How to set up your startup for tax success

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Professional advice for your startup can pay for itself many times over.

Tax is probably the least sexy part of running a startup, and founders already have enough to worry about without concerning themselves with ATO lodgements or minimising potential future tax liabilities.

However, even if a startup isn’t making money or paying income tax yet, the inconvenient truth is that tax compliance and planning are critical aspects of carrying on any venture.

For a startup, effective tax compliance and planning can set up a venture for success by helping to:

  • maximise profits and enterprise value
  • attract and encourage investment
  • take advantage of tax concessions and incentives
  • demonstrate responsible governance practices to investors

Here are 4 myths you don’t want to get caught out with when setting up your startup for tax success:

Myth 1: I can just ignore it

Poor tax compliance could result in financial penalties (which can be thousands of dollars), personal liability for directors for the company’s tax liabilities, and a review or audit by the ATO which takes time and attention away from business activities.

Additionally, a bad standing with the ATO can signal to investors that founders will not be responsible with their money which could deter investment.

Smart individuals would think twice about investing in or joining a company as a director or board member when it could expose their own personal assets due to outstanding tax debts and lodgements.

Myth 2: I can fix it later

Tax does not only become an issue once a startup is profitable. Simply ignoring what will happen to a decent chunk of future profits can significantly erode the future value of a startup.

Ideally, tax planning should be done before a formal legal structure is put in place. This is because the longer it’s left, the more expensive it is to remedy a poor structure – resulting in hefty professional fees and potential tax and duty liabilities.

This is particularly important when a startup has an international flavour – for example, to ensure income and profits are not subject to double taxation in multiple tax jurisdictions.

Myth 3: I can do what my mates have done

When deciding on a structure, or any tax issue, founders may be tempted to rely on advice from a mate or colleague. Unfortunately, there’s no ‘one-size-fits-all approach’ to structuring.

For example, your mate might run their cabinet carpentry business through a discretionary trust because of the flexibility in making distributions to family members and minimising tax – so you decide to do the same. However, a discretionary trust wouldn’t be suitable for a startup because it doesn’t easily accommodate for investors and isn’t an eligible vehicle for the R&D tax incentive.

Or perhaps your mates run various startups and operate them through companies, so you decide to do the same. However, because your startup involves the licensing of software to organisations in the United States (for which you receive royalties), it may actually be more appropriate to set up a unit trust.

Choosing the right structure depends on many factors, and expert advice would consider all of them.

Getting advice from a professional also acts as an insurance policy if the advice is wrong. A founder who suffers a financial detriment due to bad advice would be much more willing to make a claim on their advisor’s professional indemnity insurance than suing their mate.

Myth 4: I can’t afford advice now

The economic cost of not getting advice can include penalties, paying more tax than you should, costs to fix a poor structure, professional fees in dealing with an ATO audit, and missing out on tax concessions, incentives or investment funds.

In most cases, good advice can prevent money leaving your pocket. In some cases, it can put money in your pocket.

For example, making use of R&D tax incentives which can return a significant amount of money to the company if done right. Or, providing advice on whether your company is eligible as an ‘early-stage innovation company’ (ESIC) which can provide great tax incentives for eligible investors and makes your business a more attractive investment.

Also, an employee share ownership program (ESOP) may a great way to attract and maintain talented employees while reducing remuneration paid as cash and driving productivity by giving employees ‘skin in the game’.

These would all be revenue-boosting possibilities that a skilled professional could recommend.

Educate yourself

For the same reason that you wouldn’t use a homemade lifejacket when setting sail on unknown territory, you should always get advice from a qualified and experienced advisor in your startup journey.

Getting advice allows you to focus on your business, and provides peace of mind that you have put in place the most effective (and scalable) structure and systems for success. 

Seeking education and knowledge is an investment in yourself…and your business.

For more information on setting up your start up for success, visit rsm.com.au

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Andrew Ravenscroft, RSM Tax Services

Author: Andrew Ravenscroft, from RSM is a Manager in Tax Services.

Andrew Ravenscroft is a chartered accountant and entrepreneur with interests in virtual reality and gambling technologies. As a business advisory accountant Andrew assists businesses in executing their strategies and readying themselves for investment. Andrew was co-founder and CFO of Offpeak Games in (2014-2017), and treasurer of eGroup (2016-2018).

RSM is a sponsor of Startup News.