Regulatory Roundup June 2015

Crowd funding road for start-ups: Budget promises to fill some potholes

The high failure rate for new start-up businesses is more likely to be headline fodder than hard reality, although start-up failure data’s glass half full/empty nature means there is room for vast improvement.

Australian Bureau of Statistics (ABS) results tend to hover around the halfway point for new businesses surviving their first few years. ABS data for 2013-14 for example shows that of the enterprises that were started in 2010-11, half were still in operation. But the still-sizeable result means Australian regulators have been wary about the methods available to raise capital for new ventures.

The phenomenon of crowdfunded equity for start-up businesses has been a tough issue for the government to come to grips with. While crowdfunding is technically legal in Australia, the associated compliance and regulatory requirements have tended to put younger entrepreneurs at a disadvantage when it comes to seeking launch and growth capital.

However a touch of relief came last week with the federal budget and some new tax incentives for start-ups. The budget paper said, in part, that crowdfunding “is an emerging form of funding that allows entrepreneurs to raise funds online from a large number of small investors and has the potential to increase funding options available for entrepreneurs to assist in the development of their business”.

Apart from the new ability to write off “professional expenses” when launching a business, Treasurer Joe Hockey announced that $7.8 million will be spent by the Australian Securities and Investments Commission (ASIC) to construct and implement a new regulatory framework for crowdfunded equity raised for start-ups, and how access and reporting of crowdfunds can be streamlined.

Although details are still thin on the ground as to how this may be achieved, a clue was dropped by Communications Minister Malcolm Turnbull at a post-budget event for start-ups, where he said that new rules should be introduced by the end of the year, and even by August, that could closely follow New Zealand’s new crowdfunding model.

The NZ approach has been described as something of a “light touch” regime, where the NZ market regulator, while requiring crowdfunding platforms to submit a business plan, does not also require audited financial accounts.

Potential NZ investors therefore decide to invest on their own judgement, with local equity crowdfunding platform operators, such as PledgeMe’s cofounder Anna Guenther, saying that investors commit funds mostly because they know the products, the brand, or the people behind the business. “We’re trying to democratise the market,” she says. “I think, ‘Let the crowd decide’.”

A competing platform however, Sydney-based Equitise, is wary of adopting a too-lax regime in Australia. Cofounder Chris Gilbert told the Australian Financial Review that the regulatory difficulties in operation here can actually work as a filter for dodgy operators.

“The thing that scares me is that the process is made too easy in New Zealand,” he said. “We don’t want to make it too loose with what’s required because that could result in Ponzis going through. We don’t want retail investors to be fleeced.”

For now, consultation is the key. “It’s about balancing the need for consumer protection versus the extraordinary aggregation power of the internet,” Turnbull told the start-up crowd. “Getting that balance is the reason [the legislation is yet to be launched].”

In other words, watch this space.

Don’t forget: $20,000 write-off = ‘small business’ = less than $2 million ‘aggregated turnover’

The budget fillip of the new $20,000 immediate asset write-off for small businesses is welcome, and the Tax Office has already published guidance on this yet-to-be-enacted accelerated depreciation measure.

But it is perhaps timely to remind small business owners that access to the budget’s depreciation boost depends on being classified as a “small business” — and this, according to the Tax Office definition, requires annual aggregated turnover to be less than $2 million.

So just to be clear, what is meant by that term “aggregated turnover”.

According to the Tax Office, aggregated turnover is the sum of the following:

  • your annual turnover for the income year
  • the annual turnover of any entity connected with you, for that part of the income year that the entity is connected with you
  • the annual turnover of any entity that is an affiliate of yours, for that part of the income year that the entity is affiliated with you.

You are connected with another entity if either of the following applies:

  • you control the other entity
  • you and the other entity are controlled by the same third entity.

For example, you control a company if you, your affiliates, or you together with your affiliates have shares and other equity interests in the company that give you and/or your affiliates at least 40% of the voting power in the company, or the right to receive at least 40% of any income or capital the company distributes.

As far as identifying an affiliate, the Tax Office says an individual or company is your affiliate if, in relation to the affairs of their business, they act, or could reasonably be expected to act, in either of the following ways:

  • in accordance with your directions or wishes
  • in concert with you.

It adds that an individual or company is not your affiliate merely because of the nature of the business relationship shared between you or the individual or company.

Note that when you calculate aggregated turnover for an income year, do not include:

  • the annual turnover of other entities for any period of time that the entities are either not connected with you or are not your affiliate
  • amounts resulting from any dealings between these entities for that part of the income year that the entity is connected or affiliated with you.

The Tax Office also points out that there are three alternative methods to work out if you are a small business entity for the current year, but it also concedes that most businesses will only need to consider the first method.

1. Previous year turnover
If your aggregated turnover for the previous income year was less than $2 million, you are a small business entity.

2. Estimate your current year turnover
If you estimate that your aggregated turnover for the current year (worked out as at the first day of the income year) is likely to be less than $2 million, you will be a small business entity for the current year. However, you can only estimate your current year turnover if your aggregated turnover for one of the two previous income years was less than $2 million.

3. Actual current year turnover
If you are unable to use the first two methods, you will need to calculate your aggregated turnover as at the end of the income year. If your actual aggregated turnover is less than $2 million, you will be a small business entity for that year.

To be absolutely sure, it is recommended that business owners check with their tax professional.

Work-related car expense claims simplified

The federal budget has confirmed a foreshadowed change to the way work-related car expense deductions are calculated.

Work-related expenses are the most common-claimed tax deductions, with the Tax Office reporting that around seven million Australians make such claims in any tax year – with one of the most common components being car expenses, with nearly four million people claiming a work-related car expense deduction each year.

Historically, governments of all political colours have supported this tax deduction, which presently rings up more than $11 billion each year. The budget announcement however indicates that while the principle is not about to change, the method for allowing this valuable tax deduction is to get an overhaul.

At present, there are four different methods by which taxpayers can access this tax deduction. The four options are:

  • cents per kilometre
  • the logbook method
  • 12% of original value
  • one-third of actual expenses.

The government says the last two methods are used in less than 2% of cases, “and therefore are going to be discontinued in this budget as a means of streamlining the system and reducing compliance costs”.

The government says more than 80% of people use the cents per kilometre method, by which they receive a deduction according to the size of the car’s engine. For small cars it is 65 cents, medium cars 76 cents and large cars 77 cents per kilometre, up to a cap of 5,000 kilometres each year.

It says that Motoring Association data shows that the average running cost for the top five selling motor vehicles is 66 cents per kilometre. “Based on 2012-13 figures, this would see those who drive smaller vehicles getting a slight increase in deductible expenses and those who drive larger cars having a decrease in their deduction.”

For example, a person with an eligible 2.5 litre sedan would currently be able to claim at 76 cents per kilometre compared to only 66 cents per kilometre under the new rules. On a 1,000 kilometre journey, this would mean a $760 deduction under the current rules, but only $660 under the proposed rules.

The government says the average impact overall for those driving medium and larger cars would be a loss of $85 a year, and that this measure “will result in a budget saving of $845 million over the forward estimates”.

It emphasises however that for those drivers who believe their car related costs are greater than the 66 cents average, or those who drive more than 5,000 kilometres a year, will still be able to claim the deduction for the full amount based on keeping a logbook.

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