Considering small business tax implications in the early stages of a start-up is important to long-term success. Generally, when starting up a business, the most immediate concern to new entrepreneurs is profitability, with taxation somewhat near the bottom of the priorities list.
Financial and tax advisors recommend incorporating taxation issues into start-up thinking, especially into the company structure, systems and procedures that are put in place in order to ensure smooth business flow and keep open options for the future. It is important to build some flexibility into your plans and take a long-term view as much as you can.
Here are the top tips for entrepreneurs:
1. Structure the business appropriately from the outset. A lot of Clients trade using company structure for a few years and then decide to sell the business. Problem: They don’t have a great tax structure or that, if they want to change it, it will cost them a lot of money, because if it is put into a new entity it is likely to incur costs such as stamp duty and capital gains tax.
2. Remember you are building a capital appreciating asset that may require disposal in the future. Make sure if the asset is to be disposed of in the future then the business is established from the outset in a structure through which you will be able to get capital gains tax concessions. This will more than likely mean having another entity where the individuals are able to get access to capital gains tax concessions such as a unit trust or family trust which can, for example, own the intellectual capital of the business and obtain any goodwill asset at concessional rates.
3. Research and take advantage of available concessions for small businesses. There are many types of opportunities depending on the business size and industry. Examples include grants, research and development concessions and export assistance.
4. Are you eligible to defer your GST obligations for 12 months? The GFC affected many new and existing businesses which are now struggling to maintain a steady cash flow. In recognition of this, the Federal Government has a program for eligible applicants to defer their tax payment obligations and general interest charges for 12 months. This program began on 1 June 2009 and has been extended until 30 June 2011.
To be eligible your business must have:
- An annual turnover of less than $2 million
- Activity statement debt
- A mutually acceptable and sustainable payment arrangement with the ATO
5. Another ATO initiative is the Entrepreneurs Tax Offset. It is a tax offset equal to 25% of the income tax payable on your business income if you have an aggregated turnover of $50,000 or less. Once your turnover reaches $75,000, the Offset phases out. This is suitable for someone in their first year of business which allows them a discount on the income tax payable. It applies to a sole trader, a partner in a small business or a beneficiary of a trust which is connected to the business.
6. Let good business and investment decisions, not taxation, drive expenditure. Many business owners buy the latest and greatest version of machinery or technology in order to obtain large depreciation expenditures to keep tax bills down. Ultimately, their tax bills may be lowered but they don’t have any cash because they’re minimising their profitability. Let sensible and good business decisions drive investment, not tax. Tax should be a secondary concern to building a long-term, sustainable business.
7. It’s important to understand the benefits of management accounting information. It is about creating focus for the people who are running the business about where they need to direct their attention and their efforts. The reporting needs to be simple and understandable. Choose accounting software that enables you to achieve basic outcomes such as meeting compliance obligations like quarterly GST payments. Many small businesses are run very successfully by using off the shelf accounting software such as that supplied by MYOB and Quicken.
8. Don’t over complicate reporting systems, or you may have trouble identifying the drivers of your profitability. Be disciplined about maintaining up-to-date data and using good accounting software. This will keep the relevant numbers fresh and ready for analysis at any time. Quarterly GST reporting also helps keep this information current.