• Other capital expenses

    You can claim a deduction for certain other business-related capital expenses you incur, as long as you can't claim a deduction for them under any other part of tax law.

    Immediate deduction of expenses for start-ups

    From 1 July 2015, small businesses and entities can immediately deduct certain professional expenses incurred with starting up a new small business.

    Expenses can only be immediately claimed if the entity that incurred the expenditure is a small business entity for that income year.

    If you are an individual taxpayer (operating either alone or in partnership) you may be able to defer your deduction to a later income year using the non-commercial loss provisions.

    See also:

    Eligible start-up costs

    You can fully deduct expenses in the year they were incurred if they relate to setting up a proposed small business and are either:

    • incurred in obtaining advice or services relating to the proposed structure or proposed operation of the business
    • a payment to an Australian government agency of a fee, tax or charge incurred in relation to setting up the business or establishing its operating structure.

    It does not include:

    • the cost of acquiring assets that may be used by the business
    • the direct costs of the capital itself such as interest, dividends or capital repayments
    • expenses your business may incur for the operation of a proposed business (such as travel costs while assessing locations for a business)
    • expenditure relating to taxes of general application, such as income tax. This is because these taxes relate to the operation and activities of the business.

    Advice or services

    You can fully deduct expenses for professional advice or services (for example, advice from a lawyer or accountant) relating to:

    • the structure of the proposed business including
      • how the business may be best structured
      • setting up legal arrangements or business systems for the structure.
       
    • the operation of the proposed business including
      • the viability of the proposed business (including due diligence where an existing business is being purchased)
      • the development of a business plan.
       
    • costs associated with raising capital (whether debt or equity) for the operation of the proposed business including, for example, costs incurred in accessing crowd-sourced equity funding.

    Payments to Australian government agencies

    You can fully deduct expenses for regulatory costs incurred in setting up the proposed business. For example:

    • costs associated with creating the entity that may operate the business (such as the fee for creating a company)
    • costs associated with transferring assets to the entity which is intended to carry on the proposed business (for example, stamp duty).

    Example 1 – Start-up expense which can be immediately deducted

    Winston Co is a company in the process of setting up a florist business to be operated by a separate entity. Winston Co is uncertain about the best location for the proposed business. On 1 August 2015, Winston Co obtains advice from a consultant to help find a suitable location. As Winston Co is a small business and is intending to start-up a new business, the cost of obtaining this advice will be fully deducted in the income year in which it is incurred.

    Example 2 – Capital expenditure which cannot be immediately deducted

    Percy has a small established landscaping business. As part of plans to expand and improve his business, Percy gets financial advice about paying for an expansion. As Percy’s business is already established, he will not be able to immediately deduct these costs.

    End of example

    Non-commercial loss provisions

    If you have a net loss that includes costs of setting up or ceasing a business (commonly known as a blackhole expense) from a business activity you carry on as an individual, either as a sole trader or in partnership, that blackhole expense may be deferred to a later year by the non-commercial loss rules.

    The non-commercial loss rules determine whether you can use your business loss to offset income from other sources in the same income year, or whether the loss is to be deferred to later income year.

    See also:

    Five-year write-off for a greater range of business related costs

    Deductions for business related costs

    Section 40-880 of the Income Tax Assessment Act 1997 (ITAA 1997) provides a deduction in equal proportions over five years for certain capital expenditure not dealt with elsewhere in the income tax laws.

    Examples of business related costs include capital expenditure related to:

    • commencing a business (such as the cost of feasibility studies and setting up the business entity)
    • business restructuring
    • defending against a takeover
    • the costs of ceasing business.

    Note: The information in this document only relates to expenditure incurred from 1 July 2005. Different rules apply to expenditure incurred prior to 1 July 2005. If you were entitled to a deduction under section 40-880 of the ITAA 1997 for expenditure incurred prior to 1 July 2005, you can continue to claim your deductions over that five year period.

    Claimable business related costs

    You can claim deductions for business related costs in equal proportions over five years for certain capital expenditure you incur in relation to a past, present or proposed business. Section 40-880 of the ITAA 1997 is a provision of last resort (that is, the expenditure is deductible under the section only where it's not already taken into account and not denied deductibility for the purposes of the income tax law). As a provision of last resort, section 40-880 is responsive to subsequent changes in the tax law.

