Starting a business? Few start up costs are tax deductible

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It costs money to start a business, and generally you cannot deduct those expenses because they’re not incurred as part of running a company.

Money spent to start a business isn’t considered as the cost of carrying on business. For example, before your company starts operating, it cannot deduct such costs as:

    • Performing preliminary research
    • Travelling to meet potential clients or to secure export markets; or
    • Drawing up employment agreements.

However, you may be able to deduct some expenses that are characteristically typical for your type of organisation. For example, the Australian Tax Office (ATO) has held that an exploration business can deduct administrative expenses before earning assessable income. The allowed deductions include:

    • Renting business premises
    • Interest paid on loans to buy commercial premises
    • Salaries; and
    • Furniture.

These deductions are subject to rules regarding losses from non-commercial business activities.
Additionally, some business-related capital expenditures that cannot usually be deducted but are legitimate business costs may be written off over 5 years under the blackhole expenditure rule. This applies only where the expenses are not otherwise accounted for — or are denied by some tax law provision — and applies only to entities which produce, or plan to produce, assessable income.

Under the blackhole rule, for example, your operation can write off such capital expenditures as the cost of feasibility studies, setting up or restructuring.

The rule also covers many costs related to holding depreciating assets and certain expenses forming a part of the cost base of a CGT asset such as land and buildings.

Where a capital cost isn’t addressed elsewhere in the tax laws, a deduction is likely to be available over 5 years for costs incurred on or after 1 July 2005. These expenses include:

    • Marketing costs, not including entertainment
    • The costs of checking land titles, but not the expenses involved in travelling to find assets to purchase
    • Loan application and mortgage discharge fees
    • Capital and non-capital costs of owning an asset acquired after 20 August 1991, but not the costs of becoming the owner; and
    • Certain lease and licence termination payments.

This is a complex area of tax deduction and capitalisation. Consult your Westlawn Business Services Accountant who can help you to plan early-stage spending in ways that let you take advantage of the blackhole expenditure rule.

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Westlawn Business Services Pty Ltd provides this information for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers.

Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation.

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