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Ruling

Subject: Business expenses

Question

Can you deduct the capital set-up costs associated with your business under section 40-880 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following period

Year ended 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

In the 2009-10 income year you trained and then qualified as an assessor. Also in the 2009-10 income year you paid for course costs, public liability insurance, police safety check certificate and association membership before you were entitled to work.

You expected an annual turnover of at least $X per annum commencing in the 2009-10 income year from your business.

You were unable to fully operate your business successfully in the 2009-10 as the scheme suffered several organisational disruptions.

You rang the Australian Tax Office (ATO) and were advised you could not claim expenses incurred in earning an income in the 2009-10 income year until you had earned an income.

In January 2011 you only had the chance to complete two assessments in one week before the scheme ceased in February 2011.

Relevant legislative provisions

Section 40-880 of the Income Tax Assessment Act 1997

Detailed reasoning

Subject to the limitations and exceptions contained in subsections 40-880(3) to (9) of the ITAA 1997, subsection 40-880(2) provides that you can deduct, in equal proportions over a period of five income years starting in the year in which you incur it, capital expenditure you incur:

(a)    in relation to your business

(b)    in relation to a business that used to be carried on

(c)    in relation to a business proposed to be carried on

(d)    to liquidate or deregister a company of which you were a member, to wind up a partnership of which you were a partner or to wind up a trust of which you were a beneficiary, that carried on a business.

On the facts of this case the relevant paragraph to consider is paragraph 40-880(2)(c) of the ITAA 1997 because the expenditure was incurred prior to the commencement of the business.

In your case, the capital expenditure you incurred was for course costs, public liability insurance, police safety check certificate and association membership. As these expenditures were incurred as a prerequisite to commencing a business, it follows that the character of the expenditure is capable of being in relation to a business in the sense of establishing a profit yielding structure for a business proposed to be carried on.

In your circumstances, we consider that there is a sufficient and relevant connection between your incurrence of the capital expenditure and the business proposed to be carried on. Accordingly, a business was proposed to be carried on for the purposes of paragraph 40-880(2)(c) of the ITAA 1997at the time you incurred the capital expenditure.

Subject to the application of Division 35 of the ITAA 1997, under section 40-880 you can deduct 100 per cent of the capital expenditure that you incurred that is the subject of this ruling over five years (starting in the year you incurred that expenditure).

The rules in Division 35 of the ITAA 1997 prevent individuals from deducting pre- and post-business capital expenditure in relation to non-commercial activities unless certain exceptions apply.

Subsection 35-10(2A) of the ITAA 1997 provides that you cannot deduct an amount under section 40-880 for expenditure in relation to a business activity unless you satisfy subsection 35-10(2E) and one of the following tests;

§ the assessable income test

§ profit test

§ real property test

§ other assets test

§ or the Commissioner exercises the discretion set out in section 35-55 of the ITAA 1997.

Paragraph 14 of Taxation Ruling TR 2001/14 allows the assessable income test to be calculated by making a reasonable estimate of a notional annual amount if the activity has not been carried on for the whole year. As you completed two assessments in one week, notwithstanding the fact that you expected to complete substantially more assessments when the scheme commenced, you would have passed the assessable income test had you continued your business for the entire twelve months.

You meet the income requirements of subsection 35-10(2E) of the ITAA 1997 and you also meet the assessable income test of section 35-30 therefore you can deduct over five years (starting in the year you incurred that expenditure) the business related costs for expenditure related to your activity under section 40-880 of the ITAA 1997.