Avenir Group Tax Update

September 2006

Has you business incurred “Blackhole” Expenditure?

From the 6th of April 2006, changes were made to the existing “blackhole” expenditure legislation to help determine the deductibility of so-called “black hole” expenses.

Blackhole expenses are expenses of a capital nature, such as:

- legal fees to set up companies;

- change business structures;

- Expenses that cannot be deducted on revenue account.

These eligible expenses can be deducted over 5 years.

The new legislation makes some important changes as follows:

- Any business capital expenditure that is not excluded is eligible (the former law had only 7 specific items to choose from);

- It is a section of last resort, to be referred to only if no other sections permit or do not deny an items deductibility.

- The business that is the subject of the capital expenditure must be carried on for a taxable purpose. If the business is tax exempt a deduction cannot be claimed.

- The new term “business capital expenditure” is not defined - this is to be left to the courts to determine.

- The cost base of depreciating assets (first and second elements) and CGT assets has been expanded to include more items.

- Sole traders will have to test whether their business passes the non-commercial losses test before a deduction is allowed.

- Expenditure can relate to current, past and prospective business that will commence within a “reasonable” time.

In summary, if an expense does not fit anywhere else and is capital in nature refer to this section for guidance as to its deductibility.

SOURCE: Income Tax Assessment Act 1997 s 40-880

Net Medical Expenses Offset

The FAT is exceeded where the input tax credits on the financial acquisitions exceeds either or both of the following:

• $50,000; or

• 10% of the total amount of input tax credits to which the business is entitled.

To determine whether the FAT has been exceeded in a given month, it is required to test for financial acquisitions in:

• The given month and the previous 11 months; and

• The given month and the estimated next 11 months.

The test is conducted on a month by month basis.

Where the FAT is exceeded, there may be an entitlement to a “reduced input tax credit” (75%) on specific acquisitions as specified in the GST regulations. An example of such a specific acquisition may be the services of a consultant who has facilitated the financial supply and is paid a success fee.

Income Tax Rulings Update

Reasonable travel and meal allowance ( TD 2006/43

- 7.55% (up from 7.3%)( TD 2005-2006

Effective life of depreciating assets (TR 2006/5)

- The methodology used to determine the
Effective life of depreciating assets
under s 40-100 of the ITAA 1997 is
discussed in this ruling.
Source: www.ato.gov.au

Disclaimer: The above is a general overview. For further information and specific advice please contact this office.