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Tax & Accounting

- contributed by Cyre Partners

Tax and Accounting compliance obligations can be concerning for many

Below are a few items to consider when starting out

ARE CONTRIBUTIONS RECEIVED BY THE CAMPAIGNER SUBJECT TO TAX?


PictureIn a recent tax guidance note issued from the Australian Tax Office campaigners were notified that the ATO considers crowdfunding activities will be subject to income tax when funds are received.

Whist only a guidance note fom the ATO it confirms their current stance, the current commentary leaves the impression that crowdfunded business are taxed upfront on receipt of any contributions, which is not generally the case when compared to other start-ups that use their own funding.

For a more in-depth analysis of the tax implication for crowdfunding refer to the ATO website at www.ato.gov.au/individuals/income-and-deductions/income-you-must-declare/crowdfunding

We spoke to a number of tax agents who universally disagreed with taxing a product prepayment prior to its invention, commercialisation or shipment. Our own Matthew Sweeney, Tax Agent with Cyre Partners cites the ‘Arthur Murray’ case in which it was concluded amounts received in advance of a product or service being delivered was not income until such product or service was provided – particularly where there is a contingency that if the product or service was not undertaken or delivered a refund was expected.

Matthew noted that "Startups often use rewards based crowdfunding to ask ‘supporters’ to prepay for products or services to aid in the development and testing of the market. As a result it is difficult to see how these ventures would be profitable at this stage, or subject to any tax, particularly given the money is refundable if a project doesn’t proceed (a listing condition on our platform)".

ARE CONTRIBUTION MADE TAX DEDUCTIBLE?

When you make a Contribution you will not automatically be provided with a receipt suitable for tax purposes from the Community Venture. In some cases Contributions made to a Community Venture may be tax deductible if the Community Venture is a registered charity. It is your responsibility to confirm whether a Community Venture has deductible gift recipient status (DGR status) allowing you to claim a tax deduction. We recommend Campaigners to state that they are should they hold such status.

DO I NEED AN ABN? SHOULD I REGISTER A BUSINESS

It is important to understand the differences between a hobby and a business for tax and other purposes. Your tax and other obligations start once you are in business.

The following is a great LINK to the ATO and will help you work out whether you are in business yet and whether you need to register for an ABN, GST and income tax.

https://www.ato.gov.au/Business/Starting-your-own-business/Before-you-get-started/Are-you-in-business-/

WHAT BUSINESS STRUCTURE SHOULD I USE?

Typical characteristics to consider

Sole trader advantages and disadvantages

Advantages

Disadvantages

Ownership and equity funding

·         100 % Ownership and Control

·         Privacy

·         When the owner becomes incapacitate the business ends

·         Funding can be limited as sole traders must raise capital themselves

·         No separation of ownership between business assets and personal assets

·         Must be change of structure to introduce other owners

 

Control

·         Complete control over operations

 

·         No orderly succession of ownership or control

Establishment, maintenance and windup of structure

·         Inexpensive structure to establish

·         Easy to understand by owner and third parties

·         Don’t have to register business name if they run it in their own name

 

·         Life of structure limited to life of owner

·         Structure encourages personal goodwill, which can be difficult to sell

Risk Management

·         No other owners whose actions you are responsible for

·         Unlimited liability thus personally liable for obligations of business

·         Creditor has right to claim against personal assets to satisfy debt

·         Business depends on health of owners

 

Operations

·         Administrative costs are low

·         Financial results are confidential

·         Proprietors income not subject to SGC, payroll tax and workcover

·         Confidentiality of financial results

 

·         High dependency on owner

·         Can be difficult to raise finance

·         Does not cope well with high growth

Return on investments (to stakeholders)

·         Access to all return on investments

·         Income derived from business is all theirs

·         Difficult to split income unless paid as reasonable wages or business assets transferred to non income earning spouse

·         High risk means difficult to control assets pledged to the business

·         Flow of profits to owners can not be controlled

 

Tax efficiency

·         Easily able to satisfy conditions for small business CGT relief (if assets less than $5 million)

·         50% CGT discount is available

·         Tax preferences are retained

·         Access to tax free threshold

·         Refund of excess imputation credits

·         Division 7A does not apply

·         No restriction on carry forward of losses

·         Rollover available to a company

·         Access to primary producer averaging

 

·         Subject to marginal tax rates (as high as 48.5%)

·         Non-Commercial loss rules apply to individuals

·         Not able to split income

·         No group concessions (unable to transfer losses)

