Quite often, money is spent on launching a new business prior to incorporation of the actual business. This is commonly referred to as Blackhole Expenditure. There is a special section of the tax legislation in Australia that deals with Blackhole Expenditure. Business capital costs that may be deductible under section 40-880 of the Income Tax Assessment Act 1997 [ITAA97] include:
- Costs of establishing the business structure (e.g. company incorporation costs)
- Cost to raise equity for the business (prospectus costs)
- Business relocation costs
- Market research reports for new businesses
Section 40-880 provides a deduction for certain business capital expenditure (i.e. blackhole expenditure) on a straight-line basis over a 5-year period.
Though section 40-880 only applies to capital costs incurred in relation to a past, present, or proposed business that is not otherwise dealt with under income tax law. Therefore, section 40-880 is a ‘provision of last resort’.
So, it is crucial to keep in mind that capital expenditure is generally not deductible under section 40-880 to the extent that the expenditure:
- Is private or domestic in nature
- Non-deductible under the income tax laws
- Can be deducted under some other provision of the ITAA 1997
- Forms part of the cost of land
- Forms part of the cost of depreciating assets
- Taken into account in calculating a capital gain or loss
If you have further questions about Blackhole Expenditure, contact Michael Hamilton at Blue Dragon Business Services.
Blue Dragon Business Services are tax agents located in Cooroy, in the heart of Noosa Hinterland. We service all areas of the Sunshine Coast and South-East Queensland including Brisbane, Gympie, Ipswich and Logan for tax, BAS and bookkeeping. We also practice as virtual CFOs, take on interim CFO engagements as well as financial management, reengineering and restructures including business turnarounds, transformations and expert financial modelling.
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E: michael@bluedragongroup.com.au
P: 07 5412 7111
