When certain start-up expenses are immediately deductible under Section 40-880.
Section 40-880 allows certain start-up expenditure to be immediately deductible if:
- it relates to a business that is proposed to be carried on
- it is incurred
- in obtaining advice or services relating to the proposed structure or the proposed operation of the business, or
- in payment to an Australian Government agency of a fee, tax or charge relating to setting up the business or establishing its operating structure
- in that income year in which the deduction is claimed, you
- were a small business entity
- would be a small business entity if the aggregated turnover threshold was less than $50 million, or
- did not carry on a business and were not connected with or an affiliate of another entity that
- is not a small business entity and
- would not be a small business entity if the aggregated turnover threshold was less than $50 million.
Professional advice and services relating to the structure or the operations of the proposed business
Professional advice and services that may be deductible under this section include advice from a lawyer or accountant on how the business may be best structured as well as services such individuals or firms may provide in setting up legal arrangements or business systems for such structures. It does not include the cost of acquiring assets that may be used by the business. Similarly, advice and services in relation to the operation of the proposed business includes professional advice on the viability of the proposed business (including due diligence where an existing business is being purchased) and the development of a business plan.
Payments of taxes, fees or charges relating to establishing the business or its structure to an Australian Government agency may be immediately deducted under this section.
An Australian Government agency is a Commonwealth, state or territory government (or an authority of these). Local governments are included as an authority of the relevant state or territory government.
Broadly, this category of expenditure includes regulatory costs incurred in setting up the new business. Examples include the costs associated with creating the entity that may operate the business (such as the fee for creating a company) and costs associated with transferring assets to the entity which is intended to carry on the proposed business (for example, the payment of stamp duty). It does not include expenditure relating to taxes of general application such as income tax. The payment of these general taxes does not relate to establishing a business or its structure but instead to the operation and activities of the businesses. Such general taxes are also not normally deductible under section 40-880.
Immediate deductibility is also limited to expenditure by certain entities, with the effect of excluding expenditure incurred by larger businesses.
If you carried on a business in the income year, it must be a small business entity or would be a small business entity if the aggregated turnover threshold was less than $50 million.
A small business entity is broadly defined under tax law as an entity with an aggregate annual turnover of less than $10 million.
Alternatively, if you did not carry on a business in the income year, you must not be connected with or be an affiliate of another entity that carries on a business in the income year and:
- that other entity is not a small business entity
- that other entity would not be a small business entity if the aggregated turnover threshold was less than $50 million.
Example: Start-up expense which can be immediately deducted
Winston Co is a company that is a small business entity and is in the process of setting up a florist business, to be operated by a separate entity. Winston Co is uncertain as to the best location for the proposed business. Winston Co obtains advice from a consultant in order to assist in determining a suitable location. The cost of obtaining this advice is fully deductible in the income year in which it was incurred.End of example
Example: Capital expenditure which cannot be immediately deducted
Percy already carries on an established small landscaping business. As part of plans to expand and improve his business Percy obtains financial advice about financing the expansion. As Percy’s business is already established, Percy will not be able to claim an immediate deduction for the expense as it is not a start-up cost. However, Percy may be able to claim a deduction over 5 years; see Business related costs – section 40-880 deductions.End of example
For some depreciating assets, deductions must be claimed under UCA rather than under the simplified depreciation rules:
- assets allocated to a low-value or a common-rate pool before you started to use the simplified depreciation rules (those assets must remain in the pool and deductions must be claimed under UCA)
- horticultural plants
- in-house software where the development expenditure is allocated to a software development pool; see Software development pools, and
- assets that are leased out, or are expected to be leased out, for more than 50% of the time on a depreciating asset lease. (This does not apply to depreciating assets subject to hire purchase agreements, or short-term hire agreements on an intermittent hourly, daily, weekly or monthly basis where there is no substantial continuity of hiring.)
Depreciating assets used in rental properties are generally excluded from the simplified depreciation rules on the basis that they are subject to a depreciating asset lease.
You cannot deduct an amount for a decline in value of second-hand depreciating asset in a residential rental property under the simplified depreciation rules if the amount is not deductible under UCA.
As the simplified depreciation rules apply only to depreciating assets, certain capital expenditure incurred by a small business entity that does not form part of the cost of a depreciating asset may be deducted under UCA for deducting capital expenditure.
This includes capital expenditure on certain business related costs and amounts directly connected with a project; see Capital expenditure deductible under UCA.
Under UCA, you can choose to allocate to a software development pool expenditure you incur in developing (or having another entity develop) in-house software you intend to use solely for a taxable purpose. Once you allocate expenditure on such software to a pool, you must allocate all such expenditure incurred thereafter (in that year or in a later year) to a pool; see Software development pools.
If you have allocated such expenditure to a software development pool either before or since using the simplified depreciation rules, you must continue to allocate such expenditure to a software development pool and calculate your deductions under UCA.
- have not previously allocated such expenditure to a software development pool and you choose not to do so this year, or
- incur the expenditure in developing in-house software that you do not intend using solely for a taxable purpose
then you can capitalise it into the cost of the unit of software developed and claim deductions for the unit of in-house software under the simplified depreciation rules when you start to use it (or install it ready for use) for a taxable purpose.
Deductions for in-house software acquired off the shelf by a small business entity for use in their business are also available under the simplified depreciation rules.
For small businesses applying the simplified depreciation rules, you must claim an immediate deduction for the expenditure incurred in the income year that you start to use the software or have it installed ready for use if:
- you start to hold the in-house software from 7:30 pm AEDT on 6 October 2020 to 30 June 2023, and
- you have not previously allocated any amount to a software development pool.
For information on the deductibility of website expenses, see TR 2016/3 Income tax: deductibility of expenditure on a commercial website.
A small business entity can choose to claim deductions under either the simplified depreciation rules or UCA for certain depreciating assets used in the course of carrying on a business of primary production.
The choice is available for:
- water facilities
- fencing assets
- fodder storage assets
- depreciating assets relating to
You can choose to claim your deductions under the simplified depreciation rules or UCA for each depreciating asset. Once you have made the choice, it cannot be changed.
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