Immediate deductions for start-up costs

Certain start-up expenses, including costs associated with raising capital, that would otherwise be deductible over five years are immediately deductible (from July 1, 2015) where they are incurred by an SBE or an entity that is not in business. Immediate deduction for start-up costs

Before this date, business capital expenditure, including start-up expenses, was deductible over five years for all businesses under a section of the capital allowances rules, specifically s40-880.

Requirements for deduction Specifically, under these rules, expenditure that would be deductible over five years under s40-880 is fully deductible in the income year in which the expenditure is incurred if the expenditure:

relates to a business that is proposed to be carried on, andis either:incurred in obtaining advice or services relating to the proposed structure or the proposed operation of the business (see below), oris a payment to an Australian government agency of a fee, tax or charge incurred in relation to setting up the business or establishing its operating structure (see below), andthe entity that incurred the expenditure is either:a small business entity (SBE) for that income year, ordoes not carry on a business and does not control and is not controlled by an entity carrying on a business in the relevant income year that is not an SBE in that income year.

Types of start-up costs for which an immediate deduction is allowed The typical start-up costs for which a deduction would be available are as follows:

CategoryExamplesAdvice or services relating to the proposed structure or the proposed operation of the businessDeductible Legal or accounting advice on best business structure to set-up.b. Services in setting up such legal arrangements or business systems for such structures.Professional advice on the viability of a proposed business (eg feasibility of a location (see example below) or due diligence of an existing business being purchased).Cost associated with raising capital (whether debt or equity) for the operation of the proposed business – including crowd sourced equity funding.

Non-deductible Costs in relation to an existing structure (see example below).

The cost of acquiring assets that may be used by the business – when establishing a structure.

Direct costs of the capital such as interest, dividends or capital repayments – when raising capital.

Other expenses in relation to the proposed business (such as the cost of travelling to a particular location as part of assessing locations for a business).

Payment to an Australian government agency* of a fee, tax or charge incurred in relation to setting up the business or establishing its operating structureDeductible Regulatory costs in setting up a business – such as ASIC fees for setting up a company.Costs associated with transferring assets to the entity which is intended to carry on the proposed business such stamp duty.Non-deductible Expenditure relating to taxes of a general application such as income tax.

* Australian government agency means the Commonwealth, a state or territory or an authority thereof (local governments are excluded, such as councils).

Example 1: Start-up expenses that can be immediately deducted Winston Co is a company that is an SBE and is in the process of setting up a florist business, to be operated by a separate entity. Winston Co is uncertain as to the best location for the proposed business. Winston Co obtains advice from a consultant in order to assist in determining a suitable location. The cost of obtaining this advice is to be fully deducted in the income year in which it is incurred.

Example 2: capital expenditure that cannot be immediately deducted Percy already carries on an established small landscaping business. As part of plans to expand and improve his business Percy obtains financial advice about financing the expansion. As Percy’s business is already established, a deduction cannot be immediately claimed for the costs incurred.

Immediate deduction for start-up costs Immediate deduction for start-up costs Immediate deduction for start-up costs Immediate deduction for start-up costs 

# [ATO], [deduction], [small business], [start-up deductions], [tax]