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What is an ABN and why do I need one?

An ABN is an Australian Business Number and, in basic terms, is the way that the ATO can ensure that all Australian residents are declaring their taxable earnings and paying tax when they have to.

There are two main categories of taxpayers in Australia from which the ATO collects revenue.  Employees and anyone carrying on business operations.

Employees have a TFN (tax file number) and when they earn a salary or wage, their employer has to deduct the relevant amount of tax from that salary or wage earned and pay it across to the ATO.  As a result employees do not need an ABN.

But what happens if a person who has never submitted a tax return earns income via a business operation?

It would be very difficult for the ATO to be aware of these people and so ensure that they are not earning money that they are not declaring and therefore not paying the required amount of tax, ie, the “shadow or cash economy”.

As a result, the Australian Government put in place the ABN system which requires any person (this includes companies, partnerships, sole traders, trusts, etc) who earns income from business operations to register for an ABN.  In this way, the ATO is then aware of anyone and everyone who is doing business or plans on doing business.

During the application process the applicant is asked whether they also want to apply for various tax registrations, for example, tax file number, GST, FBT, etc.  The applicant can choose to answer NO to these questions, however, the ABN number is all the ATO needs to become aware of you.

You can only apply for GST registration with an ABN.

Together with the ABN requirement, the authorities put in place another big tax catch requirement to make sure that they collect any tax revenue that may be due to them.

The tax law states that if an Australian business buys a product or service from an Australian seller and the Australian seller does not supply a valid ABN, then the purchasing business has to deduct withholding tax of 47% from the amount that they pay to the seller and pay this across to the ATO.

For example, if you sell something to an Australian business for $1,100, but cannot supply the buyer with a valid ABN number on your sales invoice, then the Australian buyer can only pay to you $583 and they will to pay the remaining $517 to the ATO.  When they provide you with proof of the $517 payment to the ATO, their debt to you is extinguished.

The ATO will then treat the $517 as a tax prepayment for you for when you prepare your annual tax return, but this means that you could potentially be out of pocket for more than 12 months before getting any tax refund you may be due.

PLEASE NOTE if you have a valid ABN and you have supplied this to the buyer on your sales invoice, then the buyer cannot pay the 47% across to the ATO and only pay you the difference.  If they do, then they have short paid your invoice and you are entitled to claim the short payment from them.  It is then up to the buyer to claim the 47% back from the ATO.

At Expert Bookkeeping and Accounting Services, as experienced bookkeepers and accountants, we have significant experience in setting up the required registrations for doing business in Australia thereby ensuring that all secretarial and tax requirements are complied with.