Running a construction company in Australia can be as challenging as building a skyscraper without a blueprint. While you’re busy managing projects, coordinating teams, and ensuring safety standards are met, there’s another crucial aspect that often gets overlooked, taxes.
Imagine this: You’ve just completed a major project, and your company’s bank account is looking healthier than ever.
But before you start planning that well-deserved holiday, you realise you’re not sure how much of that money is actually yours to keep.
How much do you owe the Australian Taxation Office (ATO)? What deductions can you claim? And what on earth is a “base rate entity”?
These questions can keep you up at night, causing stress and potentially leading to costly mistakes. The last thing you want is to face an audit or hefty penalties because you misunderstood your tax obligations.
At BRI Ferrier our insolvency firm Sydney comes, can assist you in business recovery and insolvency, we understand the unique challenges faced by construction companies in Australia.
Our skilled staff can guide you through the intricate tax system and make sure you fulfil your responsibilities while maximising your profits.
What is Taxable Income?
The amount of your business’s earnings that is liable to taxes is known as taxable income.
It’s a more complex number that accounts for a number of variables rather than just the money that your construction projects bring in.
After deducting permitted deductions from your company’s gross income, your taxable income is determined.
These deductions can include business expenses, depreciation on equipment, and even some types of losses.
For construction companies, taxable income can include:
- Payments received for completed projects
- Progress payments on ongoing projects
- Income from equipment rentals
- Any other income related to your construction business
It is important to recognise that profit and taxable income are two different things. A year where you make a lot of money yet have little taxable income could be the result of big equipment purchases or high project costs.
What is Taxable Income in Australia?
The Australian Taxation Office (ATO) has specific guidelines for determining taxable income, especially for construction companies dealing with long-term projects.
The ATO recognises that construction projects often span multiple financial years, which can complicate income reporting.
For long-term construction contracts, the ATO allows two main methods for reporting taxable income
- Basic Approach: All payments received or receivable are returned as assessable income in the year they’re derived, and expenditure is deductible in the year it’s incurred.
- Estimated Profits Basis: This method allows for spreading the notional taxable income over the years taken to complete the contract.
*Important Note:
The ATO no longer accepts the completed contracts method, where income is only reported when a project is finished.
The ATO also specifies that:
Progress and final payments received in a year should be included in assessable income
The Australian Taxation Office (ATO) stipulates that all income received in a financial year must be reported, including progress payments and the final payment for any goods or services provided.
This ensures that the income earned is properly declared and taxed.
If any income is deferred or not reported, it could result in penalties for non-compliance with the ATO’s tax reporting requirements.
Expenses are deductible to the extent permitted by income tax law
Tax deductions are only allowed for expenses that are directly related to earning assessable income and must be properly substantiated with receipts or documentation.
The ATO has strict guidelines about what can and cannot be claimed as deductions, and improper claims could lead to audits or penalties. Therefore, it is essential to understand and apply these rules correctly to ensure compliance.
Up-front payments of contract price or advance progress payments are generally considered assessable income.
The ATO views up-front payments or progress payments as income when they are received, even if the services or goods have not yet been fully delivered.
This is important for businesses to remember when invoicing clients for long-term contracts, as they will need to report this income in the financial year it is received. Failing to do so could result in an understatement of income .
Non-compliance with ATO tax guidelines can lead to significant fines, penalties, or even legal action. Accurate tax reporting is not only a legal obligation but also helps businesses manage their finances better, reducing the risk of unexpected tax liabilities.
Staying informed of updates to tax law through ATO resources ensures ongoing compliance and minimises risks .
Company Tax Rates 2024 in Australia
For Australian construction businesses to ensure proper financial planning and compliance, it is imperative that they have a thorough understanding of the current company tax rates.
The improvements made in recent years, which have benefited many small and medium-sized businesses, including those in the construction industry, are still reflected in the Australian tax structure as of 2024.
Full Company Tax Rate
The full company tax rate in Australia remains at 30%. This rate applies to companies that do not meet the criteria for a lower tax rate.
Large corporations and companies whose income primarily comes from passive sources (such as dividends and investments) generally fall under this category.
Base Rate Entity and Reduced Tax Rate
However, many construction companies may qualify for a lower tax rate if they meet the definition of a “base rate entity.”
This reduced rate can significantly reduce the tax burden on businesses that are actively trading, as opposed to generating income passively.
Criteria for Base Rate Entity Status:
- Aggregated turnover of less than $50 million: A construction company must have a total turnover that does not exceed this threshold.
- 80% or less of assessable income from passive sources: To qualify, 80% or more of the company’s assessable income must come from active business activities (e.g., construction services) rather than passive income such as dividends, interest, or rent.
See this valuable resource on base rate entity company tax rates on the ATO’s website.
Reduced Company Tax Rate for Base Rate Entities
For the 2023-24 financial year and beyond, companies that qualify as base rate entities will benefit from a reduced company tax rate of 25%.
This is particularly relevant for construction companies, as their income is predominantly from active business activities, such as project work, rather than passive investments.
