Dealing with blackhole expenditures when doing your taxes is fairly complicated. They’re not assets that can be depreciated and aren’t business expenses you can claim upfront. However, the ATO has enacted provisions that allow you to claim some of these expenses back.
In this guide, you’ll learn about blackhole expenditures and how to deal with them.
What is a blackhole expenditure?
A blackhole expenditure in business is money you spend, which is capital in nature, so it isn’t immediately tax-deductible or eligible for depreciation.
When can you claim a deduction on a blackhole expenditure?
You can sometimes claim a tax deduction on a blackhole expenditure in Australia.
In some cases, you may be able to capitalise some expenditure. That is, you can add it to the total cost of buying an asset. Under section 40-880, you may also be able to claim deductions over five years for costs associated with launching or closing down a business or starting a project that goes nowhere.
When can't you claim a section 40-880 deduction?
You can't claim a section 40-880 deduction when the expense:
Is personal
Can be claimed or depreciated under other parts of tax law
Is incurred to generate income you won't have to pay tax on
However, section 40-880 was enacted so some expenses related to setting up a business could be immediately deductible. For a detailed list, please see the ATO's deductible capital expenditures.
Implications of blackhole expenditure in accounting
The implications of blackhole expenditure in accounting are varied. It can affect your financial reporting, tax strategy, profits and what you choose to invest in. For example, if an activity means you risk incurring a blackhole expense, you may choose to invest your money elsewhere. With a blackhole expense, you can't immediately deduct or depreciate the expense, so you record greater profit and pay more tax.
How to claim a deduction on a blackhole expenditure
Section 40-880 allows for a deduction for some capital expenditure, which may include blackhole expenditure. Work with your accountant to ascertain what may be deductible under this provision.
Blackhole expenditure FAQs
What are other types of capital expenditure?
Other types of capital expenditure include buying property or land, equipment, furniture or software. Because these deliver value to the business, they can be depreciated under standard tax law.
Can you amortise formation costs?
Yes, you can amortise formation costs. That means you can write off certain costs of setting up a business over five years.
What is a 40-880 deduction?
A 40-880 deduction is when you claim expenses you incurred while setting up a business. These costs might include professional advice or feasibility studies.
Are rebranding costs tax deductible?
Rebranding costs are generally tax-deductible, as they are considered a necessary part of generating sales revenue or building value in your business (an asset). If the rebranding falls outside of either of these, you may still be able to deduct the expenses over five years.
Don’t get sucked into the blackhole
Blackhole expenditure is aptly named – it’s money that goes out the door without adding immediate value to your business. It feels like it’s sucked into a black hole, where what you’ve spent can’t even be claimed as a deduction.
The good news is that Australian tax law makes provisions for blackhole expenditure, so in certain cases, you can make a deduction against your income to minimise your profit and tax obligations.
Award-winning accounting software from MYOB makes things simpler. You can give your accountant access to your financial information, so they can ensure you claim everything you’re entitled to. Try MYOB for yourself.
Disclaimer: Information provided in this article is of a general nature and does not consider your personal situation. It does not constitute legal, financial, or other professional advice and should not be relied upon as a statement of law, policy or advice. You should consider whether this information is appropriate to your needs and, if necessary, seek independent advice. This information is only accurate at the time of publication. Although every effort has been made to verify the accuracy of the information contained on this webpage, MYOB disclaims, to the extent permitted by law, all liability for the information contained on this webpage or any loss or damage suffered by any person directly or indirectly through relying on this information.
MYOB is not a registered entity pursuant to the Tax Agent Services Act 2009 (TASA) and therefore cannot provide taxation advice to clients. If you have a query concerning taxation, including filing your BAS return or annual tax statements, then you should consult with your accountant or other registered tax adviser.