7 tax questions when starting a business
We know tax can be as annoying as this video. Particularly when you’re starting a business – tax is the last thing you want to think about.
But if you don’t, you can run into a few issues fairly quickly so here we answer seven tax questions that will help your startup company get it right.
1.What is the right structure for my startup?
There are five tax structures to consider when starting a business:
- Sole trader
- Discretionary/family trust
- Unit trust
Overwhelmingly, for tech startups we recommend setting up a company and a family trust to hold shares in it. We recommend this for a whole heap of reasons but to summarise, it protects you, limits your risk and gives you more options at exit time.
And if you’re planning on developing technology, becoming an industry leader, selling your business, being acquired, going for an initial public offer (IPO) or leaving your business to family, this structure is almost certainly your best option.
Yes, it involves more paperwork at a time when you want to do the bare minimum on non-essential tasks BUT getting the right set up is essential. It’s a right royal pain to change structures down the track.
2. What is the next step after I’ve chosen my structure?
It’s important to find a lawyer who will draft the legal documents you need. For a company, you might need a shareholder agreement. For a trust, you’ll need a deed. You also need a company name, a TFN and an ABN. Work with your lawyer to see if it’s more cost-efficient for you to organise these online or for them to do it. You might want to check out General Standards. They’re dedicated startup lawyers.
3. What are my tax obligations?
There are a lot of taxes to take care of once your startup earns revenue. The top three are:
- Annual tax returns (even in the beginning, you might have three – one for you as a founder, one for your company and one for your trust). If your company’s financial year ends on 30 June, your tax returns need to be lodged and any associated tax needs to be paid by 15 May the following year.
- GST (paid through quarterly BAS returns, which are usually due on the 28th of the month after the quarter ends e.g. BAS for the July-September quarter is due on 28 October).
- PAYG withholding (if you have employees). You pay this either quarterly (with your BAS if you are withholding under $25,000 in total PAYG for the financial year) or monthly (via an Instalment Activity Statement if you’re withholding $25,000 or more in total PAYG for the financial year. IAS are usually due on the 21st of the following month)
You might also have to pay PAYG instalments if your income reaches a certain amount. You can read more on this here.
And, once your payroll reaches about $47,000 per month, you’ll likely be up for state-based payroll taxes. Here’s a good place to start unpacking these.
It sounds like a lot, we know. Many startups DIY as much as they can in the beginning and then whoop for joy when they can outsource to a startup savvy accountant.
4. How do I separate my business and personal finances?
It’s surprising how many entrepreneurs don’t do this but please take our word for it when we say at best, it leads to confusion. At worst, you could wind up paying more tax. Avoid it by setting up a separate business bank account. And use an income statement and balance sheet to track what your business earns and spends. It can be as simple as making a weekly date to update these spreadsheets.
You’re probably putting money into your startup or covering expenses for it. Make sure you account for this so you can comply with tax laws and get your money back.
5. What can I deduct in my first year of starting a business?
From the moment you start up, you can deduct all ‘ordinary and necessary’ business expenses in your tax return. That can include anything from work-related travel to office supplies and client meetings. You can even deduct organisational fees and proportional costs of your rent and utility bills if you have a home office. But don’t wait until tax time to find your receipts. Keep track of them as you go through clever technology like Receipt Bank or simply with a spreadsheet and paper file.
6. What tax incentives are available when starting a business?
There are a few tax incentives for startups:
- R&D tax incentive program. This is one of the largest sources of early stage funding for Australian startups. It provides refunds of up to 43.5% of the costs of development work.
- Employee share and options schemes for startups. This program is aimed at helping startups attract talent by allowing them to offer employees, contractors and directors tax-efficient ownership.
- Early stage investor scheme. If you’re an early stage innovation company, this program could give your investors a 20% tax offset.
7. What are the penalties for not complying with tax laws
The ATO can issue you with a failure to lodge fine if you don’t lodge your tax returns, BAS statements, IAS statements or other tax related documents on time.They will issue warnings first and often don’t issue a penalty in isolated cases of late lodgement. Fines vary depending on your size and lateness. The ATO explains all this online here.
And if issuing you with penalties still doesn’t get you to lodge a return, especially where you have several years outstanding, the ATO can issue you with default assessments, based on data about your previous income.
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