Start-up & Small Business Incentives

Are you ready to have a go?

The Treasurer, Joe Hockey, said in his 2015 Budget speech that he would like small business to “have a go”.  A lot has already been written about concessions and incentives that are on offer for both existing small businesses and start-ups but, as with many budget announcements, legislation is not yet in place and further details are emerging.

With the Budget package and other recent announcements it seems that now is a good time to take the plunge into the start-up pool.

Tax concessions are the main game

For a start-up venture, benefits on offer may not provide any immediate benefit as the majority are tax concessions which will not result in a saving until the venture starts earning taxable income.  The concessions, however, will mean that reduced tax liabilities will assist cash flow when income is earned. In any event, if deductions are available for a business which has no or little income in start-up phase, business losses may be carried forward to set-off against taxable income when it is derived in the future.

What are the incentives?

The pre-budget measures which may assist start-up ventures include:

  • changes to employee share schemes;
  • low interest rates (this is a Reserve Bank, not a Government, measure, but is in the mix);
  • crowd sourced funding.

The Budget package includes, for small businesses:

  • a 1.5% tax cut for companies;
  • a 5% tax discount for other businesses;
  • the $20,000 immediate asset write-off;
  • removal of FBT on small electronic devices;
  • deductions for start-up professional costs;
  • a CGT roll-over for changes in business structures;
  • red tape reduction – reduced compliance costs and “one-stop-shop” registrations.

Some of the proposed changes are summarised below.

Employee share schemes

Changes to the taxation treatment of employee share schemes were announced by the Government on 14 January 2015.  The changes are to take effect on 1 July 2015.  Legislation is in draft form, but has not been introduced.

The new system may help start-ups in technical and other areas by making it more attractive to remunerate employees with shares or options when cash is not available to pay sufficient salaries to attract the right employees.

The changes are intended to provide relief from measures introduced in 2009 by making some changes applicable to all companies.  For example, discounted options for shares issued by all companies will generally be taxed in the year they are exercised (not when the options are issued).

Further concessions are available for eligible start-up companies, which are those which are unlisted private or public companies registered for less than ten years, with an annual turnover less than $50 million. The start-up company must also be an Australian resident taxpayer. For these start-up companies, both options and shares issued at a ‘small discount’ (15% or less) from market value will not be taxed up-front so long as the employee holds the shares, or options, for at least three years. Options under certain conditions will have taxation deferred until they are exercised. Shares (issued at a small discount) will have that discount exempt from taxation. The Government will also extend the maximum deferral period to 15 years (extended from 7).

Lower interest rates

As we said above, interest rates are not a budget or a Government initiative, but the current lowest cash rate of the Reserve Bank should mean that loans are available for businesses at competitive rates.  For start-ups, however, without cash flow or security, loans may remain too fickle to obtain.

Crowd-funding

The budget announcement re-affirmed previous statements that the Government is looking at crowd-sourced equity funding (CSEF) for start-ups.  This could be a significant advantage for start-up enterprises, but there is little detail other than a commitment to provide $7.8 million to ASIC to implement and monitor a regulatory framework for CSEF.

Currently, regulation of fund raising is strict and complicated with requirements in both the Corporations Act and the Financial Services Regime.  Although draft legislation for CSEF has been foreshadowed to come mid-year, the issues are complex, and it is likely to be sometime before any real direction is known.

If a user-friendly system for CSEF is introduced, perhaps along the same lines as New Zealand, to allow the raising of funds on internet platforms from small investors, this would provide a real opportunity for start-ups to source funding which would not otherwise be available.

The budget announcement however only indicates that the Government is considering making it easier for public companies to access crowd-sourced equity funding.  It appears this will not be available to proprietary limited companies or non-company entities.

Tax cuts for companies and small businesses

The budget announcement proposes that for a small business that is:

  • a company – a 1.5% cut in the tax rate will apply so that the new company tax rate will be 28.5%;
  • that is not a company (a partnership, sole trader or a trust) – a 5% tax discount will apply, reducing the amount of tax on business income by up to 5%, capped at $1,000 each year.

