Like many businesses we had a meeting with our accountant today to work out what, if any, benefits we can get out of the Federal and ACT Budgets handed down over the past few weeks.
Over one too many biscotti, which have become an essential part of our planning meetings, our accountant recalled some very innovative and amusing options clients have suggested for managing a tax liability, none of which she supported.
We thought the better of that and decided to review what was actually possible under this year's budget statements.
Foremost in our thinking was two key points: (i) managing existing cash resources and (ii) any actions taken this financial year is really deferring tax liability rather than removing it.
Start-up versus Small Business
We consider ourselves a one year old start up. Defining oneself as a start-up as opposed to a small business gives rise to an interesting range of discussions. Depending on what media you read, you may get the impression that start-ups are considered more important to the economy than small business.
This comes from the belief that start-ups are focused on rapid growth and will be the big employers of the future. History is still to prove that this is in fact the case. I have rarely met any small business owner that doesn't want to grow their business and continue to employ staff to investigate new opportunities. In fact, according to the Australian Bureau of Statistics, 43 percent of private sector employees are employed in small businesses.
Medium sized companies of between 20 and 200 employees take up the majority of the rest. Are these not successful businesses?
From our experiences both the start-up and small business community suffer from the same fundamental problem – not enough working capital. Most start-ups fail due to a lack of it, whereas many small businesses survived, but don't quite reach their full potential because they lack the funds necessary to invest in diversification and resources.
I still remember the words of a very wise mentor who said that 'ten $10m companies are more valuable to an economy that one $100m company'. I also don't know of too many start-ups that started off big and needed the same assistance as most other businesses to get off the ground.
This then begs the question - isn't a level playing field and the opportunity for all businesses to grow and employ what is really important to the development of our economy?
Set-up Costs
Anyway back to what the budget means for business. We have an established business structure, paying clients and staff (including two working directors). We are therefore already in the process of writing our establishment costs, mainly professional accounting and legal expenses off over a 5 year period. If however you are thinking a starting a business, you can deduct them immediately on next year's tax return.
There has been a lot of attention paid to the red tape associated with starting a business. In reality starting a business isn't difficult, but it can be confusing. There are a number of options in terms of operating structures. There are a range of services available to help you.
You can start with your accountant, but resources like business.gov, the Australian Taxation Office website, and Lighthouse Business Innovation Centre will provide some valuable guidance. State and territory governments also have a range of support mechanisms and tools available. So do your homework before you spend decide to spend money on professional services to establish your business.
An aspect of this that is probably the one worth considering is the ability to change your legal structure (say from sole trader or partnership to a Pty Ltd Company) without incurring capital gains tax. This is likely to occur when you are looking for shareholders or new partners, or if you have intellectual property you want to transfer to a new entity.
It is also important to seek advice from those who have some familiarity with what you are planning to do or are trying to achieve – seek out professionals that have other clients in your space and learn from their experience – this will reduce cost as it saves them learning to shave on your face!
Writing off Assets under $20k
The other budgetary measure that we investigated was the ability to write off assets costing less than $20,000 immediately. While this seemed appealing we had to think about (i) what do we really need as opposed to what is 'a nice to have' and (ii) what impact would this have on our cash flow going forward.
We asked our accountant whether this had to a be a one off purchase of $20,000 or could be a range of purchases as long as each was less than $20,000 and she confirmed it was the latter. But she did stress that any one purchase above the $20,000 threshold makes the whole purchase ineligible for the tax deduction but the item would be added to the general depreciation pool.
A Savings Approach to Managing Tax Liabilities
In the end we decided to prepay a couple of expenses such as rent and insurance because we will have to incur them anyway. If we do have a tax liability we will put a 'savings plan' in place to ensure we have the cash set aside to pay it. We try to manage our GST liability this way too.
As a general rule we aim to put around 20 percent of every invoice into a 'savings' account so that we can deal with our tax payments as and when they are due. This also means that we don't spend money that doesn't actually belong to the business. It's the first rule of finance – 'you don't miss what you don't see'. We are strong advocates of this savings approach in managing your tax liabilities. We might even be a little bit ahead next year when the reduced tax rate of 28.5% is applied to the company's income – only time will tell.
