they will be required to pay you in full.
As a sole trader losing close to half your income until the end of the financial year is an unnecessary restriction on your ability to grow and adapt. So get an ABN and display your number on your invoices or other paperwork to avoid this from happening.
Tax deductions are available for any purchases you make while running your business. But this will only be possible if you have an ABN and quote it. You cannot claim a tax deduction if you do not have an ABN.
You may make substantial purchases during the process of setting up and running your business, which can result in significant tax reductions.
In the same way that you can claim tax deductions, you can also claim Goods and Services Tax (GST) credits with your ABN. The purpose of GST credits is to allow you to claim back any GST you paid on a purchase that you made for the running of your business. It can save your business a great deal of money, and you can only do this if you have an ABN.
So do you want to save some money, especially if you’re first starting your business? An ABN seems like a great way to go.
6. Other tax benefits
Other key tax benefits of ABNs include:
- ABNs offer additional tax advantages in that they enable you to earn up to $18,200 of income tax-free. Whatever you earn below that amount is tax-free.
- Having an ABN number will also allow you to avoid pay as you go (PAYG) tax on payments you get.
- You can claim both GST credits and fuel tax credits on your business activity statement (BAS) with an ABN.
7. Claim Energy Grants schemes
You can also receive more money from the Energy Grant Scheme if you have an ABN.
Businesses can earn energy grants credits using this scheme, which are monetary rewards for using cleaner fuels.
This scheme encourages businesses to become more environmentally friendly, but this benefit is only available if your business has an ABN.
Disadvantages of working under an ABN
Just like with everything, there will always be some disadvantages that you may need to consider before implementing something to your business.
The main area of concern would be ensuring that you’re keeping up to date with your records and obligations under an ABN. For example, you may forget to lodge your annual income tax return under your ABN.
But this would be an easy fix if you set up an ABN checklist list to ensure you’re meeting all your ABN requirements. For example, why not use this checklist to ensure you cover all your essential tasks:
- Lodge your annual income tax return
- Update and maintain your ABN if there are any changes
- If you no longer need an ABN, pay any outstanding income before the cancellation
- Keep all your records in a spreadsheet and update them weekly
It’s quite evident that the advantages outweigh the disadvantages. So if you want your business starting on the right foot, it’s best to apply for an ABN as soon as you get started to reap all the rewards.
What is the difference between an ABN and an ACN?
It is not uncommon for business owners to get confused between an ACN and an ABN. We’ve already established that if you run a business, you must register for an ABN.
An Australian Company Number (ACN) on the other hand, is a unique nine-digit number that is assigned to companies only. A company is a separate legal entity. It is a distinct person by law and separates from those who formed it.
So if you set up a company and fail to adhere to these obligations, it may result in ASIC taking action and you may be in breach of company and tax laws. If you need to set up your ACN, the Australian Securities and Investments Commission (ASIC) provides and issues the number.
Do I need an ABN for a hobby?
Simply put, no. An ABN is not needed for a hobby. A hobby is a pastime or leisure activity conducted in your spare time for recreation or pleasure. The key element is that a hobby is undertaken for fun, not for commercial gain.
But if your hobby becomes a vehicle through which you earn income, it will be necessary to apply for an ABN.
Still unsure whether you’re conducting a simple hobby or a business venture? Here are some simple questions you can ask yourself to figure out if your activity is a business or a hobby:
- Is the activity being undertaken for commercial purposes? – This simply means earning money or a profit.
- Is my primary intention and aim to make a profit? – Ask yourself if your hobby has become your main vocation.
- Do I regularly and repeatedly undertake this activity? – If you complete your hobby on a regularly scheduled basis, this could indicate that your hobby has become a business.
- Is my hobby planned, organised and carried out in a business-like manner? – This would involve asking yourself if you have put any marketing efforts into your hobby and how much money you’ve earned from your hobby.
If you answered yes to most of these questions, you’re likely self-employed and running a business. This will require you to get an ABN. Once you have an ABN, you can work on building your hobby into an exciting business.
If I want to get an Australian Business Number, how long does it take?
After completing the ABN application, you will usually receive an online notification of your ABN as soon as you supply all the required information. This will usually take up to 1-2 business days.
It has been more than 48 hours, and I have not received my ABN. Why?
Your ABN may be delayed if:
- There are problems with the verification of your identity;
- You have an overdue tax return;
- Already have applied for an Australian Business number; or
- A previous application has been rejected.
What happens if my application is unsuccessful?
If your application has been rejected, you have the option to dispute it within 60 days. You should detail why you object to the decision and provide supporting documentation.
Can I use the same ABN for multiple businesses?
Generally, you will be able to utilise an ABN for more than one business of the same type. What we mean here is that you will not be able to utilise an ABN for both a sole trader business you operate as well as your company.
If you are changing your business from a sole trader or partnership to a company, you will also be required to get a new ABN.
There’s no doubt that having an ABN, whether you decide to start a partnership or begin as a sole trader, will help you kick your business goals sooner than later.
The benefits of working under an ABN are quite clear. It will result in easy identification for your business, various tax and scheme benefits and the ability to reserve an Australian domain name.
Despite some extra obligations, these benefits are a great way to get a head start for your new business where identification and money-saving measures are essential.
Do you want the benefits but are still unsure about ABNs and don’t know where to start?
Why not try our fast ABN registration service, which allows you to complete your application in less than 5 minutes.