The tax cut/tax discount will apply from 1 July 2015.

The $20,000 write-off

The budget announcement that has perhaps caused the most excitement in the press and elsewhere is a proposal to allow a small business to depreciate any asset costing less than $20,000 immediately.  There is to be no limit on the number of assets which may be acquired costing less than $20,000.

This incentive applies immediately, from budget night (7.30pm AEST, 12 May 2015) until 30 June 2017.

There is no doubt that the ability to depreciate a range of assets of $20,000 or less immediately will be a substantial cash-flow benefit to small businesses.

The popularity of the $20,000 immediate asset write-off may have prompted the ATO to act quickly to issue some guidance and words of caution.  A media release of the ATO on 15 May 2015 and a guidance note have been issued.  The media release makes the following points:

  • a small business which acquires assets over $20,000 will need to pull these assets to be depreciated at a rate of 15% in the first year and 30% thereafter;
  • small businesses must keep records of their purchases to claim the deduction;
  • “the ATO will be working with small businesses looking to use the immediate deduction to ensure they are appropriately claiming it… We will be monitoring claims of this nature and following up on higher risk cases”.

FBT for portable electronic devices

A further concession to small businesses will be the ability to provide portable electronic devices, such as mobiles, laptops and tablet computers, to employees for work purposes without incurring fringe benefits tax.

This concession, like the employee share scheme proposals, is likely to be popular and to encourage more innovative employment packages.

Deductions for start-up professional costs

Currently professional costs relating to the establishment of a small business, such as legal and accounting fees, must be written-off over a five year period.  The budget proposal is that these professional costs for a small business may be written-off in the year that they are incurred.

This is likely to assist cash flow for start-up small businesses which have taxable income.

The rules relating to this write-off are not clear at the present time.  Legislation will be introduced.

CGT roll-over relief for changes in business structures

A small business will be able to change the business structures, and the entities carrying on the business, without incurring capital gains tax on transfers of business assets to a new entity.  Currently, a roll-over is available if the new entity is a company, but this will, apparently, apply to transfers to all forms of entity.

Again, the rules and limits for the roll-over will not be known until legislation is introduced.

What is a small business?

Most of the taxation-related incentives that have been announced will be available only to a ‘small business’.  A ‘small business’ is one which has a turnover of less than $2 million per year.  The business may be carried on by any entity.

Reduced compliance and registration costs

The Government intends to provide funds for the Digital Transformation Agenda which is meant to ‘drive innovation and make it easier for individuals and businesses to access Government services’.  This is to include a Streamlined Business Registration system to be completed by mid-2016 to permit a range of business registrations in a single transaction on a Government website with a single identifier (the ABN of a business).

Another red-tape related reduction is an announced review of regulatory requirements for small companies with the aim of reducing compliance costs.  Little is known of the proposals and a consultation paper is proposed to be released by Treasury in the second half of 2015.

Just how much benefit is achieved for business by these measures remains to be seen.

Time to have a go?

Although some benefits from the budget and other initiatives may not be felt immediately, and although details for many of the measures are yet to be announced and legislated, it does seem that the climate for a start-up small business may be warming sufficiently to encourage people who are thinking of this to take the plunge.

Because of the lack of detail in some of the proposed measures, anyone contemplating a start-up venture should obtain legal and accounting advice to ensure that they are able to take advantage of the new regimes.

For more information, please contact:
Sandy Donaldson

Sandy Donaldson
Director
p.  +61 8 8124 1954
e.  Email me

Eddy Nehme

Eddy Nehme
Senior Associate
p.  +61 8 8124 1963
e.  Email me

This communication provides general information which is current as at the time of production. The information contained in this communication does not constitute advice and should not be relied upon as such. Professional advice should be sought prior to any action being taken in reliance on any of the information. Should you wish to discuss any matter raised in this report, or what it means for you, your business or your clients' businesses, please feel free to contact us.

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