Many of you operate as sole traders and you won't receive the reduced corporate tax rate, but you will instead receive it as a 5% tax discount up to a total amount of $1000. We often get asked about the best structure under which to operate your business and unfortunately it isn't black and white, because it depends on your personal circumstances.
There are pros and cons to each but you need to know what works for you and what you are most comfortable with. The sites referenced above will help you gather some useful information, but this is a discussion you should consider having with a professional adviser that is across your personal finances and circumstances too.
True these tax cuts won't make any difference to anyone, whether a start-up or small business, unless you are profitable. But again this is something all companies aim to be and accumulated tax losses can work to your advantage when you do start to earn a profit. This is about preplanning and where professional advice may be helpful.
Another thing to consider is whenever there is a variation in tax rates from higher to lower (30% to 28.5%) there is some benefit to managing your revenue and expenses.
With that in mind, we have looked at ways of deferring revenue (so we pay tax on it at the new lower rate) and bring forward expenses (in order to minimise current year tax payable). It is a legitimate way of managing your tax payable and is a worthwhile exercise to investigate.
Employee Share Scheme
Those of you who have thought about taking on a partner or shareholder may have heard of the Employee Share Scheme. This is an arrangement where shares in a company (or the rights to buy them) are provided to an employee in relation to their employment. You might get paid less (or in some cases nothing) in exchange for your share of the pie.
This approach to starting up a business has been around for a long time, but the tax treatment of the equity has been confusing and often penalised the employee. The changes that were announced in the Federal budget means that staff in all companies will not pay tax on the shares until they are actually worth something and until they actually 'vest' in the employee (this is particularly beneficial if employees are granted 'options' in relation to shares).
Eligible start-ups will therefore be able to offer shares and options to employees at a discount, with the tax deferred until sale (for options) and no tax on the discount (for shares). There are still a range of issues to be clarified around 'eligible start ups' and how this all rolls out to existing start-ups.
Finding Funding
We all know, regardless of what we call ourselves, how hard it is to find funding for our business.
Grant funding programs for any kind of business endeavour are fast disappearing. We don't believe that Government should be funding everyone with a business idea – you have the potential to reap the benefit so you should take some of the risk. But grant funding can be extremely valuable in helping a business diversify and grow as long as key criteria are met.
To find what is available in your state or territory you can use free tools like Grant Ready.
But how many of you have considered Crowd Funding? This is a growing trend whereby a project or venture is funded by raising small amounts of money from a large number of people, typically via the internet. The government has committed to allowing equity crowdfunding which is currently restricted to wholesale investors who qualify with a minimum net worth or income, or else businesses are limited to raising less than $2m from fewer than 20 investors in any twelve month period (these are currently called sophisticated investors and are a requirement under current ASIC rules).
To raise equity funds in the current environment a company has to be a public company, which costs money and resources and has burdensome administrative requirements. The new proposal would mean that an entrepreneur could raise funds more cost effectively from a larger number of smaller investors. The challenge for the Government will be providing an appropriate level of protection for investors in this environment and making sure that they understand the risk of investing in start-up and small enterprises.
There are a few people that think this will be the magic bullet to growing technically based businesses in Australia, it will however also depend on the range and nature of the ideas. There are others who think that making an investment in a start-up tax deductable for an investor would have a greater impact.
This hasn't attracted a lot of support from government in Australia, but is used as an incentive in countries like the UK and Singapore. This is possibly a step to far for the current regime, but many are fighting to keep it on the agenda.
It all sounds confusing, but we have found that it doesn't have to be if you are prepared and seek the appropriate advice at the right time. For issues relating to tax an accountant is always the best to provide professional and tailored advice.
Of course you can prepare you own tax returns, but make sure you are across of the relevant and current regulations and rules at the time.
About Lighthouse Business Innovation Centre
Lighthouse has a strong track record of supporting entrepreneurs, researchers and inventers on the path from concept to commercialisation. Since July 2008, Lighthouse has worked with over 990 distinct enterprises and provided group and peer based services to over 3400 enterprises and individuals. For over five years Lighthouse has successfully delivered business advice, education, mentorship and networking opportunities to help these businesses commercialise their ideas and grow their companies. Lighthouse also delivers programs such as the ACT Microcredit Program for the ACT Government. Visit www.lighthouseinnovation.com.au for more information.
