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Accounting & Tax Essentials for
Startups
Mary Bahrami CA
Melbourne Startups
Innovation: to evidence the constant innovation required to
maintain leadership it is worth looking at what Amazon,
Facebook, and Google are doing. Cumulatively, these three firms
are investing ~US$35 billion per annum on research and
development. That is roughly twice the total spent on R&D in
Australia by all companies and research organisations combined!
(ABS: A$20Bn in 2014)
Before this, at their inception, these ideas need Business
Incubators. Incubators are a vital part of any effective innovation
ecosystem. Australia has over 30 incubators and accelerators,
which compares to 1,250 in the United States and 130 in Europe.
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Business Plans
‘If you fail to plan, you plan to fail…’ (Unknown)
Important particularly if applying for Government Grants.
A business plan is a formal statement of business goals, reasons
they are attainable, and plans for reaching them.
For established companies not just Startups. Even for social
enterprises and non-profits.
Should also think about budgets, forecasts the importance of cash
flow and cash runways at this point in conjunction with business
plan.
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Business Plans
Stages of the process
The initial definition of the business
Collection of information
Planning the business
Preparation of the business plan document
Promotion or the utilisation of the business plan
Although the view of the business plan is long-term, you will
need to change and adjust it
you have to set milestones but you may need to change
them when face reality
The business plan is constantly evolving
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Who needs a BP?
The basis of the evaluation of the business is financial and
the bottom line will be the economic justification for the
new enterprise.
Even when the goals are not necessarily a return on
capital invested but are rather social or philanthropic, the
enterprise should be evaluated and compared with other
options using economic parameters. This will ensure that
the valuable time and money invested are put to the best
possible use.
Must be realistic and not based on dreams.
At the end of the day you have to run what you are doing
efficiently; if the word ‘’business’’ interrupts with your
thinking and your enterprise is a social one then take that
word out however you still need this planning document.
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Set Up
Corporate entity / Company set up with ACN (Australian
Company Number – required under the Corporations Act).
ABN application (Australian Business Number – unique 11 digit
number that identifies your business to the government and used
for tax and other business purposes).
TFN application (Tax File Number – unique identifier issued by
the ATO to each tax paying entity).
Corporate Secretarial
ASIC (Australian Securities & Investment Commission)-annual fee & other
matters
Think about whether your operations have or will at some point
extend beyond Australia.
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Structures
You need to be aware of tax effective structures – ensuring you
have one in place for you and your Startup.
As the initial and main shareholders in your Startup, you need to
consider how these shares will be held (ideally via a corporate
trustee of a family trust).
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Holding Company
Technology
Company
Operations
Company
Structures
Holding Company
Investors can purchase equity in group
Invests in wholly owned subsidiaries
Not involved in day to day operations
Asset protection
Operating Company (a typical Subsidiary Company)
Day to day operations (entering contracts with employees; for
production of goods etc)
Net profits paid to Holding Company by way of a dividend
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Structures
Technology (IP) Company
Another typical Subsidiary Company would be use of a
technology company to officially hold all technology of group.
Things to note:
Eligibility for R&D tax incentive; own behalf test
Special rules to consider if member of a Consolidated
group
R&D tax incentive applies to your Consolidated Group as
if it is a single entity conducting all R&D activities within
that group
Should seek further specialist advice – IP Lawyers
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Structures
Consolidating the Group
Within this sort of proposed structures what would then occur is
that the group would be consolidated for both accounting and
tax purposes.
Holding Company lodges a single income tax return on behalf of
group.
Benefits of consolidating:
Share losses
No income tax implications between entities within group
Cost savings with respect to preparing only one annual tax return and
GST return per applicable period
Maintaining legal separation of functions
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Shareholdings
A proprietary limited company must have a minimum of one
member (shareholder) and can have up to 50 non-employee
members (shareholders).
Public companies (ie those with more than 50 non-employee
shareholders) can raise funds from the general public by issuing
securities.
Private companies (ie 'proprietary limited' companies that have
no more than 50 non-employee shareholders) can raise funds:
From existing shareholders and employees of the company or a
subsidiary company, and
From the general public if the fundraising does not require a
disclosure document.
