Section 40-880 deduction
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Can you deduct business-related costs under section 40-880?
No, Go to Business deduction for project pool.
Yes, Read on.
You need to know
Section 40-880 provides a five-year write-off for certain capital expenditure incurred by you in relation to a past, present or prospective business if the expenditure is not already taken into account or not denied a deduction by another provision.
For expenditure incurred before 1 July 2005, there are seven specific types of business-related capital expenditure for which you may be able to claim a deduction. For expenditure incurred on or after 1 July 2005, the law has been changed so that a deduction can now also be claimed for capital expenditure:
- 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.
Generally, you can deduct 20% of the expenditure in the year you incur it and in each of the following four years. However, for some pre- and post-business expenditure you may have to defer your claim for a deduction because the non-commercial rules apply.
For example, if you were carrying on a business during the year but your relevant capital expenditure relates to a new business that did not commence before 30 June 2006, you generally cannot claim a deduction for the expenses incurred on or after 1 July 2005 until the business activity commences. If you incur such expenditure in these circumstances you should not claim the deductible amount (20%) but note it in your business or taxation records and claim all the amounts deferred for this item in the year the business commences.
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
- 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 or is a return of a non-assessable amount (for example, repayments of loan principal).
Claim the amount deductible under section 40-880 here if you carried on a business as an individual at any time during the year. If you stopped carrying on a business as an individual in a previous income year and you have not fully claimed your five-year write-off under section 40-880, claim the amount deductible this year at item D15 on your tax return (supplementary section).
If you have incurred relevant capital expenses on or after 1 July 2005 and the expenses relate to a business that ceased in a previous income year and you carried on the business as a sole trader or through a partnership, company or trust, you claim the amount deductible (20%) at item D15 on your tax return (supplementary section).
You must show any recoupment of the expenditure as assessable income, either at Other business income or as part of your Income reconciliation adjustments in the Reconciliation items section of item P8 on your schedule.
Completing this item
Step 1, Write your deduction for primary production business-related costs at Section 40-880 deduction in the Primary production column, item P8 on page 3 of your schedule. Do not show cents.
Step 2, Write your deduction for non-primary production business-related costs at Section 40-880 deduction in the Non-primary production column. Do not show cents.
Step 3, Add up your primary production and non-primary production deductions for business-related costs and write the total at A.
Last modified: 01 Sep 2006QC 18499