·         No access to Research & Development concessions

·         Super contributions not fully deductible

 

 

Partnerships – advantages and disadvantages

Advantages

Disadvantages

Ownership and equity funding

·         Greater access to equity funding (as compared to sole proprietor)

·         Technically partnership ends when a partner joins or leaves

·         Ownership not easily transferred

 

Control

·         Allows sharing of control

·         Larger the partnership, less control each partner has

Establishment, maintenance and windup

·         Easy to understand by the partners and third parties

·         Winding up can be easy depending on the partnership agreement

·         Relatively inexpensive to maintain

·         Change in partners can be costly as this results in a new partnership

Risk management

·         To some extent risk is shared

·         Unlimited Liability

·         Partners jointly and severally liable for all contracts made by other partners and actions committed

·         If no partnership agreement, then profits and losses split equally

 

Operations

·         Structure relatively simple

·         Limited disclosure of financial results

·         Partners drawings not subject to SGC, payroll tax or workcover

·         Can cope with any size business provided partnership agreement has required sophistication

 

·         Generally the larger the partnership, the more difficult it is to manage

·         High risk for partners

·         Can not retain profits

Return on investment (to stakeholders)

·         Sharing of profits can be varied by agreement

·         Relatively simple to increase or decrease funds contributed by a partner

·         Can be relatively expensive to transfer part of an interest in the partnership

·         Not a good structure for asset protection as risky due all partners being joint and severally liable

·         Unable to accumulate income

 

Tax issues

·         Franked dividends can flow through the partnership to the individual

·         Tax losses are available for use by individual partners

·         The 50% CGT discount is available to individual partners

·         Access to all Small Business CGT concessions (subject to compliance with rules)

·         Can apply the Simplified Tax System

·         Division 7A or its equivalent does not apply

·         Ability to split income

·         The non-commercial loss rules can apply to partners that are individuals

·         No corporate tax rate unless partner is a company

·         No access to FBT concessional treatment for partners

·         Profit goes to partners and to extent they are individuals they are subject to marginal tax rates (as high as 48.5%)

·         Splitting of income is limited

·         No access to R & D concessions

·         Super contributors not fully tax deductible

 

 

Companies – advantages and disadvantages

Advantages

Disadvantages

Ownership and equity funding

·         Clearly defines ownership and can separate from day to day control

·         Facilitates additional equity funding

·         Facilitates transfer of ownership

·         Constitution allows for control of changes in ownership

·         Can have unlimited life

·         Able to retain profits

·         No stamp duty on transfer of shares

 

·         Reductions in capital relatively complex

 

·         Changes in ownership subject to value shifting rules

Control

·         Control clearly defined and separated from ownership

·         Control (and associated risk and responsibility) of day to day operations can be delegated by owners

·         Constitution can be used to restrict how changes in control occur

·         Owners cannot exercise day to day control unless they also are Directors

·         Subject to statutory regulations

Establishment, maintenance and windup

·         The concept of this structure is easily understood by third parties

·         Life of structure can be unlimited

·         Companies are relatively expensive to incorporate and operate

·         Compliance requirements of the structure

·         Costly to windup

·         Restricted when redeeming equity

·         Requirement for an audit of companies if not under 2 of following 3 thresholds:

-        50 employees

-        $10 million turnover

-        $5 million in Assets

·         Disclosure of information to public

 

Risk management

·         Owners (who are not also Directors) can limit their risk to loss of their investment in the company

·         Directors are not liable for debts of company unless is insolvent trading or not proper conduct of role

·         Owners do not control day to day operations of company (unless they act as directors)

·         Generally not a suitable structure to be used for asset protection (compared to trusts)

 

Operations

·         Copes well with any sized business

·         Retention of earnings can assist in obtaining non equity finance

·         Copes well with growth and change of operations

 

·         Requires more formality

·         Owners must rely on directors

Return on investment

·         Distribution of profits via payment of dividends can be controlled

·         Companies can accumulate assets in their own right

·         Distribution flexibility is limited

·         Income can be accumulated within the structure

·         Generally not suitable for holding of appreciating assets which as concessional taxed as concessions are not fully preserved when distributed.