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Accounting Tools
Important to have good book-keeping methods in place early on.
Accounting Software
Xero
MYOB Live
Saasu
Intuit
Set up in the name of the Operating Company
Other Apps which can link to the accounting software
Xero - Receipt Bank
Built in conjunction with Xero to track expenditure & associated
documentation
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Book-keeping
Accounting software will become integral to your compliance
and reporting obligations.
By efficiently utilising the software you will reduce costs as you
ensure time associated with basic compliance work is kept to a
minimum.
Set up chart of accounts (where all transactions will be coded).
There should be a main operating bank account and any credit
cards used by the business, live fed into the Xero file.
Regulatory requirements as part of having employees all deal
with within the software you use. Setting up payroll and super
stream.
Never mix private expenditure with business. Always have a
separate business account. 08/09/16 13
Accounting for Founders
Balance Sheet
Start Up Assets (What you don’t see)
Superior team
Disruptive innovation
Market share
Complementary products
Intellectual Property (IP)
Start Up Assets (What you do see)
Cash, Accounts Receivable, Inventories, Other assets
Liabilities
Salaries payable, Superannuation payable, Accounts payable
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Accounting for Founders
Balance Sheet
Funding & the accounting and tax implications of different
sources
The Generator Program
Grants (Government and Industry)
Venture Capitalists
Other Investors
Net Wealth / Equity (Assets less Liabilities)
Shareholdings
Retained Earnings (current year and prior years if applicable)
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Accounting for Founders
Profit & Loss
Sales less Direct Costs = Gross Profit
Examples of direct costs are direct labour (sales team); direct
materials
Gross Profit less Overheads = Net Profit
Expenses that don't relate to a specific sale are indirect costs
such as rent, salaries, insurance
Ultimately you need to be able to produce a working balance
sheet and profit & loss at any point in time to track performance
(against projections and budgets); to ensure numbers aligned
with strategy (think always - numbers and strategy and business
plan which is a moving target); for board meetings; and for
investors 08/09/16 16
Offering Equity to Employees
There are complicated rules around employee share schemes
(ESS). Will always need to engage tax professionals.
Shares in the company they work for at a discounted price
The opportunity to buy shares in the company in the future (this
is called a right or option)
Sometimes employees will be eligible for special tax treatment
(known as tax concessions)
For the most part, with Startups, treatment will be that it will be
taxable to the employee with no tax concession (much like
wages). This is termed non-concessional ESS.
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Offering Equity to Employees
Implication for the Company offering equity to employees
Dilution of shareholdings / giving up some ownership
More complicated than a traditional cash-based salary
May cause issues when founders want to sell the
company instead of an IPO
By offering equity based plans, Startups are able to
compensate key employees more competitively, while also
creating more emotional ownership of the product and
company.
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BAS’s - GST & PAYGW
A business activity statement (BAS) is a tax reporting
requirement for businesses issued by the ATO on either a monthly
or quarterly basis. It is used for reporting and paying goods and
services tax (GST), pay as you go (PAYG) instalments and PAYG
withholding tax (withheld on wages paid).
There are specific rules on tax which must be withheld from
salaries and paid to the Australian Taxation Office.
GST registration and frequency cycle needs to be decided.
Compulsory registration threshold is income > $75,000 p.a.
Voluntary GST registration allows you to claim back GST on
expenditure (receive it as a refund).
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Superannuation for Employees
First you need to determine if the person you are engaging is a
bona fide contractor or an employee as there are different
obligations in relation to each.
There are super guarantee obligations for employees and you
need to be super stream compliant.
There are super cut off dates by which time you need to ensure
super liabilities for employees are paid in order for the expense to
be tax deductible. There are penalties for not paying or delayed
payment.
Each employee should be provided a super choice form which
contains: Fund name, Fund ABN, Fund USI & Employee Member
Number
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Employment Contracts
Ideally you should have employment contracts in place for every
employee of the company. This includes you as founders.
Please refer to the Fair Work Ombudsman website. It is a
valuable guide for all employee/employer related queries. The
site has pro-forma employment contracts and information on all
employment related topics. (https://www.fairwork.gov.au/)
As a Startup you may require there to be a non-disclosure
agreement in the employment contract.
