By Christopher Raynal www.masteraccountants.co.nzYou have permission to publish this article electronically or in print, free of charge, as long as
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When typical new business operator starts a business, they concentrate on making business succeed. That is necessary but not only thing that a business operator should concentrate on. A business depends on cash flow to exist and grow, so business operators would do their business a good turn by looking at sources of cash flow provided by Government.
We are talking about taxation authorities such as Inland Revenue Department in New Zealand (IRD), Australian Taxation Office in Australia (ATO) and Inland Revenue in United Kingdom and Inland Revenue Service in USA (IRS). All of these taxation administrations, along with those in Canada and South Africa for example, have both income tax and goods and services tax (GST) or value added tax (VAT) that present opportunities for refunds when a business’ expenses exceed its income in early stages of its life.
Initially, start-up capital may come from savings, family and friends and salaried employment. The last source of finance – salaried income – means that business operator still works full-time for a salary and part-time on their business. This presents particular opportunities to receive extra cash flow to fund growth of business – from value-added taxes and income tax refunds.
It should be noted that even where business owner does not have other salaried (tax paid) income, they might have a husband or wife who does have salaried income. If they become a partner in a partnership conducting business, or a shareholder in a Loss Attributing Qualifying Company (LAQC) in New Zealand only, then they can share in business losses and receive income tax refunds.
In Australia, there was an ATO income tax ruling (IT 2218) that allowed a partner to receive a salary – as long as partnership agreement recorded it in writing – and this presented an opportunity to maximize loss for one partner (the salaried partner), thereby maximizing income tax refund. That income tax ruling was withdrawn on 22nd May 2002. Australia has no LAQC equivalent entity. However, there is nothing preventing a partnership agreement specifying a partnership split other than 50/50, so that one partner can receive more of loss than other. It would be prudent for partnership agreement to record reasons for ratio used.
