If you have started a new small business this financial year (from July 1, 2015 onwards), you are in position to reduce your tax bill thanks to the changes that were introduced from that date that allow small business owners to immediately write-off some of their start-up costs.
Hopefully, any legal or accounting professionals that you used during the set-up of the business advised you that you could deduct their costs, as well as any Australian Government fees and charges, in your first year of operations rather than spreading the deduction over five years.
According to the ATO website, these expenses must be either:
“Incurred in obtaining advice or services relating to the proposed structure or proposed operation of the business.”
“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.”
Start-up expenses that AREN’T included as an immediate write-off include:
- The cost of purchasing business assets.
- Expenses such as interest, dividends and capital repayments associated with raising capital.
- Costs incurred prior to start-up such as travel expenses when assessing locations for the business.
- Expenditure relating to general taxes (such as income tax), which relate to the ongoing operation of the business rather than specific start-up activities.
There is also a wider range of costs that small businesses can write-off over five years under the new legislation (which we will look at in an upcoming article).
How do these start-up deductions help your business?
By being able to claim more costs sooner, start-up small businesses can increase their initial deductions and potentially reduce the amount of tax they need to pay after their first year of operation. Consider this example:
A business starts up that provides highly specialised technical advice on aircraft maintenance. There aren’t large asset purchase costs during start-up, but the owner spends $100,000 in legal fees to ensure that the business can operate across America, Europe and Australia within the regulations of the various aviation regulatory bodies.
In the first year, the owner earns $120,000.
Under the old legislation, the legal fees would be spread over five years so they would only claim $20,000 in deductions in year one, resulting in $100,000 income and a tax bill of $24,947.
Under the new legislation, the owner can claim $100,000 in the first year, resulting in $20,000 income and a tax bill of $342.
This example is extremely simplified and doesn’t account for all the other expenses and deductions associated with running a business, but it clearly demonstrates the benefits that early deductions can have so soon after the high costs associated with starting a small business.
By Jennifer Lowe