Startup small businesses are able to deduct a range of expenses associated with launching their venture, such as the costs of professional accounting and legal advice.
The government’s “Jobs and Small Business” package (more here), announced with the last budget and effective from July 1 this year, changes the previous rules where such costs were apportioned over a five-year period.
If a small business owner rings up some professional costs related to starting their venture, such as costs for legal and accounting advice, these can be deducted in the same financial year. This applies to all eligible small businesses (turnover of less than $2 million a year) and a range of costs.
The expenses must relate to a small business “that is proposed to be carried on” and is either:
- “incurred in obtaining advice or services relating to the proposed structure or the proposed operation of the business”, or
- “a payment to an Australian government agency of a fee, tax or charge incurred in relation to setting up the business or establishing its operating structure”.
Startup tax deductions: What’s covered, what’s not?
Obtaining advice or services:
Costs in the category include advice from an accountant or lawyer on how the business may be best structured, as well as services provided in setting up legal arrangements or business systems for the business. However, it does not include the cost of acquiring assets that may be used by the business.
Similarly, eligible costs would include professional advice on the viability of the proposed business (including due diligence where an existing business is bought) and the development of a business plan. Also tax deductible would be the costs associated with raising capital (both debt and equity) for the operation of the proposed business, including costs incurred in accessing crowd-sourced equity funding.
Deductibility for advice and services does not include other expenses a business may wear in relation to the operation of the proposed business (such as the cost of travelling as part of assessing a location for operations).
Payments to government agencies:
This category of tax deductions broadly includes regulatory costs incurred in setting up the new business. The types of expenditure would be the costs associated with creating the entity that will operate the business (such as the fee for creating a company) and costs associated with transferring assets to that entity (for example, the payment of stamp duty).
It does not include expenditure relating to general taxes, such as income tax. Payment of these general taxes does not relate to establishing a business or its structure, but instead to the operation and activities of the businesses. There may be scope, depending on circumstances, for deductions in this area under other legislation, but a business owner will need to consult a tax professional.
Does a tax loss also mean a lost deduction?
As with many startup businesses, there may be negligible tax payable for the initial period of operation, however, there is still value from the new tax relief measures.
A business can still benefit in the longer term. Any eligible startup costs that are claimed as immediate tax deductions may not be of an immediate benefit as the company could be operating at a loss. However, any tax losses can be carried forward and be valuable in future years once the company becomes profitable, as the tax payable will be reduced.
If you’re thinking about starting a new business, or maybe you’ve already got the ball rolling, we encourage you to get professional advice. You might be surprised by how much an accountant can do for your startup – and our fee is tax deductible!
Contact us to talk to a startup specialist today.