There are many costs associated with starting a business. Up until July 1, 2015 certain costs paid by business owners could never be claimed as a tax deduction, and were labelled black hole expenditures.
As a general taxation rule capital costs of purchasing an income-producing asset are not tax-deductible, apart from those costs that the tax legislation allows to be written off over a number of years, while costs associated with maintaining and running a business are tax-deductible.
This principle of costs associated with starting a business not being deductible applies not only to when a business is purchased, but it also applies when a qualification must be obtained to allow a person to go into business. Examples of this are a degree required by a doctor before commencing in medical practice, and a trade qualification required by an electrician to start a contracting business.
Q. I have started a small business as a sole trader as a Pilates instructor after having completed a course that lasted eight months, and then qualifying in February 2017. I have an ABN and began charging clients after registering my ABN.
I paid for all my start-up costs of approximately $3500 in February and March 2016, which included the cost of the training course and course materials. Can I claim the costs incurred in the 2016 tax year against my 2017 income?
A. Your question raises a number of points with regard to the deduction of business expenses, and the ability to deduct a loss from other income earned. The costs of you completing your Pilates qualification are a capital cost of you obtaining a qualification, that enabled you to start the business, and are not tax-deductible.
The only start-up costs that are deductible, as a result of the black hole expenditure legislation being passed and applying from July 1, 2015, are expenses associated with obtaining professional advice from lawyers and/or accountants about starting a new business.
An immediate tax deduction can also be claimed for government fees, such as those charged by ASIC, that are included in the formation of a business structure such as a company or discretionary trust.
Other costs associated with establishing a business, which includes borrowing fees and other costs associated with setting up the business structure, which are not government fees, can be claimed as a tax deduction over a five-year period.
If your deductible business start-up costs and the running costs since commencing your business in February 2017, are greater than the Pilates instructor income, the loss may be deductible against other income you earned in the 2017 financial year.
To do this you will need to pass the business turnover test of $20,000. This test requires a business to have an annual turnover of at least $20,000 to offset losses against other income earned. As you were operating from February 2017 your business income for those five months would have needed to be at least $8333.
Email questions to max@taxbiz.com.au. Follow MySmallBusiness on Twitter, Facebook and LinkedIn.
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