When the government announced its small business tax package in the last Budget, all the attention was on the immediate deduction for the purchase of capital assets costing up to $20,000 and the 1.5 per cent tax cut for small companies.
But for businesses just starting out, there was an additional tax sweetener which may help to reduce the tax burden in those difficult early days…
The new relief applies to all businesses with an aggregated turnover of less than $2 million a year (which will be most businesses in start-up phase) and essentially allows an immediate deduction for many professional costs incurred in starting a business venture, such as costs for accounting and legal advice, as well as a range of government charges and taxes.
These measures took effect from 1 July, 2015 for all business start-ups from that date. Prior to the introduction of the new measure, such costs were apportioned over a five-year period.
What can be claimed?
A new business can now immediately deduct costs incurred in getting advice from a lawyer or accountant on how to structure the business.
This includes advice on whether to set up the business as a company, trust or partnership, how the business should be financed, costs of market research, and so on.
It also covers costs incurred in actually setting up the legal structure of the business.
It doesn’t however include the cost of acquiring assets such as plant or equipment that may be used by the business.
Eligible costs would also 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 covered would be the costs associated with raising debt and equity capital for the operation of the proposed business.
It’s also now possible to claim an immediate deduction for a range of payments to government agencies relating to the regulatory costs incurred in setting up the new business.
This includes 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, such as the payment of stamp duty.
Some things can't be claimed
Unfortunately, you can’t claim expenditure relating to general taxes, such as income tax. Payment of these general taxes relates to the normal operation and activities of the business, not to establishing the business or its structure.
Many start-up businesses don’t make a profit in their early days, so there may not be an immediate cash-flow advantage from these new rules.
Over the longer term, however, new businesses are likely to get a real benefit.
The immediate deduction of these start-up costs will increase the size of any available tax losses which means that once the business starts to make a profit, any tax payments will be deferred or reduced.
Mark Chapman is the director of tax communications at H&R Block, and a former senior director of the ATO.