The appropriate form of 'creative accounting'
Walking through the Louvre, in Paris, it struck me how creative some people are and how little 'artistic' talent I have. Let's be honest, accountants aren't really known for their artistic & creative abilities, yet, there is a widely regarded concept known as 'creative accounting' that different people have very different perpectives on, so I thought I would share my take on the situation at the start of the new financial year.
The start of the new financial year is the time when most of the focus is on 'tax minimisation', which is when we hear all sorts of stories from a variety of sources about what you can claim in certain circumstances.
As an accountant for over 15 years, I have lost count of the number of times I have heard 'so and so does the same job / has the same business, and they said that they always claim x, y, z', or 'another person with a similar job / business says their accountant claims a, b, c, for them'.
The thing is, even people in the same industry in the same area may have different individual circumstances that may preclude certain things from being deductible. Also, some things are deductible as a business that aren't deductible for an employee, even an employee of a business doing the same thing. Why?? Because the Tax Act is complicated!!
People say "Troy, you're an accountant, you must be good at maths". I actually think being a good accountant is more about your ability to understand, interpret and apply a very involved and intricate set of laws than it is about being good at calculus.
Which brings to my main point - there is a difference between doing something, and doing something right. Just because 'other people are doing it', that doesn't mean they are doing it correctly, or it may be ok in their situation, but not in yours. They may not know that they aren't things correctly, or they may not 'want' to do things correctly & figure 'it's ok until you get caught'. That is NOT the type of 'creative accounting' that I engage with or the kind of business owners I work with.
Instead, I am always looking for business owners that are trying to do something outside the box & doing something that other people aren't doing within their business. Innovators that have a genuine 'point of difference' & are looking for assistance with taking their business to the next level - even in a saturated market.
This point of difference is a VERY important important factor for growing a business, especially when doing marketing, applying for funding or seeking investment.
Then, we can develop a unique strategy, with
'structured flexibility' in the company setups,
ensuring that there are tax minimisation strategies available both in the short & long term,
allowing for the growth of the business & ability to access investment,
protecting the business assets & the owners against 'the unexpected'
maximising value in the business, the Intellectual Property and the assets
accessing rebates, grants & other eligible incentives
This is the kind of 'creative accounting' that I do every day for business, both large & small, across multiple industries around the country, as well as in Europe & America.
Case Study 1
I was approached by a client some months ago who was running a food manufacturing business and they wanted to expand into another premises in a different location. Their initial idea was to just having the new operations as a separate section of the current business, but they wanted to get a 'business partner' involved to give him the opportunity to "build something for himself". The goal was to purchase additional property, access a significant cash injection into the business for the purchase of equipment through a combination of a loan & investment from the individuals & other interested parties, have licences to restrict trade to certain areas due to the goal of setting up further 'replicas' of the setup (sort of like franchises, but different), to be able to have other people come in to the business at some point or be able to sell the business or it's assets without affecting the other existing businesses or selling all of the assets. Also, they didn't want the new business partner to own a part of the existing businesses, so what options were there? That's when they reached out to discuss how to 'think outside the box'.
A number of options were discussed and, due to a number of personal factors & financial influences, we agreed, with their Tax Agent & lawyer, that the following would be an appropriate set up for them, rather than just a new company;
Each individual would set up their own Trust to act as an 'investment holding entity'
The main individual would set up an "Asset Holding Entity" to own all of the equipment
They would put their money into the new trust & the Trust would lend the money for the deposit on the purchase of the equipment to the new asset entity
The main individual would also set up a Unit Trust to purchase the property
Again, they would put money into the investment entity to loan to the property Trust
They would set up an operating company
Each of their respective 'investment' entities would own 'their' shares
There would be a lease fee to the asset holding entity for the use of the equipment
There would be rent paid to the property holding entity for the use of the property
There would be an licence fee paid to the main business for use of systems & processes for the new business
Profits would be payable to the Trusts by the company, either directly or through dividends
The owners would be paid salaries personally for their 'exertion' in the business
While this is quite involved, it is not an uncommon layout. They decided to implement all of this 'up front', but it is possible to 'grow into' this kind of scenario.
Case Study 2
A client was operating a rural business & started to develop a product that he couldn't find for a particular purpose.
He spoke to his accountant that said, "It's expensive to set up a company & do the compliance work, so just spend the money in your own name. R&D won't be worth it to you. Any money you spend will just come off any profit that you make in your other business, so you'll get the benefit that way". There were already significant losses in the operating entity, so this meant there were actually NO direct 'benefits' to the business.
Within the first year he had spent over $120,000. Because he wasn't in a company (because that's what he was told by his accountant) he missed out on $50k+ of government rebates.
In conjunction with his NEW Tax Agent, we set up a company and the business that was trading loaned the money for ongoing development work to the company to be spent on his own time, as well as external design & testing.
He has since received over $250k in further R&D Tax Incentives, is eligible to register as an 'Early Stage Innovation Company' to access rebates & incentives for potential investors, has been approved for Accelerating Commercialisation for the 'Go To Market' strategy to roll out the product in Australia & has submitted an application to Export Market Development Grant to launch into overseas markets as well.
Case Study 3
A business was developing technology for an online platform and was claiming ALL costs as expenses, as most businesses do.
This innovative development was eligible for the R&D Tax Incentive, but they had not previously claimed this as they weren't made aware by their prior accountant that there even was such a thing.
I reviewed their financials & moved these costs from the prior year P&L to an asset called "Platform Development" & their NEW accountant amended their prior year tax return to reduce the carried forward loss & increase the asset value.
We then reviewed the current year expenditure & set up an 'R&D Expenses' section on their P&L. We moved all relevant expenses for the current year to the relevant R&D expenses account, and even moved an amount each month for the amount of time each staff member & business owner spent directly on R&D relevant activities.
They had previously sought investment & funding for their activities but had not been successful because they were only showing a massive loss, massive loans from associated individuals to pay for those expenses, no assets & no R&D rebates - a VERY negaive position.
Through this restructure and closer monthly management of their finances on an ongoing basis, they have since been approved for multiple sources of funding, have received over $180k of R&D Tax Incentives and received $500k of investment to continue work on the development.
They have also been approved for an EMDG amount of $100k per year for launch overseas and have generated over $1M in revenue in the past 12 months from use of the platform to small & large providers.
They are now looking at accessing further investments for further growth options, as well as engaging with lawyers to look through separating the IP holding into a separate entity as it's own "asset" or separating the operating company out into it's own entity to access investment in the 'business' and the 'asset' separately & having a licencing arrangement between the two entities.
As you can see, I always make sure that the fundamentals & foundations are right so that you can build a strong, creative, exciting and high value business. I help with ongoing financial processing & tax compliance requirements, as well as accessing funding & helping you understand your financials better so that you can create the business you know you can.
If you feel like your accountant is just 'going through the motions', and you KNOW that you could benefit from someone who appreciates creativity in 'out of the box thinking' in art as well as business, reach out for a chat & let's look at how to get the greatest benefit out of your 'point of difference' - troyschoenfisch.com/meet.