Consider the following items to see whether you qualify for a deduction.
Any adjustments to your income and expense amounts are dealt with at Income and expense reconciliation adjustments.
Section 40-880 deduction
Immediate deductibility for small business start-up expenses
Section 40-880 of the Income Tax Assessment Act 1997 allows for certain start-up expenses, including costs associated with raising capital, to be immediately deductible where they are incurred by a small business entity or an entity that is not in business. These provisions applied from 2015–16.
If you are an individual (operating either alone or in partnership), the non-commercial loss provisions may apply to defer your deduction to a later income year.
Claimable business related start-up costs
Expenses can be fully deductible in the year in which the expenditure is incurred if the expenditure relates to a small business that is proposed to be carried on and is either:
- incurred in obtaining advice or services relating to the proposed structure or the 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.
See also: Other capital expenses (including capital works deductions).
Five-year write-off for a range of business related costs not recognised elsewhere in the tax law
Section 40-880 also 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.
You can claim a deduction 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 be, 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
- the expenditure is in connection with the business that was or is proposed to be carried on and with you 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 loss 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 1 July 2018, you cannot claim a deduction for the expenses incurred 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 the amounts deferred for this item in the year the business commences. However, these claims may be subject to further deferral to the extent that they would otherwise give rise to a business loss in the current year.
See also:
The deduction cannot be claimed for capital expenditure if 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
- could 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, or if the amounts relates to a proposed primary production or performing arts business.
If you have incurred relevant capital expenses that 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, claim the expenses here. If you carried on the business through a company or trust, you claim the amount deductible (20%) at Other deductions on your tax return.
You must show any recoupment of the expenditure as assessable income, either at Other business income or Income reconciliation adjustments.
Business deduction for project pool
Certain capital expenditure you incurred after 30 June 2001 which is directly connected with a project you carry on or propose to carry on for a taxable purpose can be allocated to a project pool and written off over the life of the project. Each project has a separate project pool. The project must be of sufficient substance and be sufficiently identified that it can be shown that the capital expenditure said to be a ‘project amount’ is directly connected with the project.
You are carrying on a project if it involves a continuity of activity and active participation. Merely holding a passive investment, such as a rental property, would not be regarded as carrying on a project.
Such capital expenditure, known as a project amount, is expenditure incurred on:
- creating or upgrading community infrastructure for a community associated with the project; this expenditure must be paid (not just incurred) to be a project amount
- site preparation for depreciating assets (other than to drain swamp or low-lying land or to clear land for horticultural plants, including grapevines)
- feasibility studies for the project
- environmental assessments for the project
- obtaining information associated with the project
- seeking to obtain a right to intellectual property
- ornamental trees or shrubs.
Project amounts also include mining capital expenditure and expenditure on certain facilities used to transport minerals or quarry materials. For more information, see Guide to depreciating assets.
The expenditure must not be otherwise deductible or form part of the cost of a depreciating asset. If the expenditure incurred 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.
Project amounts are allocated to a ‘project pool’. Your deduction for project amounts allocated to a project pool is spread over the ‘project life’. The project life is the period from the date on which the project starts to operate until the date on which it stops operating. The period must be limited by something inherent in the project. If there is no limited project life, no deduction is available under these rules.
A deduction is available from the income year in which you started to operate a project to gain or produce assessable income. The deduction is worked out on the value of the project pool at the end of the income year at the rate of 150%. For pools containing only project amounts incurred on or after 10 May 2006 for projects starting on or after that day, the rate is 200%. Your deductions are capped at 150% if on or after 10 May 2006 you abandon, sell or otherwise dispose of an existing project and then restart it after that date in circumstances where it would be reasonable to conclude that this was done for the main purpose of ensuring that deductions would be calculated using the higher rate.
Use worksheet 3A or worksheet 3B to work out your deduction.
Row |
Calculation elements |
Amount |
|---|---|---|
a |
Value of the project pool at 30 June 2018. This is the closing pool value for 2016–17 (if any) plus the sum of the project amounts you allocated to the pool in 2017–18. |
$ |
b |
Your estimate of the life of the project (in years). |
years |
c |
Divide the amount at row a by the amount at row b. |
$ |
d |
Multiply the amount at row c by 200%. This is your 2017–18 deduction for the project pool. |
$ |
Your deduction at row d must not be more than the amount at row a.
If a project operated in 2017–18 for purposes other than earning assessable business income, you must reduce your deduction at row d by a reasonable amount for the extent to which the project operated for such other purposes.
Row |
Calculation elements |
Amount |
|---|---|---|
a |
Value of the project pool at 30 June 2018. This is the closing pool value for 2016–17 (if any) plus the sum of the project amounts you allocated to the pool in 2017–18. |
$ |
b |
Your estimate of the life of the project (in years) |
years |
c |
Divide the amount at row a by the amount at row b. |
$ |
d |
Multiply the amount at row c by 150%. This is your 2017–18 deduction for the project pool. |
$ |
Your deduction at row d must not be more than the amount at row a.
If a project operated in 2017–18 for purposes other than earning assessable business income, you must reduce your deduction at row d by a reasonable amount for the extent to which the project operated for such other purposes.
The pool value can be subject to adjustments, for example, a foreign exchange (forex) adjustment may apply where you met an obligation to pay foreign currency incurred as a project amount which you had allocated to a project pool.
Closing pool value for 2017–18
This is row a minus row d in worksheet 3A and worksheet 3B. You will need the closing pool value for 2017–18 to work out your deduction for the project pool next year.
Any recoupment of the expenditure must be shown as assessable income either at Other business income or Income reconciliation adjustments.
Where a project was abandoned, sold or otherwise disposed of in 2017–18
In this case, whether or not the project had begun to operate, you can claim a deduction for the 2016–17 closing pool value (if any) plus any project amounts allocated to the pool in the 2017–18 year. You must show any proceeds from the abandonment, sale or disposal of the project as assessable income either at Other business income or Income reconciliation adjustments.