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Employee vs. Contractor
Employee vs. a contractor – PAYGW and Super obligations
A worker isn’t automatically a contractor because they have an
ABN or specialist skills or you only need them during busy
periods.
Six factors to be considered:
Ability to sub-contract/delegate
Basis of payment (i.e. for the time worked vs. result achieved)
Equipment, tools & other assets (your business provides vs. worker
does)
Commercial risk (worker takes none or is legally responsible for
their work)
Control over the work (your business directs vs. worker has
freedom)
Independence (worker works within your business vs. operating on
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Insurance
WorkCover is compulsory insurance for Victorian employers
funded by their contributions.
Provides the employer with insurance cover for the cost of
benefits if your workers are injured or become ill because of
their work.
If you expect to pay more than $7,500 a financial year in
rateable remuneration, or if you have any apprentices or
trainees (unpaid or minimum pay), you must take out
WorkCover insurance. This applies even if you are a small
company with only one worker.
You may also need to look into:
Product and Public Liability insurance
Professional Indemnity (PI) insurance
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Payroll Tax & FBT
Payroll tax applies if you pay wages in Victoria and your Australian
wages exceed the threshold of $47,916 per month. The annual
threshold in Victoria is $575,000 (of course if you expand interstate and
if you have employees interstate there are different thresholds to
adhere to).
Fringe benefits tax (FBT) is a tax employers pay on certain benefits they
provide to their employees, including their employees’ family or other
associates. The benefit may be in addition to, or part of their salary
package.
Expense payments – it is where there is a private use portion that
you have a potential FBT issue
Computers, laptops & other portable electronics (FBT exemption)
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R & D Tax Incentives
How can Australia’s tax system help fund your Startup
Cash refunds for Startups
45% reimbursement for eligible Startup costs
Key requirements
Only for companies
Must satisfy the 3 criteria
Developing a new or improved service, product, device or process
Technology or science based
Experimental process (i.e. concept to testing)
Minimum $20,000 in eligible costs in the financial year
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R & D Tax Incentives
The two parties are the ATO who pays out the cash and a body
called Innovation Australia whose shop front is called Aus
Industry.
You make an application to Aus Industry. They have a form on
their website. You fill out all the details and lodge that. And we
are always looking back so you are making it at end of your
financial year.
The form asks for some basic details and it will need some figures
re turnover and tax position. Then you need to discuss your
project – what you are developing; what are your objectives; why
will it be new and improved for market.
You pool these costs and it is lodged via your tax return and your
refund will come through.
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R & D Tax Incentives
Biggest difference between this and Grant programs is that this is
an entitlement (you just need to meet the criteria, it is not a
competition)
Important Dates
for every income year you want to claim the offset
within 10 months of the end of your company’s income year
prior to claiming the R&D tax offset in your company income
tax return
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Innovation Measures
From 1 July 2016 if you invest in a qualifying early stage
innovation company (ESIC), you may be eligible for tax incentives
as the investor.
These tax incentives provide eligible investors who purchase
shares in an ESIC with a non-refundable carry forward tax offset
equal to 20% of the amount paid for their qualifying investment.
Capped at $200k.
modified capital gains tax (CGT) treatment, under which capital
gains on qualifying shares that are continuously held for at least
12 months and less than 10 years may be disregarded. Capital
losses on shares held less than 10 years must be disregarded.
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Innovation Measures
Investors that don’t meet the ‘’sophisticated investor’’ test (must
meet certain asset and income requirements) under Corporations
Act won’t be eligible for any tax incentives if their total
investment in qualifying ESICs in an income year is more than
$50,000
If, after the company has satisfied requirements, it ceases to be
an ESIC, this won’t affect the investor’s entitlement to the early
stage investor tax incentives for the shares.
The rules are complex and you will need to engage accountants if
this will affect you.
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Conclusion
New businesses in their infancy need all the accounting and
tax help they can get. You need to be aware of the topics that
affect you on this front; and have good accountants and
bookkeepers that can assist you.
Remembering not to neglect accounting and tax early on will
save you headaches in future!
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