eCommerce Tax: The Fullstack Guide
Starting an Ecommerce business in Australia requires careful planning. Here’s what you need to know about tax planning.
With Australia’s ecommerce market booming, we provide the Fullstack ecommerce tax guide to help ecommerce founders manage their growth responsibly.
Australia’s ecommerce market is one of the largest in the world, demonstrating a double-digit growth rate over the last decade. Valued at over $33 billion, the Australian ecommerce market is supported by strong internet infrastructure and a healthy economy.
The 2020 to 2021 COVID-19 pandemic saw the Australian ecommerce market experience a $4 billion boom, catalysing a surge in new ecommerce businesses and startups. The ecommerce boom has seen small businesses increase revenues by between $100,000 and $700,000 — but it’s important to pay close attention to the tax obligations incurred by ecommerce business success.
Ensuring that tax obligations are fulfilled is critical to the success of both new ecommerce startups and existing ecommerce businesses. Small mistakes in tax affairs can rapidly cause large-scale problems at tax time.
This ecommerce tax guide will break down the basic obligations, calculation, and reporting practices for tax in the Australian ecommerce market, providing guidance on how to ensure your ecommerce business is tax-compliant.
Choosing the Right Business Structure
The first step in establishing an effective tax strategy for your ecommerce business is determining the business structure you will use. The business structure you use for your ecommerce operation will vary based on factors such as cost, tax, risk, and ownership, as well as the service or product your ecommerce business offers.
In most cases, early-stage or new ecommerce operations in Australia are likely to structure their business as a sole trader. Establishing a business as a sole trader is low cost, which can help new businesses minimize early overheads.
Many new ecommerce businesses overlook tax strategy, as it’s common to operate with average or poor trading performance in early launch stages. Losses incurred during the establishment of a new ecommerce business can carry tax benefits later on, however, so it’s important to remain attentive to tax obligations and opportunities from launch.
- Ecommerce startups with multiple partners might consider partnership structures in early stages to minimize costs, or immediately establish either a trust or company structure (with company structures being the most popular). When determining the correct structure for your business, it’s important to consider:
- Tax: How will you ensure your ecommerce business meets tax obligations? Is your ecommerce business entitled to any government grants or tax concessions?
- Risk: How much risk is associated with your ecommerce business? Will your business need insurance? Some business owners may need to consider a business structure that protects their personal assets
- Ownership: Is your ecommerce business owned by multiple people, or a single owner? How will management and ownership be controlled in your business?
- Costs: Different business structures offer different advantages and fees. It’s important to factor in costs such as legal, consultantss, accounting, registration, and tax lodgement fees.
Future-proofing your business structure is important. Businesses change, grow, and evolve over time. The best business structure for your ecommerce operation may not remain cost-effective or manageable as your business scales.
While it’s possible to alter business structure at any point during the early stages of launching an ecommerce startup, business structure alterations should be executed with caution. If you’re considering changing the business structure of your ecommerce operation, it’s best to consult with a professional tax accountant or business consultant to make sure capital gains tax don’t apply or at least minimised.
Income Tax & TFN
The first step in our ecommerce tax guide is getting the basics right. Establishing a new ecommerce business requires a Tax File Number, or TFN. If you’re planning on operating your ecommerce business as a sole trader, it’s possible to use your personal Tax File Number as your sole trader Tax File Number.
If you don’t already have a Tax File Number, it’s essential to register one before engaging in any business activities. Registering a new Tax File Number is a relatively straightforward process — the Australian Taxation Office provides a simple web form that can be used to submit a TFN application.
If you already have a Tax File Number and intend to establish a trust, company, or partnership, it’s possible to use your TFN in the process of establishing these business structures. For more information on establishing a trust or a company, see Fullstack’s guide to Trustee Company vs Trust vs Company – What’s the Difference?
Do You Need an ABN for Your Ecommerce Business?
In most cases it’s necessary to possess an Australian Business Number in order to operate an ecommerce business in Australia — but not everybody is entitled to an ABN. In order to qualify for an ABN, it’s necessary to be either starting a business or carrying out business in Australia or operate a registered company.
If you’re planning on starting an ecommerce business in Australia, then it’s likely that you are eligible to apply for an ABN. Establishing a website, social media account, or advertising for a new business, or consulting with tax, financial, or business advisers are examples of activities that mean it’s time to apply for an ABN.
Similarly, any business that operates within Australia to create a profit must operate with an Australian Business Number. If you are currently operating a venture that carries out businesslike activities such as following a business plan, keeping records, or conducting a consistent number of commercial activities, it’s necessary to have an ABN.
When applying for an ABN it’s important to take into account the specific business activity requirements as outlined by the Australian Taxation Office. In some cases, smaller scale business related activities may fall under the classification of “hobby” activities.
The Australian Taxation Office provides detailed information regarding the difference between business and hobby activities via the ATO website. In simple terms, if you’re planning on generating profit through a planned, organized, and businesslike process, you’re likely to need an ABN in order to conduct business.
How to Apply for an ABN
Applying for an ABN is typically the first step taken by new ecommerce businesses in Australia and is a relatively straightforward process. In order to apply for an ABN, you’ll need to complete an online application via the Australian Business Register.
