Startups and the taxman

To post in this sub-forum you must have made 100 posts or have Trust status or have completed our ID Verification

Forums › Startups › Startups and the taxman

lanks

74 posts

Master Geek

#111577 7-Nov-2012 20:02

Not sure if this is the right place to post this but I thought reaching out to the community would be a good way to get some feedback.

I am a software developer and I am planning to take the big leap and leave my job next year to work on my own. I have been alerted to and advised about dealing with the IRD when running a company.

One of the things that has been mentioned to me which has raised some concern is the following case. If I go out and work on my own idea(s) and develop my own intellectual property for a period of time, say 2 years and then take on an outside investment for equity within my venture the IRD will tax me because they consider this income. Say for example if I were to receive an investment after two years of $250K for 25% of my venture the IRD will tax me as though I have earned around $100K per year.

My point of view is that this is not right and that the IRD should only be able to tax me based on the revenue that I earn. But then again if I am not earning anything for 2 years then all of sudden I get an investment for intellectual property that I have been developing over that time, I have earned that money even though I wasn't getting paid on a frequent basis e.g. weekly.

What are your thoughts or experiences with this?

And also is this case influenced by the way that I setup my organization? e.g. as a sole trader, company, trust.

nzkc

1274 posts

Uber Geek

#713777 7-Nov-2012 20:16

Get yourself an accountant. This is what they are for. The accountants fees are tax deductible too (they will help you with this).

Company tax you pay on profit (income - expenses). Personal income is taxed. There's lots of things you can and cannot claim pre-tax. They'll also help you with GST (though thats not hard in my experience).

Expect to pay $1000 to $2000 for an accountant.

MyHeritage

Shop MyHeritage and uncover your origins and find new relatives with a simple DNA test. (affiliate link).

lanks

74 posts

Master Geek

#713781 7-Nov-2012 20:22

Thanks for your reply. I guess the key point I was trying to get across which I think is different from running a typical business is that I won't actually have any income which means no revenue or profit.

What I am wanting to clarify is, if I take on an investment for equity in intellectual property that I have developed over a period of time will the IRD tax me as though I have earned income?

I guess I am working on the assumption here that this is a generic scenario to ask about but I could be wrong and if I am I will take your advice and talk to an accountant.

NonprayingMantis

6434 posts

Uber Geek

#713793 7-Nov-2012 20:39

your example in the OP is not correct. equity investment is NOT taxable as income. profit is what is taxed.

imagine somebody loaned you $250k. that wouldn't be taxable as income. same goes for equity. it's a form of funding, not income.

you'll need to work out how you 'earn' money from the business to pay for your personal non-business related expenses(your food, mortgage, etc). you can either pay yourself a wage (which gets taxed as income but comes out of pre-tax profit from the business) or take dividends which is taxed differently (at a lower rate BUT it comes out of post-tax profit from the business)

needless to say, this advice above is VERY simplified so you should get an accountant to tell you properly.

oxnsox

1923 posts

Uber Geek

#713838 7-Nov-2012 21:26

As others have said...talk to an accountant. Talk to one now, they'll give you the best advice for the business you're planning. Don't wait till you're up and running, and accountant will give you relevant advice now. It may only be simple advice now but often it's the simple stuff you need to know now. And finding it out months down the track may have a cost that could easily have been avoided.

Dairyxox

1591 posts

Uber Geek

#713864 7-Nov-2012 22:24

Im not an accountant, and could be completely wrong, but something to think about is
"what are you going to do with that $250k?"

If you are going to use it for your own use, like paying yourself a salary, or paying yourself for work done previously then I guess it is fair enough to tax it.

If you are going to spend it on business assets and expenses like a company car (maybe not 100% of value), or office, or staff salaries then those are business expenses, and the whole 250K will not be taxable, just whats left after those expenses.

It may seem unfair to have to pay so much tax, but if you've been on your own for two years, and made no revenue then you must have REALLY LOW overheads. So suddenly having 250k means it would be almost all 'pure income'. Even after paying tax in this circumstance, you should have enough to be quite happy with.

If not, then you would probably have a business plan (thats part of attracting investment) that would be promising, and an outline of your current and future expenses, and a healthy earning potential.

blair003

557 posts

Ultimate Geek

#713887 7-Nov-2012 23:33

It depends, simplifed-

If you create shares in your company and an investor pays money into the company for the shares, and the money is retained in the company as equity (so you can use it to pay business expenses, do further development, etc), it will not be taxed because it is equity.

If you personally sell some shares in your company to an investor and keep the money yourself, it is income for you personally and it will be taxed.

Zeon

3876 posts

Uber Geek

Trusted

#713894 8-Nov-2012 00:40

I don't quite understand why you would draw a wage when you introduced equity in the first place due to PAYE. If you just kept the money and didn't put it in as equity then no tax?

Speedtest 2019-10-14

blair003

557 posts

Ultimate Geek

#713947 8-Nov-2012 09:17

Zeon: I don't quite understand why you would draw a wage when you introduced equity in the first place due to PAYE. If you just kept the money and didn't put it in as equity then no tax?

And no tax deduction on business expenses (and no financial records to show potential investors).

You wouldn't normally take a wage/have PAYE in a one man operation, you would take drawings. But drawings would be treated as taxable income for the recipient so I guess its the same base issue.

If you have your own savings you could introduce equity as needed to pay business expenses so you get the tax deductions, and keep the rest of the savings aside to live off.

But to figure out the best way to do it would be one reason why you would talk to the accountant.

dipper

60 posts

Master Geek

ID Verified

#713991 8-Nov-2012 10:22

I am an accountant and what is am about to say is generic treatment of this type of transaction (my little disclaimer as every case is different!)

If you are selling shares in your business (assuming that you are using a company structure) and you are not in the business of selling share i.e. a share trader then the consideration that you receive for your shares should be treated as a capital payment and therefore you are not required to pay tax on the capital gain under the current rules.

A quick thought (once again with the disclaimer that this is generic and you need more advice based on your individual circumstances). If you are running this development through a company and you are to invest the funds from the investor back into the company then the company could just issue further shares for the consideration of 250k ...once again no tax would be payable.

lanks

74 posts

Master Geek

#714020 8-Nov-2012 10:36

Thanks everyone for your input. This has really helped my understanding of this and I now feel much more comfortable.

I think I will definitely take your advice and go and talk to an accountant before I startup.