    You may be able to deduct capital expenditure incurred by you in relation to:

    • your existing business
    • your or another entity's business that used to be carried on
    • your or another entity's business that is proposed to be carried on.

    If you are a shareholder, beneficiary or partner you may be able to deduct capital expenditure incurred by you to deregister a company or wind up a trust or partnership, provided that the company, trust or partnership has carried on a business.

    To determine what expenditure is not deductible, refer to the 'Non-deductible expenditure' heading below.

    Relating to your existing business

    To deduct capital expenditure in relation to your existing business, you must have incurred the expenditure and the business must be carried on by you. So if you incur expenditure in relation to a business being carried on by another entity, the expenditure is not incurred in relation to your existing business.

    Capital expenditure you incur to restructure your business or defend a takeover of your business are examples of expenditure which may be deductible.

    You can deduct the expenditure only to the extent your business is carried on for a taxable purpose, such as for producing assessable income. You work out the extent to which the business is carried on for a taxable purpose at the time you incur the expenditure, taking into account all known facts and expectations in all years. The test is not an annual test.

    Relating to your or another entity's business that used to be carried on

    You may be able to claim a deduction for expenditure you incur in relation to a business that you or, in some cases, another entity used to carry on.

    If you are an individual taxpayer, the non-commercial loss provisions may defer your deductions for post-business expenditure.

    Post-business expenses that may be deductible include capital expenses incurred to cease carrying on the business and expenses incurred as a consequence of the business ceasing (for example, capital expenses incurred on legal costs to terminate the services of employees).

    If you incur expenditure in relation to a business that you used to carry on, the expenditure is deductible only to the extent your business was carried on for a taxable purpose.

    If you incur expenditure in relation to a business that another entity carried on, you can deduct the expenditure only to the extent that:

    • the business was carried on for a taxable purpose
    • the expenditure is connected with the business that was carried on and connected with you deriving assessable income from the business.

    You do not need to be actually deriving income from the activity at the time the expenditure is incurred.

    Relating to your or another entity's business that is proposed to be carried on

    You may be able to claim a deduction for expenditure you incur in relation to a business that is proposed to be carried on by you or, in some cases, another entity.

    If you are an individual taxpayer, the non-commercial loss provisions may defer your deductions for pre-business expenditure.

    Pre-business expenses that may be deductible include:

    • expenditure to investigate the viability of the business (for example, the costs of feasibility studies, due diligence or market research)
    • establishment costs (such as the costs of incorporating a company, creating a trust or forming a partnership through which the business will be carried on).

    If you incur expenditure in relation to a business that you propose to carry on, the expenditure is deductible only to the extent that you propose to carry on the business for a taxable purpose.

    If you incur expenditure in relation to a business that another entity proposes to carry on, you can deduct the expenditure only to the extent that:

    • the business is proposed to be carried on for a taxable purpose
    • the expenditure is in connection with the business that is proposed to be carried on and with your deriving assessable income from the business.

    You don't need to be actually deriving income from the activity at the time the expenditure is incurred.

    The extent to which a business is proposed to be carried on for a taxable purpose is worked out as at the time the expenditure is incurred, taking into account all known facts and expectations in all years. The test is not an annual test.

    For a business to be 'proposed to be' carried on, you need to be able demonstrate a commitment to commence the business, and be able to sufficiently identify the business that is proposed to be carried on. This could be shown by providing some of the following:

    • a business plan
    • the establishment of business premises
    • research into the likely markets or profitability of the business
    • capital investment in assets of the business.

    Example 1

    Shirley travels to the Whitsundays for a holiday. She is inspired by the visit and decides to establish a tourism venture there. When she returns home, Shirley wants to deduct her travel and accommodation expenses as pre-business expenses as part of her future tourism venture. However as she did not intend to have a business at the time she incurred those costs, she is not entitled to the deduction. This expenditure would instead be classified as private or domestic expenditure. The same would apply if Shirley decided to establish her tourism venture while on holiday.