- Before you submit an application for an ABN, it’s necessary to possess the following information:
- Business contact details including business address, mailing address, email address, and telephone number
- Registration details including relevant Tax File Number and Australian Company Number information
- Associate Details such as the full name, date of birth, residential address, and tax file numbers. It’s important to note that if the resident associated details provided in the ABN application do not match ATO records it’s highly likely that the application will be denied
- Business details including a specific description of the main activities carried out by the business
For more information on applying for an ABN, see the Fullstack guide on How to Apply for an ABN in Australia.
Goods and Services Tax Registration for Ecommerce
The next step in our ecommerce tax guide is deciding about GST. Goods and Services Tax applies to a wide range of goods and services consumed by the Australian public which, in many cases, includes products and services sold through ecommerce platforms.
When establishing an Australian ecommerce business, it’s important to consider whether or not you will register your business for GST. Determining whether or not to factor in GST when launching your ecommerce business can be difficult — businesses that anticipate generating a revenue of over $75,000 per annum must register for GST.
Once registered for GST, a business must complete a quarterly Business Activity Statement, which is then lodged with the ATO. Australian business entities are obligated to register for GST should they meet minimum turnover, defined by the total taxable supplies — or total sales — in any given financial year and the projected sales in the remainder of a financial year.
The simplest way to register your business for GST is to complete an online application via the ATO Business Portal directly after completing an application for an Australian Business Number.
For more information on Goods and Services Tax and how it relates to your ecommerce business, see the Fullstack Guide on What is the GST & How Does the GST Work?
Preparing for Ecommerce Income Tax
Preparing your ecommerce business for income tax doesn’t need to be complicated. In simple terms, the total amount of payable income tax is generally calculated as the taxable income of a business entity multiplied by the tax rate of the business entity in the financial year.
Taxable income is defined as any profit generated during the financial year, for income tax purposes. This can generally be summarized as the accounting or actual profit generated by the business. Put simply, sales, less expenses, is profit.
How to Account for Income Tax
Accounting for income tax is relatively simple in the earliest stages of a new ecommerce startup but can become complicated as a business scales. Income tax accounting is typically executed in two different methods:
- Receipts or cash method in which income is assessable as it is received
- Earnings or accrual method in which income is assessable when derived
Determining the best method to account for income tax required careful judgement and can vary greatly depending on a wide range of factors. If you’re not sure how best to account for income tax for your ecommerce business, it’s best to consult with a professional tax advisor.
Preparing for Ecommerce Goods and Services Tax (GST)
Registering your business for Goods and Services Tax as outlined previously in this article is an important step for all ecommerce businesses. Incorporating GST into business practices, however, can be more complex.
Most Australian ecommerce businesses that expect to reach or exceed the GST threshold will add 10 percent GST on to the sales price of the products or services they provide. It’s important to note that it’s possible for businesses to claim back GST incurred for many business purchases.
Not every sale made by Australian ecommerce businesses is subject to GST. The most common GST-free sales made by Australian ecommerce businesses are exports — products sold internationally are, in most cases, not subject to GST. There are a number of exceptions, however, such as goods that remain within Australian for over 90 days before export.
Managing Goods and Services Tax obligations is performed through Business Activity Statements, or BAS. Businesses registered for GST deliver GST to the ATO though the BAS system on a quarterly basis. It is possible, however, to elect to submit BAS on an annual basis.
Businesses seeking to claim GST on the purchases that they make should also take note to keep copies of the tax invoices where the purchase is above $82.50. Many SaaS providers or online businesses (i.e. Facebook) also won’t charge GST on their invoices to you if you share your ABN beforehand.
Determining whether to lodge annual or quarterly BAS involves careful consideration of business cash flow. For more information on BAS and GST tax obligations, see the Fullstack guide to Understanding your accounting obligations – BAS’s, Tax Returns, PAYG, Receipts and More.
How to Account for GST
- Similarly to accounting for income tax, there are two methods that can be used to account for Goods and Services Tax for Australian ecommerce businesses:
- Cash method in which GST is claimable on payment, and payable upon receipt
- Accrual method in which GST is claimable on payment and payable on receipt of tax invoices.
Businesses typically account for GST using the method that is most favourable for them, which in most cases is the cash method. The cash method provides cash flow advantages as businesses must only provide GST to the ATO subsequent to receiving payment.
It’s important to note, however, that businesses with a turnover above $1 million must use the accrual method.
End of Year Stocktake
Similar to retail stores holding inventory, so too must ecommerce stores conduct an annual stocktake to record the value of stock on hand at year end.
The ATO allows a few methods to value trading stock including cost, market value and replacement value. If the value of goods has risen, then a good method to reduce your taxable income is to take cost method for valuing your end of financial year stock.
Ecommerce businesses are free from many of the costs associated with traditional retail businesses but must still ensure that they are tax compliant. Establishing an effective tax strategy for your ecommerce business helps to minimize administrative friction and ensure your business avoids overpaying tax.
That is all for our ecommerce tax guide. Tax accounting for ecommerce businesses can be complicated. If you’re considering launching or are currently operating an Australian ecommerce business, reach out to the ecommerce accountants at Fullstack for comprehensive guidance today.
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Stuart Reynolds is the founder of Fullstack Advisory, an award-winning accounting firm for businesses leading the future. He is a 3rd generation accountant who specialises in tech companies, crypto and entrepreneurs.