6 tax questions when starting a business

Starting a business is an exciting time. There are so many decisions to make and important things to learn, and tax is often the last thing that we want to think about. However, getting your tax and finance right is a matter of survival for your startup. Here are the 6 common tax questions to consider if you are starting a business.

1. What is the right structure?

The choice of business structure for your business depends many factors including fund raising, control, capability, taxes and asset protection. Refer to my article on 5 considerations for choosing a business structure for a detailed discussion of each.

a. Sole Trader – easy and cheap to set up and lets you keep full control of the business but you bear all the risk personally, meaning that in the event your business becomes insolvent, your personal assets including your home may be exposed to creditors claims. Profits and losses of the business are taxed as an individual on the marginal rate of tax, the higher your business income the more tax you pay.  There are less tax planning options with sole trader. However, it is relatively easy to change the structure as the business grows, so you aren’t locked into this structure.

b. Partnership – Simple to establish for group of individuals or entities to carry on a business together. You do need to ensure to have a written partnership agreement that spells out each partner’s rights and obligations. You and your partners are personally liable for debts of the partnership and for income tax on your share of the partnership profit.

c. Private Company – This is a separate legal entity and provides some protection over its owner’s personal assets.  A company pays tax at the company tax rate and may be eligible for small business concessional rates.

 d. Trusts – These are more complicated structures and early legal and financial advice are recommended. It provides a more flexible structure for distributing income, but comes at higher setup and admin costs. You need to have a Trust Deed and appoint a Trustee. The trustee is legally liable for the debts of the trust and may use its assets to meet those debts.

See a more detailed discussion in Choosing the right structure for your business.  We recommend legal and financial advice to be fully briefed about the implications of your choice.

2. What are my tax obligations?

It depends on the structure. However, if you anticipate that you are going to earn more than $75,000 in turnover then you will need to register for GST, however you can choose voluntary registration before you hit that amount. In the case of a company, you also need to pay super guarantee contributions (SGC) for any eligible employee and directors, and lodge an annual return to the ASIC, apart from income tax return.

3. Do I need to have a separate set of books for my business?

We recommend that you have a separate business account from the outset and start your bookkeeping from the get-go to be on top of your finance. Managing your finance is crucial for the survival and success of startups but is quite often overlooked.

4. What can I deduct in my first year of operating a business?

Like all businesses you can claim business expenses such as stock, materials, lease of premises or vehicles, staffing expenses and general operating expenses. However, in your first year you can also claim some of your start up costs such as the cost to incorporate your business. If you make a loss in the first year of operating you can claim that loss against other income, if your business had a turnover of greater than $20,000.

5. What tax incentives are available to startups?

If you are involved in innovation business and is an eligible Early Stage Innovation Company or ESIC), your investors can receive a 20% non-refundable carry forward tax offset to the value of their investment (capped at $50,000 or $200,000 depending if they are a sophisticated or non-sophisticated investor). Investors can also disregard capital gains realised on shares acquired in qualifying ESICs that have been held for between one and ten years.

Another similar incentive is the R&D Tax Incentive, which refunds up to 43.5% of your research and development spend.  Other incentives are Export Market Development Grant, where you can get up to 50% of your export promotional expenses back above $15,000.

6. What are the consequences for not complying with tax laws

Not complying with tax laws can be serious. The ATO have significant powers and can take money directly out of your bank account or direct your debtors to pay them instead of you. You can also receive criminal charges if you are found to be purposely non-compliant and that can even incur jail time in extreme situations.

If you are concerned about your start up structure and making sure that you get it right and get your tax obligations right from the beginning make sure you book an appointment with one of our advisers.