Starting a business is an exciting time in your life. 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, you can get into hot water pretty quickly if you ignore your tax obligations. So here are 7 common tax questions that you need to know if you are starting a business:
1. What is the right structure?
This is complex. Your business structure will have an impact on how much tax you pay, your personal liability, how much control you have over the business and ongoing operational costs. The right structure is important if you are seeking investment in your business.
a. Sole Trader - easy and cheap to set up. This means an individual person is in full control of the business but you bear all the risk personally. Profits and losses of the business are taxed as an individual on the marginal rate of tax. As you take all the risks of the business you are personally responsible for any liability it incurs. As the business profits generating higher income you pay more tax. 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, it is a group of individuals or entities carrying on a business together. You do need to ensure that there is formal documentation in place to set out the rights and obligations of each partner. There are some tax implications pending the structure, so you need to make sure you check with your accountant the implications and risks to yourself personally as a Partner of a business. You and your partners are personally liable for debts of the partnership and also pay tax on the income and gains of the partnership.
c. Private Company - This is a separate legal entity. This limits your liability from losses that the company incurs, which is one of the main advantages of using this structure. There are also some favourable tax incentives and grants available as a start up under this structure. There is however, higher set up costs and there is more rigorous compliance and reporting required. Companies are subject to Capital Gains Tax on sale of assets and do require an Australian Resident to act as Director.
d. Trusts – These tend to me more complicated structures and are considered to provide a more flexible structure for distributing income. You do need to have some formal documentation in place such as a Trust Deed and need to consider who acts as Trustee. We suggest you get both legal and accounting advice and support to set up the most appropriate trust structure. Trusts are also subject to residency rules and Capital Gains Tax.
2. What is the next step after choosing my structure?
After choosing the right structure for you we recommend that you get both legal and accounting advice. You need to consider estate planning, your family’s assets and tax before making a final decision. Also, depending on the structure you choose you may need an accountant or lawyer to put some paperwork together for you.
3. 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. You can do this before you hit that amount, in what we call voluntary registration or after you have hit that amount. You also need to consider income tax and company tax if you choose a company structure.
4. How do I separate my business and personal finances?
We recommend that you have a separate business account from the outset. That way all of the business expenses and income go through this account. This makes it much easier when reconciling your books.
5. 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.
6. What tax incentives are available when starting a business?
If you are a start up innovation (Early Stage Innovation Company or ESIC) then there are a couple of great incentives for you. Investors in your company 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.
7. What are the penalties 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.