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Edited version of your written advice
Authorisation Number: 1013125511607
Date of advice: 16 November 2016
Ruling
Subject: Black hole expenditure
Question 1
Is the Trust entitled to claim a deduction for expenses for the Course 1, Course 2, Course 3, and the Relevant package incurred prior to the commencement of the business under section 40-880 of the Income Tax Assessment Act 1997 ('ITAA 1997)?
Answer
No
Question 2
Is the Trust entitled to claim a deduction for the trust and business registration expenses under subsection 40-880(2A) of the ITAA 1997?
Answer
Yes.
This ruling applies for the following period(s)
Year ending 30 June 201X
Year ending 30 June 201X
The scheme commences on
1 July 201X
Relevant facts and circumstances
D1 enrolled in a course called Course 1 in early-mid 20XX. Travel costs were incurred in attending this course.
D1 enrolled in a course called Course 2 in early-mid 20XX. Travel costs were incurred in attending this course.
A Relevant package was purchased in mid 20XX. This package reviews contracts, contract negotiation, and trust asset protection for each property purchased in the business.
D1 enrolled in course called Course 3 in mid 20XX.
D1's accountant set up a Corporate Trustee and Trust and business registration.
D1 and their spouse D2 are the administrators of the business, only D1 attended the courses.
Trust deed is dated XX mid 20XX.
The business registration date is XX mid 20XX.
The Trust has signed X clients since commencing its business.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 40-880
Income Tax Assessment Act 1997 subsection 40-880(2A)
Reasons for decision
In order to claim deductions under section 40-880 of the ITAA 1997, you are required to satisfy the key components of the section. Taxation ruling 2011/6 Income Tax: business related capital expenditure - section 40-880 of the Income Tax Assessment Act 1997 core issues discusses the key components.
Key Components:
Business
The object of subsection 40-880(1) of the ITAA 1997 is to allow a deduction over five years for certain business capital expenditure, incurred on or after 1 July 2005, if:
● it is not otherwise taken into account or denied deduction by some other provision; and
● the business is, was or is proposed to be carried on for a taxable purpose
It is required that you carry on a business - or propose to do so - in order to be eligible to claim a deduction. The registration of your business in mid 20XX satisfies this requirement.
The expenditure must be business related
Proposed business
Paragraph 40-880(2)(c) of the ITAA 1997 gives you an entitlement to a deduction for capital expenditure incurred in relation to a business proposed to be carried on.
Activities which a deduction may be allowed include:
● preparation of a business plan;
● establishment of a business premises;
● research into the likely markets or profitability of the business; and
● acquiring assets for use in the business.
The intention of section 40-880 (ITAA 1997) 'black hole expenditure' provision is to provide an avenue for the capital expenses required to set up a business to be deductible against the future business.
The expenditure must be in relation to setting up the business and its structure, and the expenses this incurs, such as site exploration costs for a mine, or viability study for a new product in the market, or registration costs for a proposed business.
Educational Courses
Course 1, Course 2, and Course 3 involve self-education with regards to improving property value, and alike. We can appreciate these courses were highly beneficial in obtaining knowledge for the business; however they are of a different nature to which the section 40-880 ITAA 1997 provision applies.
Accordingly, a deduction for the Course 1, Course 2, and Course 3 is not allowable.
Relevant Package
The Relevant Package assists in the administration and running of the business. This product would be a revenue based deduction in the ordinary course of business, akin to a business claiming their accounting software against their ordinary income.
By nature of the Package, it is of a revenue (not capital) nature, and therefore not deductible prior to the commencement of the business.
Trust and Business Registration
Subsection 40-880(2A) of the ITAA 1997 allows an immediate deduction for capital expenditure on obtaining advice or services relating to the proposed business structure if the expense is incurred by a small business.
The cost to set up the Corporate Trustee and Trust, business name and registration, relate to the creation of the business structure. These costs are an allowable deduction in accordance with section 40-880 of the ITAA 1997.
Conclusion
Having taken into account the requirements of section 40-880 of the ITAA 1997, you are unable to deduct the cost of the educational courses and package.
However, the cost of setting up the business and trust is an allowable deduction in the income year in which it was incurred.
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