·         Reduction in equity relatively complex

Tax efficiency

·         Flat tax rate of 30%

·         Dividend imputation is available

·         R & D concessions are available

·         Scrip for scrip roll-over relief available

·         Access to small business CGT concessions (subject to compliance with rules)

·         Rollover relief into another company

·         Non commercial losses rules do not apply

·         Specific rules apply to debit loan accounts (Div 7A)

·         The 50% CGT discount is not available

·         The benefit of CGT indexation maybe lost on liquidation

·         Distributions are generally taxed as dividends

·         Specific rules that affect the availability of income and capital losses

·         Tax free threshold does not apply

·         Unable to pass on foreign tax credits to shareholders

·         No refund of excess imputation credits

·         Streaming of distributions generally not available

·         Limited income splitting

·         Any concessional tax treatment is usually lost when amounts distributed / returned to shareholders

 

 

 

Trusts – advantages and disadvantages

Advantages

Disadvantages

Ownership and equity funding

Unit trust                                 Discretionary trust

Unit trust                                 Discretionary trust

·         Ownership can be defined by units issued and split

·         Relatively easy to increase funding from unit holders

·         Relatively easy to reduced level of units (if unit holders agree)

·         Relatively easy to transfer units

 

·         Lack of ownership - benefits risk management.

 

·         Ownership not clearly defined

·         Does not facilitate funding by owners

·         Ownership can not be split

Control

·         Allows control to be defined where unrelated parties involved

·         Control can be clearly separated from ownership of units

·         Trust deed governs changes in control to be

·         Control can be differentiated from beneficial ownership (enabling structure to be useful for asset protection)

·         Trust deed governs changes in control

·         Control can be exercised by an appointer

·         Relatively easy to change control

 

·         Often has limited life

·         Change of trustees can be time consuming unless use a company and just change the directors

·         Concept of control can be difficult to understand

·         Often has a limited life

Establishment, Maintenance and Windup of Structure

·         Relatively inexpensive to establish (but corporate trustee will make it relatively expensive)

·         Relatively simple to windup

·         Relatively inexpensive to establish (but corporate trustee will make it relatively expensive)

·         Relatively simple to windup

·         Life is often limited

·         Can be difficult to understand and this (combined with a corporate trustee) can make maintenance costs relatively expensive

·         Life is often limited

·         Can be difficult to understand and this (combined with a corporate trustee) can make maintenance costs relatively expensive

Ownership and equity funding

Unit trust                                 Discretionary trust

Unit trust                                 Discretionary trust

·         Ownership can be defined by units issued and split

·         Lack of ownership - benefits risk management.

 

 

·         Ownership not clearly defined

Risk management

·         Unit holders risk can be limited to loss of their investment in the units

·         Legal and beneficial ownership separated and this allows the structure to be an effective vehicle for asset protection

 

·         Trustee can be exposed to high level of risk

·         Trustee can be exposed to high level of risk.

·         Corporate trustee can limit risk of day to day controllers

·         Corporate trustee can limit risk of day to day controllers

 

 

 

Return on investment to stakeholders

·         Non taxable profits can be retained

·         Share of income can be defined

·         Relatively easy to reduce issue units

·         Relatively easy to transfer or issue units

·         Non taxable profits can be retained

·         High level of flexibility of allocation of profits

·         Tax free capital profits can be easily distributed (without adverse tax consequences)

·         Undistributed taxable profits are taxed at 48.5%

·         Although easy to distribute tax free capital profit, they may be taxed in hands of unit holder

·         Undistributed taxable profits are taxed at 48.5%

·         Share of income dependant on exercise of discretion by truste

·         Investment by stakeholders can not be defined

Tax efficiency

Unit trust

Discretionary trust

Unit trust

Discretionary trust

·         50% general exemption and flows through to unit holders

·         Ability to pass on tax credits

·         Scrip for Scrip rollover available

·         Rollover to company available

·         Access to FBT concessional treatments

·         CGT discounts exemptions flow through to unit holders

·         Streaming of income possible

·         Distributions to companies to access 30% tax rate are problematic

·         Ability to pass on tax credits

·         Rollover to company available

·         Access to FBT concessional treatments

·         No flexibility for distribution

·         R & D concessions not available

·         Undistributed taxable income taxed at 48.5%

·         Small business discounts are not fully passed through to unit holders

·         Controller requirements of small business CGT concessions failed if units held by discretionary trust

·         Not able to stream income

·         Trust loss provisions apply

·         R & D concessions not available

·         Undistributed taxable income taxed at 48.5%

·         Can be difficult to pass test for small businesses CGT relief

·         Access to franking credits can be limited

·         Trust loss provisions apply