Certain start-up expenses immediately deductible

Section 40-880

Section 40-880 of the ITAA 1997 allows certain start-up expenditure to be immediately deductible if all the following apply:

• it relates to a business that you propose to carry on
• you incur the expenditure either
  • in obtaining advice or services relating to the structure you propose or the operation of the business you propose
  • in payment to an Australian Government agency of fees, taxes or charges relating to setting up the business or its operating structure
• in that income year in which you claim the deduction, you either
  • were a small business entity, or would be a small business entity if the aggregated turnover threshold was less than $50 million
  • didn't carry on a business and were not connected with, or an affiliate of, an entity carrying on a business that was not a small business entity or had an aggregated turnover of more than $50 million.

Professional advice and services relating to structure and operations

Professional advice and services that may be deductible under this section include:

• advice from a lawyer or accountant on how to best structure the business
• services such individuals or firms may provide in setting up legal arrangements or business systems for such structures.

It doesn't include the cost of acquiring assets that the business may use.

Similarly, advice and services in relation to the operation of the business you propose includes professional advice on the viability of the business. It also includes due diligence where you purchase an existing business and the development of a business plan.

Payments to Australian Government agencies

Payments of taxes, fees or charges relating to establishing the business or its structure to an Australian Government agency may be immediately deductible under this section.

An Australian Government agency is a Commonwealth, state or territory government (or an authority of these). Local governments are an authority of the relevant state or territory government.

Broadly, this category of expenditure includes regulatory costs you incur 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 doesn't include expenditure relating to taxes of general application such as income tax. The payment of these general taxes doesn't 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 of the ITAA 1997.

Eligible taxpayers

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, you 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 that carries on a business and has an aggregate annual turnover of less than $10 million.

Alternatively, if you don't 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 if:

• that other entity isn't a small business entity
• that other entity would not be a small business entity if the aggregated turnover threshold was less than $50 million.

 

Assets for which deductions are claimed under UCA

For some depreciating assets, you must claim deductions under UCA rather than under the simplified depreciation rules. These depreciating assets include:

• assets you allocate to a low-value or a common-rate pool before you start using the simplified depreciation rules (those assets must remain in the pool and you must claim deductions under UCA)
• horticultural plants
• in-house software where the development expenditure is allocated to a software development pool
• assets you lease out, or are expected to be leased out, for more than 50% of the time on a depreciating asset lease. (This doesn't 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 can't 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 isn't deductible under UCA.

Capital expenditure deductible under UCA

As the simplified depreciation rules apply only to depreciating assets, you can deduct certain capital expenditure a small business entity incurs that doesn't form part of the cost of a depreciating asset 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.

In-house software

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 you incur thereafter (in that income year or in a later year) to a pool.

If you allocate 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.

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, if you either:

• have not previously allocated such expenditure to a software development pool and you choose not to do so this year
• incur the expenditure in developing in-house software that you don't intend using solely for a taxable purpose.

Deductions for in-house software you acquire off the shelf as a small business entity for use in your business are also available under the simplified depreciation rules.

For information on the deductibility of website expenses, see Taxation Ruling TR 2016/3 Income tax: deductibility of expenditure on a commercial website.

Primary producers

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
  • landcare operations
  • electricity connections and phone lines.

You can choose to claim your deductions under the simplified depreciation rules or UCA for each depreciating asset. Once you have made the choice, you can't change.

Continue to: Record keeping for depreciating assets

Return to: Small business entity concessions