Importance of Accurate Taxable Income Calculation:
It’s important to remember that company tax rates apply to taxable income, not gross income or revenue.
Taxable income is calculated after deducting allowable business expenses, so construction companies must carefully track their income and expenses to ensure they are applying the correct tax rate.
*Important Note:
For many construction companies in Australia, understanding whether you qualify for the 25% tax rate as a base rate entity can result in significant savings.
Ensuring that taxable income is correctly calculated and knowing the distinction between active and passive income is crucial for optimising your tax obligations.
What is an Assessable Income?
In Australian taxation, assessable income is an important topic, especially for construction enterprises.
It refers to all of the revenue that your business gets and that Australian law permits you to tax.
For construction businesses, assessable income typically includes:
- Payments for completed projects
- Progress payments on ongoing projects
- Income from equipment rentals or sales
- Any other income related to your construction activities
Important Note*
Assessable income is not the same as taxable income. Assessable income is your starting point, it’s all the income that could potentially be taxed.
Taxable income, on the other hand, is what’s left after you’ve applied all eligible deductions to your assessable income.
For construction companies dealing with long-term projects, the ATO provides specific guidance on what constitutes assessable income:
- All progress and final payments received in a year should be included in assessable income.
- Income arising from long-term construction contracts includes not only payments actually received but also amounts billed or billable to customers for work carried out and certified as acceptable for payment.
The Difference Between Gross Income and Taxable Income
Although they may sound similar, gross income and taxable income are two different ideas that construction companies need to know.
| Aspect | Gross Income | Taxable Income |
| Definition | All income received before deductions or adjustments | Income subject to tax after allowable deductions |
| Components | – Revenue from construction projects |
- Equipment rentals
- Other business-related income | Gross income minus allowable deductions | | Examples for Construction Companies | Total value of all contracts completed or in progress during the financial year | Gross income minus deductions such as:
- Materials costs
- Labor costs
- Equipment depreciation
- Overhead expenses | | Tax Implications | Not directly taxed | Amount on which taxes are calculated | | Importance | Represents total revenue | Determines actual tax liability |
Key Differences
Calculation: Gross income is the total revenue, while taxable income is derived by subtracting allowable deductions from gross income.
Tax Application: Taxes are calculated based on taxable income, not gross income.
Financial Planning: Understanding the difference is necessary for accurate tax planning and reporting.
Record Keeping: Detailed expense records are essential as they can significantly reduce taxable income and the resulting tax bill.
Case Study Example: Simplified Example of Company Tax for a Construction Business
Imagine your construction company earns $5 million in a year but has $4 million in business deductions (materials, wages, etc.). This leaves a taxable income of $1 million.
If your company qualifies for the 25% tax rate as a base rate entity, you’ll pay:
- 25% of $1 million = $250,000 in tax.
Without the lower rate, at the full 30% tax rate, you’d pay:
- 30% of $1 million = $300,000 in tax.
This shows how claiming all deductions and applying the correct tax rate can reduce your tax bill.
Valuable Resources for Construction Companies
It can be difficult for construction companies to navigate the complicated world of taxes. Thankfully, there are a number of excellent resources accessible to assist:
Australian Taxation Site:
Australian Taxation Office (ATO) Website: The ATO provides comprehensive guides and tools specifically for businesses in the building and construction industry.
Their website offers information on record-keeping, tax rates, and industry-specific deductions.
Australian Securities and Investments Commission
Australian Securities and Investments Commission (ASIC).ASIC offers resources on financial reporting and corporate compliance, which are crucial for construction companies.
Master Builders Australia
Master Builders Australia: This industry association provides members with access to tax and business advisory services, as well as updates on relevant legislation changes.
Chartered Accountants Australia and New Zealand
Chartered Accountants Australia and New Zealand: They offer resources and professional development opportunities that can help you stay up-to-date with tax laws and best practices.
BizPrac Construction Management Software
BizPrac Construction Management Software: This industry-specific software can help streamline your financial management and make tax reporting easier.
Remember that in the long term, you may save time, money, and stress by being knowledgeable and getting professional help when necessary.
How BRI Ferrier Can Help
From understanding the nuances of taxable income to keeping up with changing company tax rates, the financial aspects of running a construction business require expertise and attention to detail.
This is where BRI Ferrier comes in. As specialists in business recovery and insolvency, BRI Ferrier understands the unique challenges faced by construction companies in Australia.
Our team of experts can help you develop effective tax strategies tailored to your construction business, ensuring you meet your obligations while maximising your returns.
- Financial Management: We can assist in setting up financial systems to track income, expenses, and project costs accurately, making tax time less stressful.
- Compliance Assurance: Our deep understanding of ATO requirements, we can assist you with documentation, in order for your company to remain compliant with all relevant tax laws and regulations.
- Business Recovery: If your construction company is experiencing financial challenges, our team specialises in business recovery and is here to guide you through the process.
- Strategic Advice: We provide strategic financial advice to help your construction business grow and thrive.
By partnering with our team at BRI Ferrier, you can focus on what you do best, contact our construction insolvency team today
