8th July, 2021
The 2021 Federal Budget offers assistance at the smallest end of the business community in terms of tax for startups.
While the Federal Budget was unveiled back in May, as we move into a new financial year it pays to be reminded of how new legislation and initiatives from the government could help support your business.
Today, we’re talking specifically about startups.
One thing the pandemic has proven is that many Australians like having a punt – and not just at their local betting shop.
Data from the Australian Securities and Investments Commission (ASIC) shows new business registrations soared by 34 percent between January and July 2020 compared with the same period in 2019.
Australia is ranked sixth in the world for new business ventures, with an overall startup rate of 5.8 percent.
Generally speaking, startups are all about growth not taxable profits. It’s expected that profits will come later – once the business has established itself and carved out a relevant market.
Many startups look overseas, not only because they wish to find bigger markets, but also because they often need to find workers with skills not available in Australia.
The EMDG, which recently shifted from a reimbursement model, enables small-and-medium businesses to tap into export markets.
Under the RDTI, companies with a turnover of less than $20 million could be entitled to a 43.5 percent refundable tax offset. It’s a self-assessed program, so businesses must keep a record of their R&D activities.
There are four basic business structures in Australia, but only two – partnerships and companies – apply to startups.
A partnership is a group or association of people who carry on a business and distribute income and losses between themselves. According to the Australian Taxation Office, a partnership must have its own tax file number (TFN) and it must lodge an annual partnership return showing all of the business’s income and deductions.
A partnership doesn’t pay tax on its profits. Instead, each partner reports their share of the partnership income in their own tax return. The tax rate each partner pays is the individual tax rate; they may be eligible for the small business tax offset.
The other business structure that applies to startups is the company structure. This is more complex than a partnership, but the rules about applying for a TFN and Australian Business Number (ABN) also apply.
Companies also own the money the business earns, meaning individuals who control the business can’t just take out money, except as a formal distribution of profits or wages.
Companies pay tax at the company rate, and a company may be eligible for small business concessions. In addition, companies must pay superannuation guarantee contributions for eligible employees, including the directors.
The recent Federal Budget was startup friendly, as it removed the deferred taxing point on share options.
In the past, if an employee was given access to 10,000 options in four years, but left the startup after three years, they would have to pay tax on three-quarters of those shares at market value.
From July 1, assuming the Budget amendments go through, if the employee leaves, they can hold onto those 7500 share options and wouldn’t have to pay tax until they exit – when they sell – and then pay tax.
Another Budget measure supporting startups is the Patent Box Policy. Under these new rules, the tax rate is 17 percent for startups that derive income from a product that has a patent. But keep in mind this only applies to products in the medical or biomedical space.
The final startup-friendly Budget initiative – Temporary Full Expensing – allows businesses with a turnover of less than $5 billion to write off any eligible expense immediately.
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This information is general in nature and does not constitute professional advice. For guidance specific to your situation, MYOB suggests engaging a specialist advisor near you ASAP.