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The UCA introduced a five-year write-off for seven specific types of business related capital expenditure incurred after 30 June 2001. Such expenditure did not previously attract a deduction.
As part of a new treatment for blackhole expenditure, new rules apply to business related capital expenditure incurred after 30 June 2005. Deductions are now allowable for a greater range of such expenditure, provided that no other provision either takes the expenditure into account or denies a deduction. Section 40-880 deductions are no longer limited to the seven specific types of expenditure that were previously deductible.
Expenditure incurred after 30 June 2005 is deductible if you incur it:
- in relation to your business
- in relation to a business that used to be carried on - such as capital expenses incurred in order to cease the business
- in relation to a business proposed to be carried on - such as the costs of feasibility studies, market research or setting up the business entity
- as a shareholder, beneficiary or partner to liquidate or deregister a company or to wind up a trust or partnership - the company, trust or partnership must have carried on a business.
If you incur expenditure in relation to your existing business, a business that you used to carry on or a business that you propose to carry on, the expenditure is deductible to the extent the business is, was or is proposed to be carried on for a taxable purpose.
You cannot deduct expenditure in relation to an existing business that is carried on by another entity. However, you can deduct expenditure you incur in relation to a business that used to, or is proposed to, be carried on by another entity. The expenditure is only deductible to the extent that:
- the business was, or is proposed to be, carried on for a taxable purpose, and
- the expenditure is in connection with the business that was or is proposed to be carried on and with your deriving assessable income from the business.
If you are an individual operating either alone or in partnership, this deduction may be affected by the non-commercial loss rules. Refer to the fact sheet Non-commercial losses: overview for information on the non-commercial loss rules.
Ralph decides to start carrying on his existing business through a company. The business will continue to be carried on for a taxable purpose. Ralph will be the only shareholder of the company and he will be entitled to receive all the profits from the business. He incurs expenses to incorporate the existing business. Legally, Ralph and the company are separate entities. However, Ralph can deduct the incorporation expenses (subject to non-commercial loss rules). This is because the expenditure is in connection with the business proposed to be carried on by the company and the expenditure is in connection with him deriving assessable income from the business.
The extent to which a business is, was, or is proposed to be, carried on for a taxable purpose is worked out at the time the expenditure is incurred. For an existing business or a business proposed to be carried on, you need to take into account all known and predictable facts in all years.
For a business to be 'proposed to be' carried on, you need to be able to sufficiently identify the business and there needs to be a commitment of some substance to commence the business. Examples of such a commitment are establishing business premises, investment in capital assets and development of a business plan. The commitment must be evident at the time the expenditure is incurred. It must also be reasonable to conclude that the business is proposed to be carried on within a reasonable time. This time may vary according to the industry or the nature of the business.
The deduction cannot be claimed for capital expenditure to the extent to which it:
- can be deducted under another provision
- forms part of the cost of a depreciating asset you hold, used to hold or will hold
- forms part of the cost of land
- relates to a lease or other legal or equitable right
- would be taken into account in working out an assessable profit or deductible loss
- would be taken into account in working out a capital gain or a capital loss, or
- would be specifically not deductible under the income tax laws if the expenditure was not capital expenditure
- is specifically not deductible under the income tax laws for a reason other than the expenditure is capital expenditure
- is of a private or domestic nature
- is incurred in relation to gaining or producing exempt income or non-assessable non-exempt income
- is excluded from the cost or cost base of an asset because, under special rules in the UCA or capital gains tax regimes respectively, the cost or cost base of the asset was taken to be the market value
- is a return of or on capital (for example, dividends paid by companies or distributions by trustees) or a return of a non-assessable amount (for example, repayments of loan principal).
If the expenditure arises from a non-arm's length dealing and is more than the market value of what it was for, the amount of the expenditure is taken to be that market value.
You deduct 20% of the expenditure in the year you incur it and in each of the following four years.
Even if the business ceases or the proposed business does not commence (for example, if there is an unforeseen change in circumstances), the deduction may be able to be claimed over the five years. Deductions for expenditure in relation to a proposed business can be claimed before the business is carried on. However if you are an individual taxpayer, the non-commercial loss rules may defer your deductions for pre- and post-business expenditure - refer to the fact sheet Non-commercial losses: overview for information on the non-commercial loss rules.
A recoupment of the expenditure may be included in your assessable income.
Last modified: 18 Jul 2006QC 27742