Can your business dig a deduction out of expenditure’s “blackhole”?

If you haven’t heard of “blackhole” expenditure before, it is a term used to describe some legitimate capital business expenditure that, by accident, design or otherwise, falls outside of the ambit of other provisions of Australia’s tax legislation. It broadly refers to certain outgoings that are neither depreciable nor deductible in general terms, and that are not included in the cost base of a CGT asset.

In other words, it is expenditure that is not covered by any other income tax laws. The present rules apply to expenditure incurred from July 1, 2005.

Business taxpayers are allowed by law to deduct particular business capital expenditure, in equal proportions over five years, where:

  • the expenditure is not otherwise taken into account in some way elsewhere in the income tax provisions, such as a deduction, an addition to the cost base of a depreciating or CGT asset or in relation to a CGT event
  • a deduction is not specifically denied by some other provision of the tax law, and
  • the business is, was, or is proposed to be carried on for a taxable purpose.

The five year period must start in the year that the expenditure is incurred, and the deduction must be taken over five consecutive years at 20% a year.

This deduction for blackhole expenditure may be available to a taxpayer that used to run a business, a taxpayer that is setting up a prospective business, or a business that is currently operating, provided the expenditure is capital in nature.

If the expenditure is for a proposed business, there must be a serious plan for the business to be initiated within a reasonable time — that is, not be merely a “pie- in-the-sky” dream – in order to qualify for a deduction. There is even provision for a taxpayer themselves to seek a claim for a proposed enterprise, even if a business structure has yet to be initiated.

However even blackhole provisions have exceptions. The types of business capital expenditure that cannot form part of a blackhole deduction include if the expenditure:

  • forms part of the cost of land
  • is expenditure of a private or domestic nature
  • is incurred in relation to gaining or producing exempt income or non-assessable non-exempt income
  • is incurred by way of returning an amount the taxpayer has received, and
  • is for another entity, a return on an equity interest, or debt interest that is an obligation of the taxpayer.

Note that the non-commercial loss provisions for an individual may apply where a blackhole deduction results in a business loss for an individual taxpayer. This will effectively quarantine the business loss to be carried forward and offset against future business profits.

You may also qualify for blackhole deductions if you are a shareholder in a company, a partner in a partnership, or a beneficiary of a trust that carried on a business, and you personally incur the capital expense to wind-up the entity.

A blackhole expenditure deduction may be made available so that taxpayers obtain some tax relief for business-related capital expenditure where no other relief is available under the tax laws. But make sure that the expenditure in question is capital in nature before taking this path, and remember that there are limitations and exceptions.

Advice from a tax professional will most likely be very worthwhile.

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