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Claiming deductions prior to business start up?

Discussion in 'Accounting, Tax & Legal' started by Crusher, 11th Jan, 2010.

  1. Crusher

    Crusher Well-Known Member

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    11th Jul, 2008
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    Location:
    Newcastle, NSW
    Just curios - Can you claim deductions before a business is registered? For example, say you want to start up an online business

    You go out and buy domain names / web hosting / new desk etc..

    Then register the business, 4 weeks later (hypothetically) Can you claim things you've already purchased?

    I guess in this same example .. Say you buy a new computer, then 6 months later (in the same financial year) you decide to start a business and use the computer as your primary means of business, can you claim it that financial year?

    Thanks
     
  2. jason626

    jason626 Member

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    if its in the same finanical year then yes you should be able to claim deductions, however make sure they are deductions if your just strating a business then most of the items you get will be capital purchases in nature and will get depreciated normally over a 5 year peroid.

    For example if you buy a shop freehold for your business and decide to paint it straight away then it would be considered a capital purchase, where if you had the shop for about a year or so and decide to paint it it would be considered maintenance and you would be able to claim as a deduction.
     
  3. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Generally, no - I don't think you would get away with claiming expenses made before the company was set up and operational. Any such costs relating to setting up a company are generally capital in nature.

    However, if you want to buy a laptop now and will subsequently use it for your business ... you could sell it to your company I guess (at cost or depreciated value if in a subsequent financial year).

    My advice?
    1. get an accountant if you are setting up a business - you'll need their advice
    2. set up the company first before you start incurring any expenses
    3. Run ALL business expenses through a separate bank account where possible, or at worst, submit expense claims to your company for reimbursement of expenses you've incurred on the company's behalf
     
  4. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Generally, no - I don't think you would get away with claiming expenses made before the company was set up and operational. Any such costs relating to setting up a company are generally capital in nature.

    However, if you want to buy a laptop now and will subsequently use it for your business ... you could sell it to your company I guess (at cost or depreciated value if in a subsequent financial year).

    My advice?
    1. get an accountant if you are setting up a business - you'll need their advice
    2. set up the company first before you start incurring any expenses
    3. Run ALL business expenses through a separate bank account where possible, or at worst, submit expense claims to your company for reimbursement of expenses you've incurred on the company's behalf
     
  5. Superman

    Superman Well-Known Member

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    Gold Coast, QLD
    OK - I think both Jason and Sim have it right.

    There is really two questions:

    1. When can the deduction be claimed?
    2. Is the expenditure is capital in nature, or an expense?

    There is a difference with a sole trader between the timing of the commencement of the business and the registration of the business
    (TIP: When you register an ABN you can back date the registration to the date you paid for the domain name if necessary. This keeps it all clean and inline - but it shouldn't matter if you did the registration after).

    In my opinion the date you register the domain is the date the business commences in the case of a sole trader operating a web-based business.

    Domain name and hosting costs will be generally deductible [s8-1] - if the website is going to be built from scratch.

    If you are purchasing an existing website, then it will be capital in nature.

    Things such as desks and computers etc will be capital items, so you will only be able to claim the depreciation on these (which will spread the deduction off over a number of years).

    You also need to reduce the deduction you claim for any private use %. SBE (Small Business Entity) provision may also apply.

    As Sim mentioned it is best to have advice from an accountant on this.

    In general certain situations some expenses (such as the set up of a company) cannot be deducted becuase the expense is paid before the businesses commences (i.e. when the company is incorporated). In this case that set up expense would be 'blackhole' expenditure and written off over 5 years.

    I have attached some technical stuff on this - but it won't apply if you are simply trading under an ABN in your own name.


    Now - your next issue is if you new web-based business makes a loss in the first year. If so, the something call the non-commercial loss provisions apply - I covered this in a previous post:

    Probably a little information overload here - sorry!

    This is actually the second time today someone has asked me these types of questions :)

    Must be the time of year people are starting to make changes in terms of starting new businesses or looking for new jobs.

    SM
     

    Attached Files:

  6. Rob G.

    Rob G. Well-Known Member

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    The ATO would like to argue these are preliminary to starting your business ... e.g. Softwood Pulp & Paper case law.

    But where you can demonstrate a commitment, then revenue expenses are immediately deductible ... e.g. Steele's case.

    Also, for capital expenses that do not form the cost base of an asset please see section 40-880, ITAA97. Possible 5 year write off for business capital expenses including startup costs.

    Cheers,

    Rob
     
  7. Crusher

    Crusher Well-Known Member

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    Newcastle, NSW
    Thanks for the feedback. I will see my accountant in a couple of weeks to clarify some things and go from there :)
     
  8. timbo123

    timbo123 New Member

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    26th May, 2010
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    Location:
    Melbourne, VIC
    Hi,

    Just stumbled across this thread when looking for information on this issue in Google. I am helping my partner set herself up as a sole trader at the moment, she is a film director/artist. We registered her for an ABN a couple of days ago and entered the business start date as being that same day. However, last August she purchased a professional camera for her work. Having read about the 'small business tax break', I was wondering if this could be eligible for the tax break given that it was a business expense, just purchased before the business was registered?

    Any advice is greatly appreciated!

    Tim.