Tax incentives for startups this EOFY

For regular accountants, end of financial year is mostly about tax returns. For us, it’s more about making the most of tax breaks available to you as well as tax incentives for startups.

Otherwise known as, looking on the bright side! Join us there … here’s how.

Consider these tax breaks in your spending between now and EOFY

  • Instant asset write-off
    Between now and 30 June 2018, a startup founder can immediately write off any asset purchase that costs less than $20,000. To qualify for this, you need to be a small business with turnover of under $10 million. This concession stops at the end of this financial year (30 June 2018) so this might be your last chance.
  • Prepaid expenses
    This tax break for startups is often overlooked. You can prepay business expenses, like rent, utilities, internet, insurance, travel and subscriptions up to a year in advance and claim a tax deduction on them. So check your payments and see if anything qualifies.  We also have a larger list of general EOFY tips if you’re interested.

Make use of tax incentives for startups

We all know startups are strapped for cash. In fact, our Managing Partner, Remco, is a virtual CFO to a bunch of startups and often calls himself a “cash hustler”. So if you’re in product development or fundraising mode, here are some tax incentives for startups (straight from the hustler’s mouth).

You might already know about the R&D tax incentive – it is one of the largest sources of early stage funding for Australian startups – but just in case, it provides refunds of up to 43.5% of the costs of R&D work.  Yes, refunds of up to 43.5 per cent!   Cash.

There are a few requirements, which we list here.  We’ve helped many startups breathe and grow with this cash by submitting an R&D claim to AusIndustry and preparing the R&D schedule for their tax return.

While you’ve got until April 2019 to claim for the 2017/18 tax year, this is cash now so why wait?  We’re already working with our startups so we can lodge as soon as possible after 30 June.

Realistically, the earliest you expect cash refunds is around September.  So we’re also helping some clients access this funding in advance, thanks to the R&D lenders we work with. They lend you the money and you pay it back once your R&D claim comes through. There are some requirements of course, like providing projected cash flows and other modelling. All of which we can handle for you

Understand these tax incentives for startup investors

If you’re raising investment, EOFY can be a good time to do this because investors can get an immediate tax deduction. How good is that …you get to raise funds for your startup and help investors with their tax “problem” at the same time!

If you’re an early stage innovation company (also known as an ESIC), there are two tax incentives for startups designed to help you attract investment:

  1. A 20% tax offset for investors (capped at $200k for sophisticated investors and $50k for unsophisticated investors, per year)
  2. A capital gains tax write off on shares held for at least 12 months and less than 10 years – yes that means investors get to keep all the benefits of any exit, tax free

It wouldn’t be tax without some rules though, and there are quite a few for these tax incentives.

To qualify, investors must have purchased new shares in your company on or after 1 July 2016, and your company must qualify as an ESIC* at the time of purchase or immediately after.  And there are several other rules and restrictions. The ATO lists them here, but the key ones are that the investor:

  • Cannot hold more than 30 per cent of the equity in your company immediately after buying the new shares
  • Must meet the sophisticated investor test, for at least one of his/her shareholdings in an ESIC, if they’ve invested more than $50,000 in one or more ESICs that financial year

* So how does your startup company qualify as an ESIC?  The ATO explains it here, and we’ve also summarised it here for you.  But you’re right, all this stuff is not easy to understand.  If you’d like help with it or with startup funding in general, you might want to try our virtual CFO service

Bonus tip: Read this if you’re lending company money to anyone

Once a startup company becomes profitable, it might temporarily loan or advance funds to founders, private shareholders or their associates.

This is okay, as long as the funds are paid back before the end of the financial year that they were loaned in.  Why?  Because of the ATO’s Division 7A rules, which are designed to stop company profits being distributed to shareholders as tax-free ‘loans’.

If there are outstanding loans at the end of the financial year, we work with startup founders on the best possible treatment, which might be a loan-with-interest, dividends or even salary.  

Before you go …

Thanks for reading!  And just before you go, we need to let you know that this blog post is general in nature. It’s not personal tax advice.  If you would like that, please get in touch with our resident tax expert, Michael Budnow.

AND!  We’re also running our popular (and free) end of financial year tax workshops for startups in Sydney (19 June) and in Melbourne (26 June) soon.  We’d love to see you there if you can make it.

Image by Miguel A. Padrinan on

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