    If your expenditure does not relate to a proposed business but is instead incurred for the purpose of pursuing a hobby or other leisure activity, it will not be deductible, even if the activity does eventually result in a business.

    To be deductable, the expenditure would need to relate in a real sense to the prospective business.

    Example 2

    Greg plays the drums in a band as a hobby. He spends money to investigate the possibility of customising a room in his house for the purposes of rehearsing with the band. He seeks to claim a deduction for the expenditure as being in relation to a business he proposes to carry on. However, Greg has no evidence that he proposes to carry on a prospective business, so on an objective basis the only benefit of the expenditure is to Greg himself (that is, the expenditure is of a private nature). Greg is not entitled to a deduction as the expenditure is not a business related cost.

    The deduction will be available before the business commences – even if it fails to commence – provided that you can objectively show that the expenditure relates to a business that is or was proposed to be carried on.

    Example 3

    'Ab-one Co' incurs expenditure on due diligence prior to purchasing an existing business with an annual turnover of $5 million that Ab-one Co proposes to carry on. Before the sale can be finalised, the seller withdraws from the sale. The expenditure is deductible over five years as a business related cost.

    The deduction in relation to a proposed business is only available if (in relevant circumstances) it is reasonable to conclude that the business is proposed to be carried on within a 'reasonable' time. What is considered to be a reasonable amount of time may vary according to the industry or nature of the business.

    End of example

    Non-deductible expenditure

    You cannot claim deductions under section 40-880 of the ITAA 1997 for expenditure to the extent that:

    • it forms part of the cost of a depreciating asset you hold, used to hold or will hold – if expenditure is included in the cost of such an asset, a deduction for the expenditure must be taken by you as a deduction for the decline in value of the asset (illustrated in 'example 5' below)
    • a deduction is available for the amount under some other provision, even if the expenditure has not yet been or can no longer be deducted (illustrated in 'example 6' below)
    • it forms part of the cost of land – whether or not the land is held by you
    • it is in relation to a lease or other legal or equitable right – this exclusion may not apply if the expenditure is incurred to preserve the value of goodwill (illustrated in 'example 7' below)
    • it is taken into account in working out an assessable profit or a deductible loss
    • it is taken into account in working out a capital gain or capital loss - this exclusion may not apply if the expenditure is incurred to preserve the value of goodwill (illustrated in 'example 8' below)
    • it would be specifically not deductible (including where it is limited or capped) under the income tax laws if the expenditure was not capital expenditure - the expenditure must be expressly made non-deductible
    • it is specifically not deductible (including where it is limited or capped) under the income tax laws for a reason other than the expenditure is capital expenditure - the expenditure must be expressly made non-deductible (for example, fines and entertainment expenses)
    • it is of a private or domestic nature
    • it is incurred in relation to gaining or producing exempt income or non-assessable non-exempt income
    • it is excluded from the cost or cost base of an asset because under special uniform capital allowance (UCA) or CGT rules respectively, the cost or cost base of the asset was taken to be the market value (for example, if a depreciating asset was acquired under a non-arm's length arrangement and the amount paid for the asset exceeded its market value)
    • it 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).

    Example 5

    Two companies, 'O'Keefe Pty Ltd' (O'Keefe) and 'Hamblen Pty Ltd' (Hamblen) each incur $5,000 on a pre-acquisition check of one particular depreciating asset they both intend to purchase for their respective business. However, O'Keefe is successful in purchasing the asset and Hamblen misses out. O'Keefe includes the $5,000 in the cost of the depreciating asset it starts to hold and cannot claim a deduction under section 40-880 of the ITAA 1997. As Hamblen did not acquire a depreciating asset, it is able to claim a deduction under section 40-880 for the $5,000 (provided that all other conditions for the deduction are met).

    Example 6

    In October 2006, 'QOTSA Pty Ltd' undertakes a feasibility study directly connected with a project they propose to operate during the 2008 income year. The expenditure qualifies as a 'project amount' and will be deductible under the 'project pools' provisions. Even though the expenditure will not be deductible under these provisions until the project begins in 2008, no deduction under section 40-880 of the ITAA 1997 is allowable.

