WHAT IS BLACKHOLE EXPENDITURE?

 

Certain business-related capital expenditure is expenditure that is not tax-deductible, nor included in the cost base of a CGT asset or the cost of a depreciating asset. For example, expenditure incurred before a business commences or after it ceases that cannot be demonstrated to have a connection with the derivation of assessable income to claim a deduction under s 8–1 ITAA 97. Such expenditure is commonly referred to as “blackhole expenditure”.

Under s 40–880 ITAA 97, blackhole expenditure can be written-off in equal amounts over five income years generally commencing in the year that the expenditure is incurred.

To claim the write-off, it must normally be shown that the expenditure is related to a present, past or future business. This is a once only up-front test to be satisfied at the time when the expenditure is incurred.

Taxation Ruling

TR 2011/6 includes the Tax Office guidelines for this requirement.

An immediate deduction can be claimed under s 40–880(2A) ITAA 97 for certain “start-up” expenses incurred in relation to a business proposed to be carried on. From 1 July 2015, taxpayers who are either not in business or who are small business entities can immediately deduct expenditure incurred to obtain advice or services relating to the proposed structure or operation of a business or a government fee or tax to set up or establish the operating structure of a business. From 1 July 2020, the immediate deduction is also available to medium business entities (taxpayers that would be small business entities if the aggregated turnover threshold were $50m).

Effect of non-commercial loss rules

Where the non-commercial loss rules in Div 35 apply, individuals acting alone or in partnership are prevented from claiming blackhole expenditure before the year that the proposed business commences. Taxpayers can only claim a deduction in the year the business activity commences if the following requirements of Div 35 are satisfied at that time (s 35–10(2)):

• • the business activity satisfies one of the four tests (set out in s 35–30 to 35–45)
• • the Commissioner exercised the discretion under s 35–55 for the business activity, or
• • the business activity was a primary production business or professional arts business and the income from other sources was less than $40,000.

Where the above requirements are not satisfied in the year the business commences the deduction otherwise available under s 40–880 is deferred. This deferred amount is carried forward and may be claimed as a deductible expense in a future year when the requirements of Div 35 are satisfied.

Example: Limitations on black-hole deductions for start-ups

John, a wage and salary earner, incurs $1,000 in income year one to establish a business consulting partnership. This expenditure satisfies the requirements of s 40–880 and would therefore be deductible in equal proportions for income years one to five, apart from Div 35.

However, the consulting business does not commence until income year three. This means that the $200 deductions cannot be claimed by John in income years one or two (s 35–10(2B)) and are quarantined until the business commences in income year three, assuming that the Div 35 requirements are then satisfied.

Accordingly, where an individual taxpayer commences a business activity but is still deriving salary and wages income blackhole expenditure will be deferred until the business commences. However, if the business ceases without having first satisfied the requirements of Div 35 the deferred deductions may be lost.

However, Div 35 does not apply if the business activity will be conducted via an entity other than an individual or partnership. Accordingly, blackhole expenditure will be deductible in the year it is incurred by an individual if the proposed business activity will be carried on by, for example, a company or trust.