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What is Blackhole Expenditure?

Blackhole expenditures are expenses relating to a business carried on for taxable purposes, which cannot be deducted under any other provision of the tax law. They can arise in a variety of situations, including the establishment or cessation of a business, the termination of a lease, and more. For taxpayers, the inability to deduct these expenses can result in a significant tax burden and reduce the profitability of their operations.

Fortunately, the Australian Taxation Office (ATO) provides guidance on the deductibility of certain blackhole expenditures. Keep reading to find out what blackhole expenditures are, when they are deductible, and how to claim deductions for these expenses correctly.

What is a business-related capital expenditure?

A business-related capital expenditure, or a blackhole expenditure, is an expense incurred that is not deductible under any other provision of the tax law. These could include the cost for the establishment of a business structure, the cost to raise equity, relocation costs, or even market research reports for new businesses.

Dealing with blackhole expenditures

Blackhole expenditures can be tax deductible in some circumstances under the Income Tax Assessment Act 1997 (ITAA 1997). Businesses could formerly deduct blackhole expenses that were capital in nature but must do so over a period of five years on a straight-line basis, with the first portion available in the income year when the expenditure was incurred. 

For business-related capital expenditures incurred after 30 June 2005, the ATO provides specific guidance. Unlike before, Section 40-880 deductions are no longer limited to only seven types of business-related capital expenses. The company can now claim deductions incurred after this date if: 

  • They relate to the business 
  • They relate to a former business
  • They relate to a proposed business
  • It was incurred as a shareholder or partner to liquidate or deregister a company
  • It was incurred to wind up a trust or partnership that carried on a business

However, if the company incurs capital expenditure for an existing, former, or proposed business, the expenditure is only deductible to the extent that the business is, was, or is proposed to be carried out for a taxable purpose. 

Additionally, the company cannot deduct expenditure for an existing business carried on by another entity or a proposed business unless it is proposed to commence within a reasonable time. 

Nonetheless, the company can deduct expenses incurred for a business that was formerly carried on by another entity or is proposed to be carried out by another entity. But only to the extent that the expenditure is in connection with a business that is/was/will be carried on and relates to the derivation of assessable income from that business by the partnership.

When can’t you claim a section 40-880 deduction?

Please note that a section 40-880 deduction cannot be claimed under certain categories. This includes if the expense:

  • Is claimable under other provisions of income tax laws
  • Is part of a depreciating asset
  • Is related to land
  • Is associated with a lease or other legal/equitable right
  • Would be included in determining an assessable profit or deductible loss
  • Could be considered in determining a capital gain or loss from a CGT event
  • Would not be deductible under the income laws if it was not a capital expenditure
  • Is not specifically deductible for a reason other than it being capital expenditure
  • Is private or domestic in nature
  • Is incurred to product exempt or non-assessable non-exempt income
  • Is excluded from the cost of an asset due to special rules in the UCA or CGT regimes
  • Is a return of capital or non-assessable amount

If the capital expenditure qualifies, a company can claim a 20% deduction in the year the expense was incurred, plus the following four years.

Grow Your Business with QuickBooks

When is a fund carrying on a business?

In some circumstances, APRA-regulated superfunds may be able to claim expenses for “carrying on a business”. The ATO assesses each super fund on a case-by-case basis, so the matter of “carrying on” a business is a complex issue. 

Generally, the ATO considers a fund to be carrying on a business if:

  • The fund is undertaking activities consistent with those of a typical business
  • The fund is engaging in activities intended to generate a profit
  • The fund is engaging in activities on a regular and systematic basis

It’s worth noting that carrying on a business is not the same as carrying on an investment activity, so funds primarily engaged in investment may not be considered to be carrying on a business.

If a fund is carrying on a business, it will be subject to the same tax rules and regulations as any other business, which includes the potential deduction of blackhole expenditures for expenses that are not capital in nature.

How to claim deductions for blackhole expenditures

Deducting blackhole expenses is complex, so it’s important to ensure you are correctly claiming deductions to avoid potential penalties and interest charges.

Follow these steps:

1. Determine whether the expense is really a blackhole expenditure. If it is not, then it may be deductible under other provisions of the tax law.

2. Determine if the expense is capital in nature. If it is, then it is not deductible. Capital expenses relate to the acquisition, improvement, or disposal of a capital asset, such as land, buildings, or equipment. 

3. Ensure the expense is related to income-producing activities. A blackhole expenditure is only tax deductible if it is incurred while carrying on a business or other income-producing activity like investing.

4. Claim the deduction in the correct year. Generally, you can only deduct the expenditure in the income year in which it is incurred.

5. Keep accurate records. It’s vital to keep accurate records of all blackhole expenditure, including invoices, receipts, and other documents. This will substantiate a claim for a deduction and ensure evidence can be provided to the ATO.

Keep track of expenditures with QuickBooks

QuickBooks online accounting software can help you manage your expenses and deductions with ease. When you can view all your income and expenditures in one place, it makes it easier to file taxes and get through tax season quickly and without hassle. Plus, QuickBooks software can generate reports and provide insights into your financial position to help you make better decisions about your business or fund.

If you want to streamline your accounting processes, sign up today with a 30-day free trial to see how QuickBooks can help.

While every care has been taken to ensure the accuracy of the information presented as at 12 April 2024, Intuit is not providing you with professional advice and we recommend you obtain your own professional advice. Intuit is not liable for your use of the information presented.

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