The term “blackhole” expenditure broadly refers to certain outgoings that are neither depreciable nor deductible, and that are not included in the cost base of a CGT asset. In other words, it is expenditure that is not covered by existing income tax laws.
Taxpayers are therefore allowed, under the legislation, to deduct particular business capital expenditure, over five years, where:
• The expenditure is not otherwise taken into account in some way elsewhere in the income tax provision, such as deduction, capitalisation or amortisation etc
• A deduction is not denied by some other provisions, and
• The business is, was, or is proposed to be carried on for a taxable purpose.
So a deduction for “blackhole” expenditure may be available to a former business, a prospective business, or a business that is currently operating, provided the expenditure is capital in nature.
•
•
But there are certain items that are specifically denied as deductions under the blackhole provisions.
These include if the expenditure:
• Forms part of the cost of land
Is in relation to a lease or other legal or equitable right
Is expenditure of a private or domestic nature
• income
Is incurred in relation to gaining or producing exempt income or non-assessable non-exempt
• Is incurred by way of returning an amount the taxpayer has received, and
• taxpayer.
For another entity, is a return on an equity interest or debt interest that is an obligation of the
When allowing a blackhole deduction, the Tax Office usually considers whether or not the payments claimed are of a capital nature.
Claiming a blackhole deduction is certainly possible, and the provision is there so that taxpayers have an option for business-related capital expenditure where there is no other option under tax legislation. But make sure that the expenditure in question is capital in nature before taking this path, and remember that there are limitations and exceptions.
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www.taxpayer.com.au Issue 1 • 2009/2010 6 July 2009
The Tax Office has released Interpretative Decision ATO ID 2009/39 which considered when a taxpayer is entitled to a deduction under s40-880 ITAA97. The scenario discussed in the ID provides an insight into the
Commissioner’s approach in interpreting the requirements of s40-880 ITAA97.
Broadly, ‘blackhole’ expenditure refers to certain expenditure which is not deductible, depreciable, nor included in the cost base of a CGT asset. Section
40-880 deals with this kind of ‘blackhole’ expenditure by allowing taxpayers to deduct certain business capital expenditure over five years where:
• the expenditure is not otherwise taken into account in some way elsewhere in the income tax provision, such as deduction, capitalisation or amortisation etc
• a deduction is not denied by some other provisions, and
• the business is, was, or is proposed to be carried on for a taxable purpose.
In other words, a deduction for ‘blackhole’ expenditure may be available to a former business, a prospective business, or a business that is currently operating provided the expenditure is capital in nature.
Certain items are specifically denied as deductions under s40-880 to the extent that:
• it forms part of the cost of land
• it is in relation to a lease or other legal or equitable right
• it is expenditure of a private or domestic nature
• it is incurred in relation to gaining or producing exempt income or non-assessable non-exempt income
• it is incurred by way of returning an amount the taxpayer have received, and
• for another entity, it is a return on an equity interest or a debt interest that an obligation of the taxpayer.
ATO ID 2009/39 considers whether a taxpayer is entitled to claim a deduction under s40-880 for a payment made voluntarily to extinguish a liability incurred by a company of which the taxpayer was previously a director and shareholder. The Commissioner held that the taxpayer is not entitled for the deduction under s4-880 ITAA on the basis that the payment does not constitute capital expenditure.
In determining whether the payment is of a capital or revenue nature, the Commissioner considered the character of the advantage sought.
In his view, expenditure should be capital in nature and should therefore produce some asset or advantage of a lasting character for the benefit of the profit earning structure. In arriving at the determination, the
Commissioner referred to Forely Brothers Pty Ltd v FC of T
(1965) 13 ATD 562 where the Court held that outgoings incurred for the purpose of altering the origination or structure of the profit-yielding subject were considered to be of a capital nature.
Based on the assumed facts in the ID, the Commissioner was not satisfied that the voluntary payment, made privately and under no obligation, was in return for no benefit from either the company’s creditor or the company, or made for the purpose of altering the profit- yielding structure of the company.
As a result, the Commissioner held that the payment could not be of a capital nature and the taxpayer was not eligible for a deduction under s40-880.
The purpose of the s40-880 is to allow taxpayers a deduction for certain business-related capital expenditure where there is no other provision in the tax legislation to provide this outcome. Taxpayers should ensure the expenditure in question is capital in nature before relying on s40-880 for a deduction. Moreover, taxpayers should be aware that there are a number of limitations and exceptions in s40-880(5)-(9) which also must be satisfied. n
The Taxpayer 6 July 2009
Copyright Taxpayers Australia 2009-10