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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 PlansStages 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.08/09/16 5

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 youhave one in place for you and your Startup.

� As the initial and main shareholders in your Startup, you need toconsider how these shares will be held (ideally via a corporatetrustee 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 dividend08/09/16 8

StructuresTechnology (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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StructuresConsolidating 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 onemember (shareholder) and can have up to 50 non-employeemembers (shareholders).

� Public companies (ie those with more than 50 non-employeeshareholders) can raise funds from the general public by issuingsecurities.

� Private companies (ie 'proprietary limited' companies that haveno more than 50 non-employee shareholders) can raise funds:

� From existing shareholders and employees of the company or asubsidiary company, and

� From the general public if the fundraising does not require adisclosure 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 & associateddocumentation

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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 FoundersBalance 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 differentsources

� 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 FoundersProfit & 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.08/09/16 17

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

own) 08/09/16 22

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.08/09/16 26

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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