What comes to mind when you hear the word start-up? You might conjure up a picture of young tech gurus running a business from a garage or university dorm room. Others might think all start-ups end in massive success stories, like Melanie Perkin’s Canva, for example. The reality is that lots of start-ups fail, and all start-ups are incredibly hard work. But like any business, founding a start-up and growing your business is incredibly rewarding and creates opportunities for many!
During the early stages of a start-up, raising funds is a huge part of the work involved, and a lot of it will likely come from bootstrapping finances, through your own pockets or community. An early-stage start-up will invariably involve a small, tight-knit team with a common goal, a certain level of chaos, truckloads of excitement and infinite opportunities. These early stages can last a long time too. Even a five-year-old company can still fall under the category of a start-up.
In Australia, the federal government acknowledges the importance of fostering an entrepreneurial spirit among the business community. To encourage and assist start-ups, there are tax concessions and tax strategies available that could benefit your business.
Reduce Tax and Attract Talent with the Employee Share Scheme Start-up Concession
When an ESS is set up correctly, employees are eligible for special tax treatment, AKA tax concessions. If receiving the shares at a discounted price, an employee can reduce the taxable discount income relating to their ESS interests to nil.
This tax concession allows start-ups to keep more cash for growing their business, which may have been otherwise used to remunerate good talent. Ultimately, the intention is to make Australia more attractive to innovative start-ups. This case study demonstrates ESS start-up concessions in action. It’s important to note the concession is only available for ESS interests acquired after 30 June 2015.
Claim Deductions for Business Start-up Costs
Under normal circumstances, start-up costs are regarded as a capital cost of a business and not immediately tax deductible. However, a small business entity with a turnover of less than $10 million can claim a deduction for these costs. These allowances include costs relating to capital raising, financial and legal advice concerning suitable business structures, professional advice on the viability or strategy of the business and regulatory fees relating to the setup of the business.
Use Finance to Fund Your Start-up Business
There are ways for founders to secure start-up funding without selling equity too soon. One of these is through finance via a bank loan, although you will need to show steady revenue growth and a well-thought-out business plan or provide collateral. Where start-up funding is achieved through business finance, a tax deduction can be claimed for the interest and other borrowing costs associated with the loan.
Explore Tax Incentives for Research and Development
The Research and Development Tax Incentive offers generous tax offsets of up to 43.5% or 43.5 cents for every dollar invested by businesses. The size of the offset is determined by the entity’s aggregated turnover, with start-ups likely to receive the full amount if their aggregate turnover is under $20m.
The Australian Government offers the R&D Tax Incentive to entice businesses to invest in research and development. This is one way our government recognises that it can support R&D activities to advance good ideas, which ultimately benefit us all through innovation and economic growth.
Go Global with an Export Market Development Grant
Is global domination part of your business growth strategy? If your operations expand to overseas markets, you might be eligible for the EMDG program. The grant, which mainly covers international promotional activity, effectively allows you to double your marketing budget to increase reach and export opportunities.
But Wait, There Might Be More Tax Strategies for Start-ups...
Hopefully, there are some tax deductions and strategies listed here that your start-up can take advantage of or plan for in future tax return periods. If you already implement these strategies, there are other concessions that might be applicable to your specific start-up's situation. Reach out to our start-up accounting experts to see how we can help your business go to the next level.