    Example 7

    'AORT Pty Ltd' (AORT) was seeking to obtain a prospecting right over a particular tract of land. It undertakes an investigation to determine if there are any other rights over that land. The investigation finds that a farmer holds a right of access over the land, and AORT agrees to pay the farmer compensation to access the land. As AORT's expenditure is in relation to a right (being compensation for the right to access the land), no deduction under section 40-880 of the ITAA 1997 is allowable.

    Example 8

    'Chooks Pty Ltd' (Chooks), a restaurateur, enters into a franchise agreement under which it pays $100,000 for the right to use the franchisee's name. The right to use the name is a capital gains tax (CGT) asset and its cost will be recognised at the time of a subsequent CGT event (for example, if Chooks disposes of the right). Therefore, no deduction under section 40-880 of the ITAA 1997 is allowable.

    End of example

    Claiming the deduction

    You deduct business related costs in equal proportions over a five-year period on a straight line basis (that is, 20% of the expenditure for each year, commencing with the year the expenditure is incurred).

    If you incur the expenditure part way through the year, the deduction is not apportioned.

    Eligibility for the deduction is determined as at the time you incur the expenditure. Therefore, even if your business ceases or fails to commence, you may continue to claim the deduction over the five years (subject to the non-commercial loss provisions).

    Example 9

    Eleanor and Olivia own a small but successful coffee shop and are seeking to expand their business. They incur qualifying expenditure during the 2006 income year for the purpose of establishing another coffee shop in a newly constructed shopping mall. Eleanor and Olivia deduct 20% of the expenditure for the 2006 income year. The following income year, Eleanor and Olivia are forced to sell the new coffee shop due to unforseen personal circumstances. They are able to continue to claim the remaining 80% of the expenditure in equal proportions for each of the 2007 to 2010 income years

    End of example

    If you are an individual taxpayer (operating either alone or in partnership), the non-commercial loss provisions may apply to defer your deduction to a later income year.

    Non-commercial loss provisions

    If you have a net loss that includes a blackhole expense from a business activity you carry on as an individual, either as a sole trader or in partnership, that blackhole expense may be deferred to a later year by the non-commercial loss rules.

    The non-commercial loss rules determine whether you can use your business loss to offset income from other sources in the same income year, or whether the loss is to be deferred to later income year.

    See also:

    Five-year write-off for certain lease and licence termination payments

    Capital expenditure you incur from 1 July 2005 to terminate a lease (other than a finance lease) or a licence will be deductible under section 25-110 of the Income Tax Assessment Act 1997 (ITAA 1997) in equal proportions over five years, provided:

    • the expenditure has resulted in the termination of the lease or licence
    • the expenditure is incurred in the course of carrying on a business, or in connection with ceasing to carry on a business
    • the expenditure is not for the granting or receipt of another lease or licence over the asset that is the subject of the lease or licence
    • where you are a party to the lease or licence, you (or an associate) and the same party with whom you entered into the lease or licence (or an associate) do not enter into another lease or licence of the same kind as the one terminated.

    Capital expenditure incurred to terminate a lease that is classified as a finance lease in accordance with accounting standards (as defined in the Corporations Act 2001), or statements of accounting concepts made by the Australian Accounting Standards Board are specifically excluded from this provision. A licence for the purposes of section 25-110 of the ITAA 1997 includes an authority, permit or quota.

    Example: capital expenditure to terminate a lease

    Keith holds a 10-year lease over premises for his pet shop in a shopping centre. After four years of the term of the lease, he finds cheaper premises to lease across town which are also more suitable for his business. Keith makes a payment to terminate his current lease. The payment is able to be deducted in equal proportions over five years under the new provision, provided all of the conditions in section 25-110 of the ITAA 1997 are met.

    A 'market value substitution rule' applies to prevent deductions for inflated lease and licence termination payment(s) where there is non-arms length dealing between you and another party to the arrangement under which you incurred the termination payment(s). The rule ensures the amount of expenditure taken into account for the purposes of section 25-110 of the ITAA 1997 is the market value of the lease or licence immediately before its termination, assuming no termination occurred or was proposed to occur.

    End of example
    Last modified: 21 Apr 2016QC 33713